United States: Hague Securities Convention's Impact On Secured Transactions Choice-Of-Law Rules

Last Updated: January 12 2017
Article by Edwin E. Smith and Alan W. Beloff

Choice-of-law rules for security interests in security entitlements in securities credited to security accounts will change on April 1, 2017 when the Hague Securities Convention comes into effect.

The choice-of-law rules for the perfection and priority of a security interest in security entitlements in securities credited to a securities account are set forth in Articles 8 and 9 of the Uniform Commercial Code (UCC), particularly UCC Sections 8-110 and 9-305.

But look out.

The Hague Securities Convention (Convention) will become effective in the United States on April 1, 2017. The Convention provides choice-of-law rules for the perfection and priority of a security interest in security entitlements in securities credited to a securities account that will preempt the choice-of-law rules in Articles 8 and 9 to a large extent. Although in most instances the outcome under the choice-of-law rules of the Convention will be the same as under Articles 8 and 9, there are some differences. These differences matter not only for new transactions but also for existing ones to which the Convention also will apply on its effective date.

This LawFlash provides some brief background on the Convention, explains the Convention's choice-of-law rules applicable to a security interest in security entitlements in securities credited to a securities account, describes what steps secured parties may need to take now for existing secured transactions (and in planning for new ones), and indicates where additional information concerning the Convention is available.

Background

The Hague Conference on Private International Law promulgated the Convention in 2006. The only countries other than the United States to have adopted the Convention so far are Mauritius and Switzerland. Nevertheless, the Convention will become effective in the United States on April 1, 2017—even for secured transactions where there is no connection with Mauritius, Switzerland, or any country that adopts the Convention in the future.

The Convention provides choice-of-law rules for the perfection and priority of a security interest in "securities credited to a securities account." That phrase is equivalent to a security interest under Articles 8 and 9 in "security entitlements" in securities credited to a securities account.  While the Convention's definition of "securities" may be somewhat broader than the term "security" as defined in Article 8, a "security" as defined in Article 8 would seem to be included in the definition of "securities" under the Convention.

The Convention does not provide choice-of-law rules for the perfection or priority of a security interest in directly held securities or in commodity contracts or commodity accounts.

The Convention's Choice-of-Law Rules

The Convention's choice-of-law rules for the perfection and priority of a security interest in security entitlements in securities credited to a securities account are fairly straightforward. Perfection and priority will be determined by the substantive law of the jurisdiction whose law governs the account agreement between the securities intermediary and the entitlement holder. The account agreement may, however, provide that the issues governed by Article 2(1) of the Convention be determined by the law of a different jurisdiction. The Article 2(1) issues include the applicable law to determine the perfection and priority of a security interest in security entitlements in securities credited to a securities account.

There are two important qualifications to the Convention's general choice-of-law rule. The first is that the chosen law in the account agreement, or the law otherwise specified in the account agreement to govern the Article 2(1) issues, must be that of a jurisdiction in which the securities intermediary has an office that deals in securities—whether or not the securities are the collateral in question. This is the so-called "Qualifying Office" test. The second qualification is that, for a "multi-unit" country like the United States, there are some special rules. If the chosen law is that of a US state, the Qualifying Office test is satisfied if the securities intermediary maintains an office in any US state. For example, if the account agreement is governed by New York law but the securities intermediary's Illinois office is the only one that deals with securities, the Qualifying Office test is satisfied under the Convention.

In addition, given the status of the United States as a "multi-unit" country, if the chosen law is that of a US state and the Qualifying Office test is met, the Articles 8 and 9 choice-of-law rules will still be effective to operate for perfection by filing within the United States (i.e., as long as the choice-of-law rules under Articles 8 and 9 of the state chosen under the Convention point to another US state). For example, if the account agreement is governed by New York law and the entitlement holder is a Delaware corporation and therefore viewed to be located in Delaware (as a "registered organization" under UCC Section 9-307(e)), Delaware substantive law would govern whether the security interest has been perfected by filing after applying the choice-of-law rules of Articles 8 and 9 of the New York UCC. Delaware substantive law would govern perfection by filing even though the general choice-of-law rule of the Convention otherwise points to New York substantive law.

