What effect does the Hague Securities Convention have on perfection by filing?
— Part Four of Four —
The Convention does not affect perfection of a lien by taking physical possession of the securities. However, the Convention may affect perfection of a lien by filing, including the place where the security interest or other lien implementation document must be filed. Under the relevant provision of the UCC (§ 9-305) the jurisdiction of the intermediary, NOT the borrower determines the effect of perfection and the priority of the security interest (a lien). Under the Hague Convention, in a Multi-unit State such as the United States, where the governing law of the jurisdiction chosen in the account agreement requires that the law of a different location governs perfection by public filing, the law of that other location will apply, so long as it is another territorial unit of the same Multi-unit State. (Hague Securities Convention, Art. 12(2)(b)). The question of where to file is one that must be carefully considered in each case. A few examples may assist in clarifying this point:
Example 1: A borrower located in New Jersey offers its stock in Unilever, a Dutch company, to secure a loan. Its securities account is with an intermediary located in New York, and the account agreement specifies that New York law governs. Under the New York UCC, the lender taking an interest in the securities held by an intermediary under an account agreement as collateral must file in the borrower’s location to perfect its lien. (UCC §§ 9-301 and 9-307). Thus, the lien should be filed in New Jersey. Under the Hague Convention, the same result is reached; New York law applies based on the choice-of-law provision in the account agreement, which is enforced because the intermediary has a Qualifying Office in the United States. New York law dictates filing in New Jersey, which is another “territorial unit” of the same “Multi-unit State” (i.e. the United States).
Example 2: A same facts as Example 1, except the borrower is organized under German law. German law does not generally require a filing for protection. Under the UCC (§§9-301 and 9-307(c)), if there is no appropriate place to file outside the U.S. to perfect a security interest, the default rule is to file in the District of Columbia. Thus under the UCC, the filing should be made in the District of Columbia. Under the Convention, New York law governs pursuant to the intermediary account agreement, and because the District of Columbia is another territorial unit of the same Multi-unit State (i.e. the United States), the filing in the District of Columbia is effective.
Example 3: Same facts as Example 2, except now the borrower is an Ontario, Canada corporation with its main office in Toronto. Canada (unlike Germany in the prior example), has a well-recognized filing system, so under the UCC (§ 9-305) a lender would typically file in Ontario. Here, however, the outcome is different under the Hague Convention. New York law was chosen to govern in the intermediary account agreement, and Ontario is NOT a unit of the same Multi-unit State (i.e. the United States) as New York. Accordingly, the filing of the security interest must be made with the Secretary of the State of New York.
Review the choice of law provision in every account agreement with intermediaries and make certain: (i) that after April 1, 2017, the text invokes the Hague Securities Convention as set out above AND (ii) that the intermediary has a Qualifying Office in the United States.