An Act respecting the transfer of securities and the establishment of security entitlements (the Quebec STA) received Royal Assent on June 20, 2008 and will come into force on January 1, 2009. The adopted legislation differs from Bill 47 as initially introduced in the National Assembly and upon which we commented in December 2007.
The Quebec STA seeks to implement the principles of the Uniform Securities Transfer Act, while harmonizing Québec's rules with the securities transfer legislation of other provinces. The concepts found in the Quebec STA follow the model of the USTA and Article 8 of the U.S. Uniform Commercial Code (including the companion provisions of UCC Article 9). The Quebec STA introduces or formalizes into Quebec law concepts such as adverse claims, securities intermediaries, security entitlements, entitlement holders, securities accounts, financial assets, control and protected purchasers.
The adoption of the Quebec STA is a highly important development for Quebec participants and their counterparties in the derivatives, structured finance and securities financing markets. As an example, the Quebec STA amends the Civil Code of Quebec provisions regarding the creation and publication (perfection and priority) of security interests in securities and security entitlements. Among its most important features are the following:
- The legislation will adopt a comprehensive definition of "security" that includes not only publicly-traded corporate debt and equity securities, but also government securities, units or other equity securities issued by mutual funds or trusts, equity securities of non-publicly traded corporations and certain securities issued by partnerships.
- The distinction between certificated and uncertificated securities is established with different rules applicable to transfer for each of these categories.
- It will adopt the concept of a security entitlement to identify the interest of a holder in the indirect holding system and the concept of a financial asset to help to define the types of interests or property held in a securities account and to which a security entitlement may relate.
- It includes in the concept of a financial asset certain property held in a securities account, including the cash balances in the account and instruments such as bills and notes.
- A collateral taker may publish its security interest in a security and a security entitlement by taking control of the security or security entitlement, as the case may be. The difficulties associated with having to publish by registration with respect to book-based securities will no longer exist.
- Control will include being the entitlement holder with respect to the securities account as well as lesser forms of control established by means of control agreements.
- Purchasers, including collateral takers, who obtain control will generally have priority over secured creditors who publish by any other means.
- Protections against adverse claims will also benefit persons who acquire a security or a security entitlement for value without notice of any adverse claim.
- The Civil Code amendments expressly allow a secured party to rehypothecate collateral that are securities or security entitlements.
The conflict of laws rules for indirectly held securities have been implemented in a liberal manner inasmuch as they allow the parties to designate the applicable jurisdiction. The Quebec STA does not adopt the Ontario STA concept of the securities intermediary's jurisdiction, however, the results of the new rules are very similar. The Quebec STA modifications to the Civil Code private international law rules provide for a series of alternative jurisdictions applied in the following order:
- The jurisdiction that is the governing law of the securities account agreement, unless agreed to otherwise such as in a control agreement,
- The jurisdiction of the office where the securities account is maintained, if that office is designated in the securities account agreement,
- The jurisdiction in which the office identified in an account statement as the office where the account is located, or
- The jurisdiction in which the decision-making centre of the securities intermediary is located.
The Quebec STA amendments to the Civil Code indicate that an individual consumer will not be able to grant security over uncertificated securities or a security entitlement unless authorized by law. Regulations permitting such security are anticipated to be adopted and come into force at the same time as the Quebec STA.
Modifications to the Civil Code and the transitional provisions of the Quebec STA apply to security granted on other movable incorporeal (roughly intangible) property in addition to securities and security entitlements.