Part V Perfecting an Article 9 Security Interest
Chapter 21 Perfection As To Investment Property
A. Interface between Article 8 and Article 9
Corporate securities and other such investment property can be important sources of collateral. As noted in Chapter 8 (The Specifics of Enforceability -- A Security Agreement Authenticated by the Debtor or Its Equivalent) and Chapter 12 (Perfection Generally), the drafters of the UCC have struggled with the question of whether all matters pertaining to investment property should be placed in Article 8 or whether the regulation of security interests in such property should be in Article 9. Underlying the question are changes in the way investment property is held and traded.
The drafters incorrectly predicted a movement away from certificated securities to a system comprised of "certificateless" (uncertificated) securities in which corporate equity holdings and other interests were represented electronically and not by stock certificates. What actually happened is that, for the most party, only governmental securities and certain mutual funds have become certificateless. Individual stock certificates continue to exist. However, there has been a major move to an indirect holding system in which brokers and other intermediaries hold "jumbo certificates" in which individuals have interests.
New Article 9 governs perfection of security interests in investment property but, as was the case under former Article 9, applying the perfection provisions of new Article 9 requires reference to many definitions and key concepts found in Article 8, as well as those in Article 9. New section 9-102(a)(49) defines "investment property" to include a range of securities and related property and also commodities property. However, the definitions of specific types of investment property are found in Article 8. See Article 8, sections 8-102, 8-301, 8-501 and Official Comment 6 to new 9-102.
This chapter focuses on security interests in securities, securities accounts and securities entitlements because such property is more likely to be encountered in Article 9 practice. A thorough treatment of the subject of investment property, including the trading and security practices associated with such property, is beyond the scope of these materials. To reduce the risk of becoming lost in a maze of definitions and concepts, many of which are found in Article 8, the discussion of perfection that follows is not complete in all particulars. However, be aware that a practitioner who regularly deals with security interests in investment property is responsible for knowing the many nuances of both Article 8 and Article 9.
B. New Article 9
1.Control as the Primary Mode of Perfection
Former Article 9 adopted “control,” as defined in Article 8, section 8-106, as the central mode of perfection of a security interest in investment property. New Article 9 once again makes control, as given meaning in Article 8, the primary method of perfecting a security interest in investment property. Thus, under new section 9-314(a) a security interest in investment property may be perfected by control under new section 9-106(a) and new section 9-106(a) defines control by reference to Article 8, section 8-106.
Under new section 9-312(a), a security interest in investment property, other than one created by a broker or other securities intermediary, as defined in Article 8, section 8-102(a)(14), also may be perfected by filing a financing statement covering the investment property. Under new section 9-313(a), a security interest in a certificated security may be perfected by delivery of the security under Article 8, section 8-301(a). New section 9-309(10) provides that a security interest in investment property created by a broker or other securities intermediary is perfected on attachment, i.e., automatically, but may not be perfected by filing. See Official Comment 4 to new 9-312.
As will be explored more fully in Part VI, under new section 9-328(1), a secured party having control of investment property has priority over a security interest held by a secured party who does not have control, including a secured party who has taken delivery under Article 8, section 8-301, but does not have control under new section 9-106(a).
2. Control of a Certificated Security
This chapter focuses on perfecting security interests in securities, securities accounts and security entitlements. As noted earlier, most equity interests in securities are embodied in a certificate (albeit today often a "jumbo" certificate). As it happens, most investment property today consists of securities entitlements, that is, interests and rights in securities held by someone else, typically a broker, and perfecting a security interest in a security entitlement is of particular concern. Nonetheless, the concept of "control" may best be understood as it applies to certificated securities.
Control of a certificated security depends on whether the security is in bearer or in registered form. A security is in bearer form when it is transferable without the need for an indorsement by the bearer of the certificate (or action by the issuer of the certificate). A security is in registered form when the person entitled to the certificate is specified in the certificate (and a transfer of the security may be registered on the books of the issuer). Transfer of a registered security requires an indorsement by the person named in the certificate (or action by the issuer).
Control of a certificated security in bearer form and, hence, perfection of a security interest in the certificate under new sections 9-314(a) and 9-106(a), is achieved when the certificate is delivered to the secured party as required by section 8-106(a). Control of a certificated security in registered form and, hence, perfection of a security interest in the security under new sections 9-314(a) and 9-106(a), is achieved when either of two sets of conditions are satisfied.
The first set of conditions is that the security has been delivered to the secured party and the certificate has been indorsed to the secured party (or in blank). The second is that the security is delivered to the secured party and is registered in the name of the secured party by having the security issued to the secured party or by having the issuer register a transfer of the security to the secured party. These conditions of control are spelled out in section 8-106(b).
