Source: https://www.millerthomson.com/fr/publications-fr/communiques-et-dernieres-nouvelles/communique-de-services-financiers-et-fr/1er-juin-fsi/canadian-perspective-hague-securities-convention/
Timestamp: 2018-09-22 04:23:10
Document Index: 24336686

Matched Legal Cases: ['Art. 9', 'Art. 9', 'Art. 9', 'Art. 8', 'Art. 4', 'Art. 2', 'Art. 4', 'Art. 3108']

A Canadian Perspective on the Hague Securities Convention | Publications | Miller Thomson LLP
Perspectives juridiques/Communiqués/Communiqué - Services financiers et insolvabilité/1er juin 2017/A Canadian Perspective on the Hague Securities Convention
1er juin 2017 | Keyvan Nassiry, Eve Tessier
On April 1, 2017, the Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary (the “Convention”) became effective in the United States. While Canada has not yet ratified the Convention, it is important for Canadian financing practitioners to become familiar with the new rules thereunder.
The Convention’s primary objective is to provide for a uniform set of rules applicable to the determination of the law governing the perfection and priority of security interests encumbering security entitlements held in a securities account by a securities intermediary1. While the Convention supersedes the conflict of laws rules of the Uniform Commercial Code (“UCC”), it has no effect on the substantive law that will apply once the choice of law determination has been made2.
Before April 1, 2017, the conflict of laws rules applicable to the perfection, the effect of perfection, and the priority of a security interest in security entitlements were determined by Articles 8 and 9 of the UCC. Under such rules, the “local law of the securities intermediary’s jurisdiction” governed the perfection, the effect of perfection and the priority of a security interest encumbering security entitlements4. However, the “local law of the jurisdiction in which the debtor is located”5 governed the perfection by filing of such security interest6.
In most cases, the securities intermediary’s jurisdiction7 is expressly set out in the agreement8 governing the securities account entered into between the entitlement holder and the securities intermediary.
Under the Convention’s primary rule9, the applicable law is the governing law of the Account Agreement, unless the parties have expressly chosen another law to apply to the specific issues governed by the Convention (which includes the perfection, effect of perfection and priority of security interests)10.
In order for the Convention’s primary rule to apply, the securities intermediary must have an office that deals in securities or engages in the activity of maintaining securities accounts11 in the selected jurisdiction (the “Qualifying Office Requirement”).
Generally speaking, Canadian conflict of laws rules on security interests in security entitlements provide for a regime that mirrors Articles 8 and 9 of the UCC. Such rules are set forth in the applicable Personal Property Security Act and Securities Transfer Act13 in most provinces other than Quebec, where the Civil Code of Québec14 applies.
A debtor located in Ontario has entered into an Account Agreement governed by New York law. The securities intermediary has an office in the State of New York (which meets the Qualifying Office Requirements) and the Account Agreement provides that the securities intermediary’s jurisdiction is New York.
Under the Old Rules: Because of the “securities intermediary’s jurisdiction” clause, the law applicable was New York law.
A debtor located in Ontario has entered into an Account Agreement governed by Ontario law with a securities intermediary incorporated under the laws of New York. The securities intermediary has an office in the state of New York (which meets the Qualifying Office Requirements) and the Account Agreement provides that the securities intermediary’s jurisdiction is New York.
A debtor located in Quebec has entered into an Account Agreement governed by Quebec law. The securities intermediary has an office in the state of New York (which meets the Qualifying Office Requirements) and it is expressly and unambiguously stated in the Account Agreement that the securities intermediary entered into the Account Agreement through this particular office. The Account Agreement provides that the securities intermediary’s jurisdiction for the purpose of the Account Agreement is Quebec.
Under the Old Rules: Because of the “securities intermediary’s jurisdiction” clause, the law applicable to the effect of perfection and priority of the security interest was Quebec law.
Under the Convention, “securities” are specifically defined to exclude “cash”16 held in a securities account. Further, the Convention does not deal with security interests encumbering directly held securities (i.e. not held through a securities intermediary). Accordingly, the conflict of laws rules of Articles 8 and 9 of the UCC continue to apply to both instances.
The Convention’s primary objective is to simplify cross-borders transactions by providing certainty and predictability regarding the law applicable to holding and transferring of securities held by an intermediary.
In the future, considering that a secured party does not typically enter into the Account Agreement, it will want the parties thereto to covenant not to amend the governing law of same without notice to (or written consent of) the secured party. As indicated above, an amendment to the governing law of an Account Agreement could have a material impact on the perfection, effect of perfection and priority of the secured parties’ security interest.
The Uniform Law Conference of Canada (ULCC) will no doubt take into account United States’ adoption of the Convention when it will hold its annual meeting in August 2017. Since Canada participated in the negotiation of the Convention more than ten years ago, and given the overall similarities of its secured lending laws and those of the United States, it is expected that Canada will ratify the Convention in the near future.
