PERFECTION IN SECURITIES
By: John Newman, Winter, 2002
2001 amendments to the Uniform Commercial Code made significant changes in the law concerning perfection of security interests in investment property such as stocks and bonds, whether or not represented by certificates and whether or not held in a brokerage account. Understanding these changes is essential for lenders intending to use investment property as collateral.
Perfection
A lender may perfect a security interest in investment property by filing a Financing Statement which adequately identifies the investment property. Filing with the State will perfect the security interest so that it will not disappear if the debtor files bankruptcy.
A lender may also perfect by obtaining “control” of the investment property. If a bond is in bearer form, the lender obtains control through possession. If a stock or bond is in registered form, a lender obtains control if the certificate is delivered to the lender and it is either endorsed in blank or endorsed over to the lender, or registered in the lender’s name. If a security is not represented by a certificate, then a lender obtains control if the non-certificated security is delivered to the lender or the issuer of the security has agreed that it will comply with instructions from the lender without further consent by the owner.
A lender can also obtain control of investment property held by a third party such as an account with a brokerage firm. This occurs when the brokerage firm enters a “Control Agreement” in which it agrees that it will comply with orders originating from the lender without further consent of the debtor.
Priority
Control takes precedence over filing. Thus, if a lender obtains a perfected security interest in investment property by control after the debtor has already granted a security interest which was perfected by filing, the later security interest, perfected by control, will have priority over the earlier (filed) security interest. No lender should rely solely on filing if there is a risk of the debtor giving a second security interest to another lender.
If two lenders have control over the same investment property, the first to obtain control will have priority. If the brokerage firm has its own lending relationship with the debtor (such as a margin account) and obtains a security interest in the account after a lender has obtained “control” of the account, the security interest of the brokerage firm will take priority. In this case, a lender may want to obtain an agreement from the brokerage firm stating that if it obtains any security interest in the brokerage account, it will be subordinated to that of the lender.
As in all lending, obtaining and maintaining perfection and priority are vital. When the collateral is investment property, the lender can now rely on explicit provisions of the Code, especially if securities are held by third parties such as brokerage firms.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
2001 amendments to the Uniform Commercial Code made significant changes in the law concerning perfection of security interests in investment property such as stocks and bonds, whether or not represented by certificates and whether or not held in a brokerage account. Understanding these changes is essential for lenders intending to use investment property as collateral.
Perfection
A lender may perfect a security interest in investment property by filing a Financing Statement which adequately identifies the investment property. Filing with the State will perfect the security interest so that it will not disappear if the debtor files bankruptcy.
A lender may also perfect by obtaining “control” of the investment property. If a bond is in bearer form, the lender obtains control through possession. If a stock or bond is in registered form, a lender obtains control if the certificate is delivered to the lender and it is either endorsed in blank or endorsed over to the lender, or registered in the lender’s name. If a security is not represented by a certificate, then a lender obtains control if the non-certificated security is delivered to the lender or the issuer of the security has agreed that it will comply with instructions from the lender without further consent by the owner.
A lender can also obtain control of investment property held by a third party such as an account with a brokerage firm. This occurs when the brokerage firm enters a “Control Agreement” in which it agrees that it will comply with orders originating from the lender without further consent of the debtor.
Priority
Control takes precedence over filing. Thus, if a lender obtains a perfected security interest in investment property by control after the debtor has already granted a security interest which was perfected by filing, the later security interest, perfected by control, will have priority over the earlier (filed) security interest. No lender should rely solely on filing if there is a risk of the debtor giving a second security interest to another lender.
If two lenders have control over the same investment property, the first to obtain control will have priority. If the brokerage firm has its own lending relationship with the debtor (such as a margin account) and obtains a security interest in the account after a lender has obtained “control” of the account, the security interest of the brokerage firm will take priority. In this case, a lender may want to obtain an agreement from the brokerage firm stating that if it obtains any security interest in the brokerage account, it will be subordinated to that of the lender.
As in all lending, obtaining and maintaining perfection and priority are vital. When the collateral is investment property, the lender can now rely on explicit provisions of the Code, especially if securities are held by third parties such as brokerage firms.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