Existing Secured Transactions

So, assuming that the Qualifying Office test is met, under what circumstances will the choice-of-law result under the Convention be different than under Articles 8 and 9 for existing transactions in which a security interest is granted in security entitlements in securities credited to a securities account?

Three situations come to mind:

1. Perfection is by control, but the chosen law in the account agreement is that of a non-UCC jurisdiction.

In this situation, it would be necessary for the secured party to obtain perfection and priority of the security interest under the substantive law of the jurisdiction whose law governs the account agreement, or to amend the agreement to specify that the law of a UCC jurisdiction will govern the issues referred to in Article 2(1) of the Convention. However, no action is necessary if the pre-effective date account agreement refers to a UCC jurisdiction as the "securities intermediary's jurisdiction."

We explain why: It is true that under the basic rules of the Convention any reference to the "securities intermediary's jurisdiction" will have no relevance for perfection of a security interest by control. For example, if the account agreement is governed by English law but provides that New York is the "securities intermediary's jurisdiction" for purposes of the UCC, then under the basic choice-of-law rules of the Convention—absent the account agreement being amended—perfection and priority of a security interest in security entitlements in securities credited to the securities account will be governed by English substantive law, even though under Articles 8 and 9, perfection and priority by control would be governed by New York substantive law.

Nevertheless, a special transition rule of the Convention preserves choice-of-law rules in a pre-effective date account agreement that point to the law of another jurisdiction for the issues covered by Article 2(1) of the Convention. Accordingly, under the example above, if the account agreement was entered into prior to the effective date, perfection and priority by control would still be governed by New York substantive law.

2. Perfection is by filing, and the chosen law in the account agreement is that of a non-UCC jurisdiction.

It will be necessary for the secured party in this situation to perfect the security interest—whether by filing (if available) or otherwise—and obtain priority of the security interest under the substantive law of the non-UCC jurisdiction. This is the case even though the debtor is located (as determined under UCC Section 9-307) in a UCC jurisdiction.

For example, if the account agreement is governed by English law, the entitlement holder is a Delaware corporation, and perfection of the security interest is claimed by filing in Delaware, then, absent the account agreement being amended, perfection and priority of a security interest in security entitlements in securities credited to the securities account would be governed by English substantive law, even though under Articles 8 and 9, perfection by filing would be governed by Delaware substantive law.        

3. Perfection is by filing, the debtor is located (as determined under UCC Section 9-307) in a non-UCC jurisdiction, and the account agreement is governed by the law of a UCC jurisdiction.

In this case, it will be necessary for the secured party to perfect the security interest by filing and obtain priority under the substantive law of the chosen UCC jurisdiction. This is the case even though perfection and priority may have already been achieved under the substantive law of the foreign jurisdiction.

For example, if the account agreement is governed by New York law, the entitlement holder is located (as determined under UCC Section 9-307) in Ontario, Canada, and perfection of the security interest is claimed by a filing in Ontario, it would be necessary for the secured party to perfect its security interest under New York substantive law, presumably by the filing of a financing statement in New York. This is the case even though the filing of a financing statement in New York is not otherwise effective under Articles 8 and 9.

New Secured Transactions

For new transactions being planned now or entered into on or after April 1, 2017, a secured party will need to bear in mind the choice-of-law rules of the Convention. In addition, absent the secured party relying solely upon the governing law of the account agreement, it is advisable for the account agreement to contain a clause such as the following to satisfy both the UCC's and the Convention's choice-of-law rules:

The State of [X] is the securities intermediary's jurisdiction for purposes of the Uniform Commercial Code, and the law in force in the State of [X] is applicable to all issues specified in Article 2(1) of the Hague Securities Convention.

Other Sources of Information on the Convention

There is much more that can be said about the Convention. It covers choice-of-law issues that go beyond security interests in security entitlements in securities credited to a securities account, and there are other nuances as well. The Convention itself and an explanatory report on the provisions of the Convention are available on the website of the Hague Conference on Private International Law. Furthermore, the Permanent Editorial Board for the Uniform Commercial Code has published a draft report on the Convention, which is available on the website of the American Law Institute.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.