On July 1, 2007, new legislation called the Securities Transfer Act (the "STA") became effective in British Columbia. The province follows Ontario and Alberta, which both proclaimed similar legislation earlier this year. Other provinces and territories are expected to follow suit.

The STA establishes a modern legal framework governing the property rights that exist whenever securities are bought, sold or used to secure obligations. The STA is modelled closely on Revised Article 8 of the United States Uniform Commercial Code (the "UCC") and contains rules that address securities that are directly held (that is, where there is a direct relationship between the issuer and the investor) and securities and other financial assets that are indirectly held (that is, where the investor has rights in relation to an underlying financial asset but holds its interest through a securities intermediary rather than directly with the issuer). As such, it is commercial law, not securities regulatory law, that codifies existing commercial practices.

Although the detailed provisions of the STA (and the conforming amendments to other provincial statutes such as the Personal Property Security Act (the "PPSA") and the Business Corporations Act (the "BCA") are complex, it is anticipated that the legislation will bring legal certainty, both from a capital markets perspective and a cross-border financing perspective.


Prior to the 1960s, purchasers of shares and bonds in public companies would typically receive physical certificates evidencing their securities. In order to transfer ownership, they could simply deliver the certificates to the purchaser endorsed for transfer or accompanied by a stock transfer power of attorney. This system – known as the direct holding system – became impractical for handling the large volumes of public trades occurring on a daily basis.

To address this issue, a book-entry system – known as the indirect holding system – was introduced using central securities depositories such as the Canadian Depository for Securities Limited (CDS) and the Depository Trust Company (DTC) in the United States as clearing houses. Under this system, the vast bulk of securities transactions are transferred by computerized book-entries on the records of various intermediaries (primarily brokers, banks and trust companies) that in turn settle on a net basis with the central depositories in which the intermediaries are participants. This indirect holding system has been extremely effective in allowing volumes of securities to be transferred daily on a cost-effective basis.

However, commercial law, which was generally based on the actual delivery and possession of securities under the direct holding system, failed to keep pace with these advances in technology. While some attempts were made by various provinces to amend their legislation to reflect the rise of book-entry settlement using the concept of deemed delivery and deemed possession, these measures were incomplete, thereby resulting in increased uncertainty, transactional cost and risk.

In 1994, Article 8 of the UCC was revised to take into account the fundamental differences between the direct and indirect holding systems and the revisions were passed in all states. The Canadian Securities Administrators, in conjunction with the Uniform Law Conference of Canada, published a comprehensive proposal to modernize Canadian commercial law rules governing property rights in securities transactions. Central to the proposal was the development of a Uniform Securities Transfer Act, with the goal that new provincial legislation based on the model uniform act could be enacted with uniformity in every province.

The British Columbia, Alberta and Ontario STA are all based on the model uniform act.

Overview of the STA

The following is a brief overview of each part of the STA:

Part I – Interpretation and General Provisions
Part I contains the definitions and interpretation provisions that apply throughout the legislation. Specifically, it sets out parameters for interpretation, imposes an obligation of good faith in the performance or enforcement of every contract to which the legislation applies, permits the variation of the effect of certain provisions of the legislation by agreement and confirms that the principles of law and equity continue to apply and supplement the legislation. Part I also provides that the rules adopted by a clearing agency governing the rights and obligations between the clearing agency and its participants or between participants in the clearing agency are effective even if such rules conflict with the legislation.

Part II – General Matters Concerning Securities and Other Financial Assets

Part II sets out some basic concepts and rules applicable to securities and other financial assets. Some of the key new concepts are discussed below. It classifies certain obligations and interests as either securities or financial assets for the purpose of the legislation. It explains when a financial asset or interest in a financial asset is acquired, sets out what constitutes and does not constitute notice of an adverse claim and defines what constitutes control of financial assets. Rules for effective endorsements, instructions and entitlement orders are set out. The warranties that apply in securities transactions in both the direct and indirect holding systems are set out. Rules governing the conflict of laws, seizure of securities, the enforceability of contracts and evidence in legal proceedings on securities are set out. Part II also deals with the liability and status of securities intermediaries as purchasers for value.

Part III – Issue and Issuer

Part III sets out rules dealing with the rights of a purchaser against an issuer in the direct holding system. It does so by setting out the obligations of issuers and restricting the rights of issuers to assert certain defences.

Part IV – Transfer of Certificated and Uncertificated Securities

Part IV sets out rules governing how a transfer takes place in the direct holding system and provides protection to purchasers from adverse claimants.

Part V – Registration

Part V deals with the process of registration of transfer by the issuer or transfer agent in the direct holding system.

Part VI – Security Entitlements
Part VI introduces and defines the concept of the "security entitlement" – namely, the rights and property interests that an investor holds in indirectly-held securities; that is, securities held by intermediaries on the investor’s behalf through a securities account and the clearing houses operated by central securities depositories.

Parts VII, VIII and IX – Consequential Amendments to other Acts

Consequential amendments are made to the Business Corporations Act, the Court Order Enforcement Act and the Personal Property Security Act.

Some Key New Concepts

"Security Entitlement"

The STA introduces a new type of personal property, called a "security entitlement." A security entitlement is the name used to describe the rights and property interests of a person who holds a security or other financial asset through a securities intermediary. An important element of the security entitlement concept is that the entitlement holder’s interest may only be asserted against that holder’s direct intermediary, rather than the issuer of the financial asset or another intermediary in the indirect holding chain. However, all interests of the intermediary, in particular financial assets that are held for the entitlement holders of such assets, are not the property of the intermediary and are not subject to the claims of creditors of the intermediary (unless the intermediary does not have sufficient interests in the particular assets to satisfy its obligations to such entitlement holders and to creditors having interests in such assets).

