24/03/2017 Hague Securities Convention to Enter Into Effect in the United States | Publications | Shearman & Sterling LLP http://www.shearman.com/en/newsinsights/publications/2017/03/haguesecuritiesconventiontoeffectinus 1/5 On April 1, 2017, the Hague Securities Convention — or by its actual name, the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary — will enter into effect in the United States. The Convention changes existing US State law relating to the choice of law governing certain contracts pertaining to securities held with an intermediary in a securities account. It does not change any substantive law. As a result, both new and existing secured transactions and conveyances involving securities held with an intermediary in a securities account should be scrutinized to be sure that the parties’ intentions are reflected, taking into account the changes wrought by the Convention. The Convention’s ChoiceofLaw Principles The Convention has the status of a statute of the United States, and consequently preempts the choiceoflaw rules in the Uniform Commercial Code and any related federal law. The Convention provides rules governing the 23 Mar 2017 Hague Securities Convention to Enter Into Effect in the United States Choice of Law in Respect of Securities Held by Intermediaries in a Securities Account 24/03/2017 Hague Securities Convention to Enter Into Effect in the United States | Publications | Shearman & Sterling LLP http://www.shearman.com/en/newsinsights/publications/2017/03/haguesecuritiesconventiontoeffectinus 2/5 choice of law relating to the liabilities and rights of an intermediary holding securities in a securities account and third parties, including the perfection and priority of a security interest in securities held in a securities account. The primary rule of the Convention is that the law governing for these purposes is that specified in the “account agreement,” if any, relating to the securities account. The Convention goes on to provide fallback rules to determine the choice of law in the absence of an account agreement or in the absence of a specification of the governing law of the account agreement. (In negotiating significant commercial transactions, parties will generally not want to rely on fallback rules.) The “account agreement” is clearly the custody agreement between the intermediary and the account holder. The only limit on the application of the primary rule is that the intermediary must have, at the time when the account agreement is entered into, a “qualifying office,” i.e., an office that is in the “State” specified in the account agreement and that is engaged in the business or regular activity of maintaining securities accounts. “State” is defined so that a choice in the account agreement of the law of any state of the United States will be effective if the intermediary maintains a qualifying office any state of the United States. Transition Rules The Convention contains transition rules in an attempt not to require the wholesale amendment of existing security arrangements. It provides that the perfection and priority of security interests in securities held in securities accounts under preApril1 documentation will continue to be governed by previouslyapplicable law if the relevant account agreement specifies either the governing law for any of the issues within the scope of the Convention or the location of the securities account. Specific Issues in Secured Transactions Text for New Documentation. In new documentation, parties will in general wish to include in the account agreement language selecting the law of a specified jurisdiction as the governing law for the purposes 24/03/2017 Hague Securities Convention to Enter Into Effect in the United States | Publications | Shearman & Sterling LLP http://www.shearman.com/en/newsinsights/publications/2017/03/haguesecuritiesconventiontoeffectinus 3/5 covered by the Convention. Secured parties will also want to include mechanics to ensure that the governing law of an account agreement (which is often not a contract to which the secured party is party) cannot be amended without the secured party’s prior written consent. Text for Existing Documentation. If preApril1 documents are used in transactions in which additional collateral may be provided on or after April 1, then the account agreement should be amended to include the Convention language, in the same form as for a new postApril1 account agreement. Cash. The Convention’s scope includes securities accounts holding not only securities, but also financial assets, much as Article 8 of the UCC does. But cash is excluded. Accordingly, the attachment and perfection of security interests in cash treated as “financial assets” in a securities account under the UCC will continue to be governed by the choiceoflaw rules provided in the UCC. Perfection by Filing of Financing Statements. Though the preferred means of perfection under the UCC of a security interest in rights under a securities account is by “control,” perfection of such security interest may also be perfected by the filing of a financing statement. Under the Convention, when the account agreement is governed by the law of a state of the United States for purposes of the Convention, perfection by filing will continue to work. However, if an account agreement specifies the law of a jurisdiction other than a state of the United States, then the rules of the specified jurisdiction will govern the effect and mechanics for the purposes of perfection. 24/03/2017 Hague Securities Convention to Enter Into Effect in the United States | Publications | Shearman & Sterling LLP http://www.shearman.com/en/newsinsights/publications/2017/03/haguesecuritiesconventiontoeffectinus 4/5 Authors & Contributors William Yaro Of Counsel / New York +1 212 848 7037 | Send Email Related Services Practice Finance Project Development & Finance Real Estate Structured Finance Industry Financial Institutions Region North America William Yaro Reade Ryan Steven Sherman 24/03/2017 Hague Securities Convention to Enter Into Effect in the United States | Publications | Shearman & Sterling LLP http://www.shearman.com/en/newsinsights/publications/2017/03/haguesecuritiesconventiontoeffectinus 5/5 ABU DHABI | BEIJING | BRUSSELS | DUBAI | FRANKFURT | HONG KONG | LONDON | MENLO PARK | MILAN | NEW YORK | PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SAUDI ARABIA | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. Copyright © 2017 Shearman & Sterling LLP. Shearman & Sterling LLP is a limited liability partnership organized under the laws of the State of Delaware, with an affiliated limited liability partnership organized for the practice of law in the United Kingdom and Italy and an affiliated partnership organized for the practice of law in Hong Kong. Our firm operates in association with Dr. Sultan Almasoud & Partners for the practice of law in Saudi Arabia.