[Senate Executive Report 114-15]
[From the U.S. Government Publishing Office]
114th Congress } { Exec. Rept.
SENATE
2nd Session } { 114-15
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CONVENTION ON THE LAW APPLICABLE TO CERTAIN RIGHTS IN RESPECT OF
SECURITIES HELD WITH AN INTERMEDIARY
_______
September 14, 2016.--Ordered to be printed
_______
Mr. Corker, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 112-6]
The Committee on Foreign Relations, to which was referred
the Convention on the Law Applicable to Certain Rights in
Respect of Securities Held with an Intermediary (Treaty Doc.
112-6), having considered the same, reports favorably thereon
with one declaration, as indicated in the resolution of advice
and consent, and recommends that the Senate give its advice and
consent to ratification thereof.
CONTENTS
Page
I. Purpose..........................................................1
II. Background.......................................................2
III. Major Provisions.................................................3
IV. Entry Into Force.................................................5
V. Implementing Legislation.........................................6
VI. Committee Action.................................................6
VII. Committee Recommendations and Comments...........................6
VIII.Text of Resolution of Advice and Consent to Ratification.........7
I. Purpose
The Convention on the Law Applicable to Certain Rights in
Respect of Securities Held with an Intermediary (the
``Convention'') aims to establish clear rules to resolve a
narrow but important problem with respect to determining which
country's law applies to certain aspects of a cross-border
securities transaction (for example, transactions in which any
of the investors or owners, the issuers, the clearing
corporation, and the owner's bank or broker are located in
different countries).
II. Background
In modern capital markets, investment securities are
commonly held in electronic form by banks, securities brokers
and central clearing depositaries collectively known as
``securities intermediaries.'' Under the laws of many legal
systems, when determining what law governs rights in these
investment securities, courts apply the law of the place where
the paper copies of the securities are physically held or, if
the securities are entirely electronic, where they would be
held. These determinations are often difficult to make. In the
modern economy, electronic securities interests of increasing
value move through intermediaries in increasingly high volumes,
and frequently cross national borders. The value of trades and
collateral transactions in these securities can exceed over $2
trillion per day. Uncertainty as to what law governs the
perfection, priority and other interests in the securities
arising from these electronic transactions has imposed friction
costs on securities transactions, and has limited attempts to
reduce credit and liquidity risk exposures.
The Convention provides uniform rules for rapidly
determining the law applicable to certain rights in investment
securities held through intermediaries. The primary rule of the
Convention looks to the law in force in the jurisdiction
expressly identified in the agreement between the investor and
the intermediary governing the account in which the security is
held. The Convention would provide greater legal certainty in
this area, thereby reducing legal risk, enhancing efficiency in
market transactions and facilitating the global flow of
capital. The Convention deals only with choice of law issues
and only with securities held with an intermediary and credited
to a securities account. It does not include, and has no effect
on the substantive law that will be applied once the choice of
law determination has been made.
Furthermore, the Convention is limited to international
transactions and would apply only in situations where a
combination of the account holder, the parties to a disposition
of the securities, the securities account or interests therein,
the relevant intermediary, or the issuer or issuers of the
securities are located in different countries. Finally, account
holders and intermediaries are not bound by the Convention's
standard choice of law rules if they choose to take affirmative
steps to contractually provide for alternative choice of law
rules.
The Convention is largely consistent with U.S. law as
reflected in Articles 8 and 9 of the Uniform Commercial Code
(UCC). The treaty reflects U.S. choice of law principles under
UCC Articles 8 and 9. The UCC is not a federal statute but is a
state law that has been uniformly adopted by the states in this
area. As noted above, the Convention would be limited to
transactions involving multiple countries where choice of law
rules would be relevant.
The Convention is supported by all relevant U.S. regulatory
agencies, including the Department of the Treasury, the U.S.
Securities and Exchange Commission, the Commodity Futures
Trading Commission, and the New York Federal Reserve Bank. It
is also supported by the National Conference of Commissioners
on Uniform State Laws (also known as the ``Uniform Law
Commission'').
The Convention is also supported by securities clearance
and settlement entities, including the Depository Trust &
Clearing Corporation (the primary U.S. central securities
depositary), as well as commercial market interests that
include custodian banks, broker-dealers, securities
intermediaries, and securities industry associations such as
the Securities Industry and Financial Markets Association and
the International Swaps and Derivatives Association. The
American Bar Association has also adopted a formal resolution
recommending U.S. ratification.
A detailed paragraph-by-paragraph analysis of this treaty
may be found in the Letter of Submittal from the Secretary of
State to the President on this instrument, which is reprinted
in full in Treaty Document 112-6. What follows is a brief
summary of some key provisions.