There are two main methods by which a person may acquire a security entitlement. The first is if the securities intermediary indicates by book entry that the financial asset has been credited to the person’s securities account. The second is if the securities intermediary receives a financial asset from the person and credits it to that person’s account. There is no concept of a direct transfer of a security entitlement from one holder to another. Instead, the security entitlement of the transferor is extinguished and a new security entitlement in favour of the transferee is created. This extinguishment and creation of a new entitlement reduces the complications around cross-border transactions involving multiple intermediaries, as the obligations between entitlement holders and their intermediaries are isolated at each tier of the indirect holding system.

"Financial Asset"
A "financial asset" is the broadest category of property covered by the STA and subsumes securities as conventionally understood. It is a new term broadly defined to capture the rights of investors in relation to any property that is held in their securities accounts and includes securities as well as other assets such as an interest in a partnership or limited liability company, bankers’ acceptances, commercial paper and other short-term money market instruments and credit balances in a securities account.

"Securities Account"

A "securities account" is an account to which a financial asset is or may be credited in accordance with an account agreement between the securities intermediary and the person for whom the account is maintained.

"Securities Intermediary"

A "securities intermediary" is a person who, in the ordinary course of its business, maintains securities accounts for others, and includes a clearing agency.


The definition of "control" is the modern equivalent of delivery and possession and subsumes current concepts of physical delivery and possession of paper securities certificates and replaces deemed delivery and possession in the case of uncertificated or book-based securities.

Concurrently with the coming into effect of the STA, consequential amendments have been made to the PPSA to allow for the creation and perfection of security interests in a new category of personal property, referred to as "investment property," which includes both certificated and uncertificated securities, security entitlements and securities accounts. Control is a new method of perfection in relation to security interests in investment property. A secured party obtains control of investment property when it has taken whatever steps are necessary, given the type of investment property, to place itself in a position where it can have such property sold, without further action by the debtor. As in the past, a secured party can also perfect a security interest in investment property by filing a financing statement. However, control will be the preferred method of perfection for two reasons. First, with respect to security interests in the same type of property, the secured party having control will take priority over one that does not have control. Second, the secured party having control will also be protected against a third-party purchaser who acquires the property for value without knowledge of a breach of the applicable security agreement.

As a practical matter, little has changed in relation to perfection of a security interest in directly-held securities, except that the rules are now clearer in the context of uncertificated securities.

In the indirect holding system, a secured party may obtain control of a security entitlement, thereby perfecting its security interest in same, either: (a) by becoming the entitlement holder (the person identified in the records of the intermediary as the person having a security entitlement), which may be done by having the debtor’s position in the underlying financial asset debited from the debtor’s account and credited to the secured party’s account; (b) by entering into a control agreement with the securities intermediary that maintains the debtor’s securities account pursuant to which the securities intermediary agrees that it will comply with instructions from the secured party without further consent of the debtor; or (c) by having another person take control of the security entitlement on behalf of the secured party or obtaining an acknowledgement that such person already has such control.

Conflict of Laws Rules
The STA and the accompanying PPSA amendments set out clear conflict of laws rules that are designed to be compatible with the UCC conflict rules, thereby reducing existing uncertainty as to where and how to perfect a security interest in investment property. The basic rule is that the validity, perfection and priority of a security interest in investment property is governed by the law of the jurisdiction (a) where the certificate is located, if the collateral is a certificated security; (b) of the issuer’s jurisdiction, if the collateral is an uncertificated security; and (c) of the securities intermediary’s jurisdiction, if the collateral is a security entitlement or a securities account.

The STA sets out rules for determining the issuer’s jurisdiction, depending on the type of issuer. The STA also sets out the following sequential series of tests to determine the securities intermediary’s jurisdiction:

(a) the jurisdiction expressly provided by agreement between the securities intermediary and its entitlement holder governing the securities account as the security intermediary’s jurisdiction for that jurisdiction, the STA or any provision of the STA;

(b) if (a) does not apply, the jurisdiction designated in the governing law clause of the account agreement;

(c) if none of the above apply, the jurisdiction of the office where the securities account is maintained if specified in the account agreement;

(d) if none of the above apply, the jurisdiction in which the office identified in an account statement as the office serving the entitlement holder’s account is located;

(e) if none of the above apply, the jurisdiction in which the chief executive officer of the securities intermediary is located.

The STA also lists several factors which are not to be taken into account in determining the securities intermediary’s jurisdiction, namely the physical location of the share certificates, the issuer’s jurisdiction, or the location of facilities for data processing or other record keeping concerning the account.

Transition Issues

Under the British Columbia PPSA amendments, a security interest in investment property that was perfected immediately before the coming into force of the STA will continue to be perfected, provided that the method of perfection is sufficient to perfect the security interest under the new rules. If the security interest is perfected in a manner that would not be sufficient for perfection under the new rules, a secured party will have a grace period of four months to re-perfect its security interest. Accordingly, security interests perfected by registration or physical possession of security certificates will remain perfected. In the majority of circumstances, a security interest that is perfected under the pre-STA rules will remain perfected under the new rules. However, secured parties ought to consider whether to take additional steps to obtain control so that they obtain the desired level of priority and protection afforded by the new rules.