Delivery is a requirement of control as to a certificated security whether the security is in bearer or registered form. "Delivery" of a certificated security occurs under Article 8, section 8-301(a) when the secured party gets possession of the security certificate or another person gets possession of the certificate on behalf of the secured party or acknowledges that it previously acquired possession of the certificate and it holds the certificate on behalf of the secured party. Possession by "another person" who is a securities intermediary results in delivery only if the security is in registered form and has been specially indorsed to the secured party by an effective indorsement.
Note that the essence of delivery as to a certificated security is possession by or on behalf of the secured party. Note also that possession by another on behalf of the secured party may be accomplished without the need for an authenticated record acknowledging that the possession is for the secured party's benefit as is required for perfection by possession of other than investment property under new section 9-313(c). Note finally that a secured party may get possession of a security by delivery without also getting control where, for example, a registered security has not been properly indorsed.
3. Control of an Uncertificated Security
Control of an uncertificated security and, hence, perfection of a security interest in such a security under new sections 9-314(a) and 9-106(a), is achieved when the secured party takes delivery of the security or when the issuer has agreed that it will comply with instructions given by the secured party without the need for further assent by the registered owner, as provided for in Article 8, section 8-106(c).
Delivery as to an uncertificated security occurs under Article 8, section 8-301(b), when the issuer registers the secured party as the owner at the time of original issue or by registration of transfer or another person, other than a securities intermediary, either becomes the registered owner on behalf of the secured party or, having previously become the registered owner, acknowledges that it holds for the secured party.
4. Control of a Security Entitlement
As indicated above, as a practical matter, because of the way most investment property is held today, perfection of a security interest in a security entitlement may be of greatest interest. Security entitlements are indirect interests, i.e., interests in securities held by a securities intermediary, typically a broker. A security entitlement is distinguishable from a securities account in that the latter refers to all of the investment positions held through a given account rather than particular investment positions held through that account. See Official Comment 6 to new 9-102.
Perfection by control of a security interest in a security entitlement is somewhat analogous to perfection by control of a security interest in an uncertificated security, as discussed in the previous paragraph; however, control cannot be accomplished by delivery as to a security entitlement. A secured party has control of a security entitlement and, hence, has perfected a security interest in such investment property under new sections 9-314(a) and 9-106(a), in any one of three situations provided for in Article 8, section 8-106(d).
The first situation is that the secured party has become the entitlement holder (the person identified in the records of the securities intermediary as having a security entitlement against the intermediary). The second is that the securities intermediary has agreed that it will comply with entitlement orders originated by the secured party without further consent by the entitlement holder. The third is that another person has control of the security entitlement on behalf of the secured party or, having previously acquired control, the person acknowledges that it has control on behalf of the secured party.
5. Control of a Securities Account
As noted above, a securities account refers to all of the investments positions held through a given account. The term is included in the definition to facilitate transactions in which a debtor wishes to create a security interest in all of the investment positions held through a particular account rather than in specific positions carried in the account. See Official Comment 6 to new 9-102.
Under new section 9-106(c), a secured party having control over all security entitlements in a securities account has control over the securities account.
6. Duration of Perfection by Control
New Article 9 expressly addresses the question of when perfection by control commences and how long it continues. Under new section 9-314(c) a security interest in investment property is perfected by control under new section 9-106(a) from the time the secured party obtains control. Under the same section a secured party remains perfected by control until the secured party does not have control and (1) in the case of a certificated security the debtor has or acquires possession; (2) in the case of an uncertificated security the issuer has registered or registers the debtor as the owner; or (3) as to a security entitlement the debtor is or becomes the entitlement holder.
You may test your grasp of the basics of the complex matter of perfecting security interests in investment property in the next problem.
Problem 21.1 (interactive)
Northern Bank is about to lend to Delia Debtor. Delia has offered as collateral government securities held in uncertificated form, stock certificates as to which Delia is the registered owner, and a securities entitlement held by Delia against Bonnie Broker.
How may Northern perfect its security interests in such property?
How should Northern perfect its security interests?
Exactly what must Northern do to so perfect its security interest by control as to the uncertificated securities?
Exactly what must Northern do to so perfect its security interest by control as to the certificated securities?
Exactly what must Northern do to so perfect its security interest by control as to the security entitlement?
If Delia's securities account with Bonnie Broker includes several security entitlements and Northern has taken a security interest in the securities account, what must Northern do to get control of the securities account?
2011-08-22 update