The Securities and Other Financial Assets Transfer Act (the “Quebec STA”) was introduced as Bill 47 in the Quebec National Assembly on November 13, 2007. Modelled on the Uniform Securities Transfer Act, the Bill seeks to implement the same principles in Quebec in a way that harmonizes with the rules under the Securities Transfer Acts 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 will introduce into Quebec law such concepts as securities intermediary, security entitlement, entitlement holder, securities account, financial asset, control and protected purchaser.
The introduction of the Quebec STA is a highly important development for Quebec participants and their counterparties in the derivatives, structured finance and securities financing markets. In addition, the new Act amends the Civil Code of Quebec provisions regarding the creation and publication (perfection and priority) of security interests in securities. Among its most important features are the following:
- It will adopt the PRIMA (place of the relevant intermediary) approach to many conflict of laws issues including those governing validity, perfection and priority of certain security interests in financial assets held through the indirect holding system.
- 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 and certain securities issued by partnerships.
- It will adopt the concept of a security entitlement to identify and define the interest of a holder in the indirect holding system and the concept of a financial asset to define the types of interests held in a securities account and to which a security entitlement may relate.
- It includes in the concept of a financial asset certain interests held in a security 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, a security entitlement and any other financial asset by taking control of the security, securities account or security entitlement, as the case may be. The difficulties associated with having to publish by registration or possession 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 have priority over secured creditors who publish by any other means.
- Protections against other adverse claims will also benefit persons who acquire a security entitlement for value without notice of the adverse claim.
- The Civil Code amendments expressly allow a secured party to rehypothecate collateral that are securities or security entitlements, if the security agreement permits. In these circumstances, the secured party is deemed to retain “control”, until the debtor obtains control of the collateral.
The PRIMA approach to conflict of laws for indirectly held securities has been implemented in a liberal manner inasmuch as it allows the parties to designate the applicable jurisdiction. It provides for a series of alternative jurisdictions applied in the following order:
- The jurisdiction that is the governing law of the securities account agreement,
- The jurisdiction of the office where the securities account is maintained, if that jurisdiction 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 a security entitlement unless authorized by law.