III. Major Provisions
As noted above, the Convention is largely consistent with
U.S. law, specifically the choice of law rules of Articles 8
and 9 of the Uniform Commercial Code, which are very similar to
those of the Convention. Therefore, according to administration
testimony before the Foreign Relations Committee, not only
would the Convention require minimal adjustment for U.S.
investors and financial institutions, it would help globalize
the UCC choice of law rules, thereby simplifying the planning
for transactions that involve multiple jurisdictions.
The Convention, does, however, differ from the choice of
law rules in the UCC in certain minor respects. First and
foremost, under Article 4, the Convention has a ``Qualifying
Office'' test while the UCC Articles 8 and 9 choice of law
rules do not. The administration observes that this is
generally not an obstacle for U.S. banks, brokers or other
securities intermediaries, as under current industry practice,
they would normally require that the governing law of the
account agreement be that of a jurisdiction in which they
maintain an office. In response to a question from the
Chairman, the administration stated further:
In fact, the Qualifying Office test arguably may be
viewed as a modest improvement to current U.S. law
because it requires some minimal connection between the
intermediary and the governing law that is chosen. The
Convention also sets forth the consequences of a change
in the governing law of an agreement. This is a very
rare occurrence. Moreover, parties already can amend
the governing law in their account agreements under UCC
Articles 8 and 9 wholly apart from the Convention.
Satisfying the Qualifying Office test requires more than a
mere agency presence. Without a true function in the
maintaining of securities accounts, the Qualifying Office test
would not be met. Article 4(1) of the Convention requires that
the office be ``engaged in a business or other regular activity
of maintaining securities accounts.'' Additionally, Article
4(2)(d) makes explicit that the requirement is not satisfied
merely because an office ``engages solely in representational
functions or administrative functions, other than those related
to the opening or maintenance of securities accounts, and does
not have authority to make any binding decision to enter into
any account agreement.''
Therefore, the Convention is expected to have very minimal
impact on current and future practices in the United States
regarding account agreements. The administration has assured
the committee that ``[i]mplementing and adapting to the
Convention's choice of law regime should be relatively easy for
U.S. investors and financial institutions, and global market
participants should be attracted to U.S. law in view of the
clear and workable rules in UCC Articles 8 and 9.
Additional minor differences between the Convention and
existing U.S. law include: (a) fall-back choice of law rules
that differ slightly from those of UCC Article 8, (b) differing
rules on perfection of security interests by filing under two
narrow and easily planned-for circumstances, and (c) slight
differences from UCC Article 9 in the way the Convention
protects interests acquired before an amendment to the
governing law set forth in an account agreement.
With respect to perfection of security interests by filing,
the administration has informed the committee they do not
expect the Convention to disrupt current U.S. industry
practices under Article 9 of the UCC, including with respect to
the perfection of security interests. UCC Article 9 permits a
security interest in intermediated securities to be perfected
by either of two principal means: the filing of a financing
statement or the secured party's obtaining ``control'' of the
securities. The Convention allows for both of these means of
perfection.
In the case of perfection by control, both the Convention
and UCC Articles 8 and 9 permit the applicable law to be
determined either by the law governing the account agreement,
or by a more focused clause in the agreement addressing the
issues specified in Article 2(1) of the Convention, including
the requirements for perfection. In the case of the Convention,
the Qualifying Office test must also be met.
In the case of perfection by filing, the UCC Article 9
choice of law rules provide that the jurisdiction in which the
investor is ``located'' (as determined under UCC Article 9) is
the jurisdiction whose substantive law governs perfection by
filing. This is the case regardless of the law specified in the
account agreement. If perfection is by the filing of a
financing statement rather than control, Article 12 of the
Convention, dealing with multi-unit countries, then becomes
relevant to minimize any disruption of U.S. practices.
Article 12 permits the UCC Articles 8 and 9 choice of law
rules to continue to be effective within the United States for
purposes of determining the law governing perfection by filing.
The administration has provided the committee with the
following example:
[If] the account agreement is governed by New York
law, the Convention would generally require that New
York law govern issues of perfection. But, if the
investor were a Delaware corporation, Article 12 then
supplements the Convention's general choice of law rule
and permits New York's UCC Articles 8 and 9 choice of
law rules to continue to be effective within the United
States for purposes of determining the law governing
perfection by filing. As a result, applying New York's
UCC Article 9 choice of law rules, Delaware law would
still govern perfection by filing as it does in the
absence of the Convention. There generally would be no
change in U.S. practice for perfection by filing.
The administration notes, however, that there are two
limited circumstances in which the Convention would affect the
UCC Articles 8 and 9 choice of law rules for perfection by
filing:
If the account agreement is governed by the law of a
non-UCC-jurisdiction, the availability of perfection by
filing would be determined by the law of the non-UCC
jurisdiction, not UCC Article 9. For example, if the
investor was a Delaware corporation but the account
agreement was governed by English law, perfection by
filing would be determined under English law. The UCC
Article 9 choice of law rules for perfection by filing
would not be relevant. We would expect, though, that
U.S. intermediaries would typically insist on the law
of a UCC jurisdiction to govern their account
agreements. Moreover, we would expect global market
investors generally to be attracted to choose the law
of a state of the United States to govern their account
agreements given the clear and workable rules of UCC
Articles 8 and 9.
