Uniform Commercial Code - Article 8

Article 8

The ownership of securities is governed by Article 8 of the Uniform Commercial Code (UCC). This Article 8, a text of about thirty pages, underwent important recasting in 1994. That update of the UCC treats the majority of the transfers of dematerialized securities as mere reflections of their respective initial issue registered by the two American central securities depositories, respectively the Depository Trust Company (DTC) for the securities issued by corporations and the Federal reserve for the securities issued by the Treasury Department. In this centralised system, the title transfer of the securities does not take place at the time of the registration on the account of the investor, but within the systems managed by the DTC or by the Federal reserve.

This centralization is not accompanied by a centralized register of the investors/owners of the securities, such as the systems established in Sweden and in Finland (so-called "transparent systems"). Neither the DTC nor the Federal Reserve hold an individual register of the transfers of property. The consequence for an investor is that proving ownership of its securities relies entirely on the accurate replication of the transfer recorded by the DTC and FED at the lower tiers of the holding chain of the securities.

Each one of these links is composed respectively of an account provider (or intermediary) and of an account holder.

The rights created through these links, are purely contractual claims: these rights are of two kinds:

1) For the links where the account holder is itself an account provider at a lower tier, the right on the security during the time where it is credited there is characterized as a "securities entitlement", which is an "ad hoc" concept invented in 1994: i.e. designating a claim that will enable the account holder to take part to a prorate distribution in the event of bankruptcy of its account provider.

2) For the last link of the chain, in which the account holder is at the same time the final investor, its "security entitlement" is enriched by the "substantial" rights defined by the issuer: the right to receive dividends or interests and, possibly, the right to take part in the general meetings, when that was laid down in the account agreement concluded with the account provider. The combination of these reduced material rights and of these variable substantial rights is characterised by article 8 of the UCC as a "beneficial interest".

This decomposition of the rights organized by Article 8 of the UCC results in preventing the investor to revindicate the security in case of bankruptcy of the account provider, that is to say the possibility to claim the security as its own asset, without being obliged to share it at its prorate value with the other creditors of the account provider. As a consequence, it also prevents the investor from asserting its securities at the upper level of the holding chain, either up to the DTC or up to a sub-custodian. Such a "security entitlement," unlike a normal ownership right, is no longer enforceable "erga omnes" to any person supposed to have the security in its custody. The "security entitlement" is a mere relative right, therefore a contractual right.

This re-characterization of the proprietary right into a simple contractual right may enable the account provider, to "re-use" the security without having to ask for the authorization of the investor. This is especially possible within the framework of temporary operations such as security lending, option to repurchase, buy to sell back or repurchase agreement. This system the distinction between the downward holding chain which traces the way in which the security was subscribed by the investor and the horizontal and/or ascending chains which trace the way in which the security has been transferred or sub-deposited.

Contrary to claims suggesting that Article 8 denies American investors their security rights held through intermediaries such as banks, Article 8 has also helped US negotiators during the negotiations of the Geneva Securities Convention, also known as the Unidroit convention on substantive rules for intermediated securities.