[1] The Convention was initially signed by the US in July 2006 in an attempt to improve the functioning of investment securities markets and reduce the uncertainty in cross-border transactions.
[2] Message from The President of the United States transmitting the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, done at the Hague on July 5, 2006, and signed by the United States on that same day, 112th Congress, 2d Session, Treaty Doc. 112-6, Authenticated U.S. Government Information, GPO, [On Line], https://www.foreign.senate.gov/imo/media/doc/Treaty_112-61.pdf.
[3] This discussion of the UCC is based on the authors’ understanding of the state of the code and not intended to constitute legal advice in any way.
[4] UCC, Art. 9-305 (a).
[5] Please note that the scope of this articles does not include the analysis of the determination of the “location of the debtor”. As a cautionary note, the rules of the UCC applicable to the determination of the domicile of the debtor only apply if a debtor’s residence, place of business or chief executive office is located in a jurisdiction whose Personal Property Registry (collectively, with the Quebec Register of Personal and Movable Real Rights, the “PPR”)) is considered to be a “notice filing systems for non-possessory security interest”, equivalent to those of the UCC jurisdictions (UCC, Art. 9-307 (c)). If the PPR does not meet such threshold, the UCC provides that the debtor is deemed to be located in the District of Columbia. However, if the PPR is considered to be equivalent to the filing systems in place in the UCC jurisdictions, such additional filing would not be necessary. Because of the absence of case law on this specific question, there is no unequivocal answer. It is therefore typical for secured parties to elect to file an additional financing statement in the District of Columbia to be shielded from the potential argument that Quebec is not a UCC equivalent jurisdiction.
[6] UCC, Art. 9-305 (c).
[7] UCC Art. 8-110 (e). The “securities intermediary’s jurisdiction” is (i) if the Account Agreement expressly provides what the securities intermediary’s jurisdiction is, such jurisdiction; (ii) if (i) does not apply, the governing law of the Account Agreement, if any; (iii) if (i) and (ii) do not apply, the law applicable in the jurisdiction of the office where the securities account is maintained, provided that such information is expressly set forth in the Account Agreement; otherwise (iv) the jurisdiction in which the office serving the entitlement holder’s account is located, if such information is available in an account statement; or (v) if none of the preceding paragraphs apply, the jurisdiction where the chief executive office of the securities intermediary is located.
[8] Hereinafter, the “Account Agreement”.
[9] Convention, Art. 4(1).
[10] Convention, Art. 2(1) : The Convention determines the law applicable to the following issues in respect of securities held with an intermediary – (a) the legal nature and effects against the intermediary and third parties of the rights resulting from a credit of securities to a securities account; (b) the legal nature and effects against the intermediary and third parties of a disposition of securities held with an intermediary; (c) the requirements, if any, for perfection of a disposition of securities held with an intermediary; (d) whether a person’s interest in securities held with an intermediary extinguishes or has priority over another person’s interest; (e) the duties, if any, of an intermediary to a person other than the account holder who asserts in competition with the account holder or another person an interest in securities held with that intermediary; (f) the requirements, if any, for the realisation of an interest in securities held with an intermediary; and (g) whether a disposition of securities held with an intermediary extends to entitlements to dividends, income, or other distributions, or to redemption, sale or other proceeds.
[11] Convention, Art. 4(1): The relevant intermediary must have, at the time of the agreement, an office in that State, which (a) alone or together with other offices of the relevant intermediary or with other persons acting for the relevant intermediary in that or another State (i) effects or monitors entries to securities accounts;(ii) administers payments or corporate actions relating to securities held with the intermediary; or (iii) is otherwise engaged in a business or other regular activity of maintaining securities accounts; or (b) is identified by an account number, bank code, or other specific means of identifications maintaining securities accounts in that State.
[12] Convention, Sub-paragraphs 5(1) (a) through (e). This fall-back rule only applies if the jurisdiction of the securities intermediary’s office is expressly and unambiguously stated in the Account Agreement. Such express and unambiguous provision does not include notice provisions or provisions pertaining to the consent to a jurisdiction to institute legal proceedings.
[13] For the purposes of this article, we have referred to the Ontario Personal Property Security Act (“PPSA”) and Securities Transfer Act (“STA”). Please note that there are some differences between each PPSA and STA across Canada. Securities Transfer Act, 2006, S.O. 2006, c. 8, Sec. 44 and 45; Personal Property Security Act, R.S.O. 1990, c. P.10, Sec. 7.1.
[14] Civil Code of Québec, CQLR c CCQ-1991, Art. 3108.7 and 3108.8.
[15] The determination of the applicable law is only from the stand point of the rules set forth by the Convention. Canadian conflict of laws rules may provide for a different outcome.
[16] “securities” means any shares, bonds or other financial instruments or financial assets (other than cash), or any interest therein.