If the law of a UCC jurisdiction governs the account
agreement and the investor is located in a non-UCC
jurisdiction for purposes of UCC Article 9, the
availability of perfection by filing would be
determined by the law of the chosen UCC jurisdiction
rather than by the law of the non-UCC jurisdiction. For
example, if the investor was a company that UCC Article
9 determines to be located in Ontario and the account
agreement was governed by New York law, Article 12 of
the Convention would not be applicable. That is because
New York's UCC Article 8 and 9 choice of law rules do
not point to another jurisdiction within the United
States; they point to Ontario. Accordingly, under the
Convention, New York law, the law chosen in the account
agreement, would determine perfection by filing, and a
financing statement would need to be filed in New York.
That outcome differs from the outcome under the UCC
Articles 8 and 9 choice of law rules by which, in the
example, perfection by filing would be determined by
Ontario law. We believe that this change in the
location for the filing of a financing statement can be
easily addressed by the secured party investigating the
governing law of the account agreement.
IV. Entry Into Force
The treaty will enter into force on the first day of the
month following the expiration of three months after the
deposit of the third instrument of ratification, acceptance,
approval or accession. Currently, the Republic of Mauritius and
the Swiss Confederation have ratified the treaty. With deposit
of its instrument of ratification, the United States would be
the third country, bringing the treaty into force among the
ratifying countries. Under Article 19 of the treaty, the
Convention shall enter into force for both the United States
and the other ratifying countries on the first day of the month
following the expiration of three months after the deposit of
the U.S. instrument of ratification.
V. Implementing Legislation
The executive branch has indicated that the United States
currently has all necessary authority to implement the treaty.
Accordingly, no new legislation is necessary or is being sought
in conjunction with the treaty. The Resolution of Advice and
Consent to Ratification includes a Declaration stating that the
treaty is self-executing.
VI. Committee Action
The committee held a hearing to consider the treaty on May
19, 2016.\1\ The hearing was chaired by Senator Isakson. The
committee considered the treaty on June 23, 2016, and ordered
the treaty favorably reported by voice vote, with a quorum
present and without objection, with the recommendation that the
Senate give advice and consent to its ratification, as set
forth in this report and the accompanying resolution of advice
and consent to ratification.
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\1\To view the published transcript of the May 19, 2016 hearing (S.
Hrg. 114-324), see: https://www.govinfo.gov/browse/content/pkg/CHRG-
114shrg20973/pdf/CHRG-114shrg20973.pdf
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VII. Committee Recommendations and Comments
The committee believes the Convention would provide
significant benefits for U.S. investors and financial
institutions, notably increased legal certainty in cross-border
transactions and a reduction in legal and systemic risk,
without having to adapt to a new legal framework and therefore
recommends the Senate give its advice and consent to
ratification. Further, by providing predictability in these
transactions, the Convention would reduce costs and facilitate
capital flows. The Convention would not contradict any federal
or state laws or common practices in the United States.
The committee believes the Convention will provide a
narrow, technical fix to a serious problem in cross-border
securities markets in an appropriate and narrowly tailored
manner. Because the Convention reflects much of the Uniform
Commercial Code, the Convention would in many respects extend
current U.S. law and practice to the global financial markets.
The committee has included a proposed declaration in the
resolution of advice and consent, which states that the
Convention is self-executing. This declaration is consistent
with statements made in the Letter of Submittal from the
Secretary of State to the President on this instrument. The
Senate continues to include statements regarding the self-
executing nature of treaties in resolutions of advice and
consent in light of the Supreme Court decision, Medellin v.
Texas, 128 S.Ct. 1346 (2008). The committee continues to
believe that a clear statement in the resolution is warranted.
A further discussion of the committee's views on this matter
can be found in Section VIII of Executive Report 110-12.\2\
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\2\To view Exec. Rept. 110-12, see: https://www.gpo.gov/fdsys/pkg/
CRPT-110erpt12/pdf/CRPT-110erpt12.pdf
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VIII. Text of the Resolution of Advice and
Consent to Ratification
Resolved (two-thirds of the Senators present concurring
therein),
SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO AN UNDERSTANDING AND A
DECLARATION.
The Senate advises and consents to the ratification of the
Convention on the Law Applicable to Certain Rights in Respect
of Securities Held with an Intermediary, adopted at The Hague
on July 5, 2006, and signed by the United States on that same
day (the ``Convention'') (Treaty Doc. 112-6), subject to the
declaration of section 2.
SEC. 2. DECLARATION.
The advice and consent of the Senate under section 1 is
subject to the following declaration:
The Treaty is self-executing.
[all]