At the end of May 2006, both the Ontario and Alberta legislatures passed the Securities Transfer Act (STA) and consequential amendments to their Personal Property Security Acts (PPSA). These Acts will not be brought into force until late in 2006, by which time a few other provinces might also have introduced or passed this same legislation. Those familiar with the U.S. Uniform Commercial Code Article 8 will find the STA and the PPSA amendments quite familiar.
This legislation is very important to market participants in the derivatives, structured finance and securities financing markets. Among its most important features are the following:
- The PPSA and STA adopt the PRIMA (place of the relevant intermediary) approach to conflict of laws issues including those governing validity, perfection and priority of a security interest in financial assets held through the indirect holding system.
- The legislation adopts a comprehensive definition of security that includes not only corporate debt and equity securities, but also government securities, mutual funds and securities issued by trusts and partnerships.
- It adopts the concept of a security entitlement to identify and define the interest of a holder in the indirect holding system and the concept of a financial asset to define the types of interests held in a securities account and to which a security entitlement can relate.
- It includes in the concept of a financial asset any interest held in a security account, including the cash balances in the account and including instruments such as bills and notes.
- A collateral taker can perfect its security interest in a security, a security entitlement and any other investment property by taking control of the security, securities account or security entitlement. The difficulties associated with having to perfect by registration or possession with respect to book based securities will no longer exist.
- Control will include being the entitlement holder with respect to the securities account as well as lesser forms of control established by means of control agreements.
- Purchasers, including collateral takers, who obtain control will have priority over secured creditors who perfect by any other means.
- Protections against other adverse claims will also benefit persons who acquire a security entitlement for value without notice of the adverse claim. For example, a secured creditor that becomes the entitlement holder of the securities account in which the financial assets are held as the means of perfecting its security interest will have acquired a security entitlement for value and will take free of any claim against the financial assets by anyone claiming through the debtor as long as it did not have actual notice of the claim.
- The amended PPSA expressly allows a secured party to rehypothecate or otherwise transfer or dispose of collateral that is investment property (securities, security entitlements, other financial assets, futures contracts) if the security agreement permits. In these circumstances the secured party is deemed to retain "control", until the debtor obtains control of the collateral.
The PRIMA approach to conflict of laws for indirectly held securities has been implemented in a liberal manner inasmuch as it allows the parties to designate the applicable jurisdiction. It provides for a series of alternative jurisdictions applied in the following order:
- the jurisdiction the securities account agreement designates as the securities intermediary’s jurisdiction,
- the jurisdiction that is the governing law of the securities account agreement,
- the jurisdiction of the office where the securities account is maintained if that jurisdiction is designated in the securities account agreement,
- the jurisdiction in which the office identified in an account statement as the office where the account is located, or
- the jurisdiction in which the chief executive office of the securities intermediary is located.
Hopefully Canadian intermediaries will begin to specify a jurisdiction in their account agreements as many U.S. intermediaries now do. Until the STA is enacted in all provinces, it would of course be sensible to specify an STA (or similar) jurisdiction in the account agreement. There is not any requirement that the selected jurisdiction be one connected to the intermediary’s business. With this definition in mind, secured parties would be prudent to ensure that the entitlements are held in an account with a securities intermediary located in an STA jurisdiction. Otherwise, the applicable law may turn out to be one that does not recognize an effective means of perfecting a security interest in an indirectly held financial asset.
Market participants that are members of ISDA can expect to see a new form of Canadian opinion on the Credit Support Annexes once the legislation comes into force.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.