What do these provisions accomplish?
— Part Two of Four —
The cited provisions are choice-of-law provisions that select the governing law for the intermediary account agreement, which under the Hague Securities Convention will then also dictate the governing law for other issues regarding the securities, enumerated in Article 2(1) of the Convention, such as perfection of liens and priority of interests. By designating the governing law with reference to the Hague Securities Convention, the provisions eliminate ambiguity (and potential conflicts) over which jurisdiction’s laws apply when determining: (i) whether a lien has been perfected; (ii) what kind of foreclosure processes are required; and (iii) how an adverse party can challenge the situation – all those are answerable by reference to the chosen governing law. Note, however, they do NOT change the substantive law of that chosen law; neither the provisions nor the Hague Securities Convention change anything with respect to any regulatory requirements applicable to an intermediary or any other party.
The Hague Securities Convention is intended to resolve uncertainties in determining which countries’ laws should be applied which had developed as secured transactions evolved and grew more complex. Historically, it was possible to obtain a lien (called a security interest under the Uniform Commercial Code [“UCC”]) on a security by taking physical possession of the security. With the growth of book-entry securities (such as U.S. Treasuries and Agencies) and greatly increased administrative burdens involved, the commercial world evolved by the mid-1990’s to recognize the role of securities intermediaries — typically trust companies, brokerage firms, and specialized third-party players such as the Depository Trust Company and Euroclear. This evolution was recognized in U.S. law by the amendments to Articles 8 and 9 of the UCC, which specifically recognized securities intermediaries and prescribed how a lender might perfect a security interest in an account of a securities holder at a securities intermediary. However, these UCC revisions did not address what law governs when the situation involves an international aspect when any of the following are located in a different nation:
- The account holder
- The issuer of the securities
- Any party to the transfer of the securities
- Any securities intermediary
- The physical location of the securities certificates
- Any adverse claimant
For example, if a New Jersey resident owned securities of a foreign issuer (e.g., Unilever, Novartis, Alibaba, etc.) and wished to use those securities as collateral for a loan made by a Pennsylvania bank, what law would govern questions of perfection, etc.? What if the lender were a Spanish Bank?
In 2000, the Hague Conference on Private International Law began work on a treaty to address these issues. The resulting Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary (“the Hague Securities Convention”) was promulgated in 2006. Two nations, Switzerland and Mauritius, promptly ratified the Convention. The United States signed it in 2006, but did not submit it to the U.S. Senate for its advice and consent until 2012, and that advice and consent was not given until September 2016. The U.S. submitted its instrument of ratification to the Hague in December 2016. The Convention provides that it becomes effective 90 days after three nations have ratified it, so with the U.S. ratification, the Convention becomes effective on April 1, 2017. Although only three nations are now bound by the Convention, it is expected that the Convention will soon be ratified by other major capital market countries such as Japan, the UK, Germany, Australia, and the like, especially with the U.S. having ratified the Convention and the size of the U.S. securities markets. In addition, it is expected that provisions in an account agreement specifically invoking the Hague Securities Convention will be given considerable deference by the courts even in non-signatory nations.