[Senate Hearing 114-324]
[From the U.S. Government Publishing Office]
S. Hrg. 114-324
TREATIES
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
MAY 19, 2016
__________
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COMMITTEE ON FOREIGN RELATIONS
BOB CORKER, TENNESSEE, Chairman
JAMES E. RISCH, Idaho BENJAMIN L. CARDIN, Maryland
MARCO RUBIO, Florida BARBARA BOXER, California
RON JOHNSON, Wisconsin ROBERT MENENDEZ, New Jersey
JEFF FLAKE, Arizona JEANNE SHAHEEN, New Hampshire
CORY GARDNER, Colorado CHRISTOPHER A. COONS, Delaware
DAVID PERDUE, Georgia TOM UDALL, New Mexico
JOHNNY ISAKSON, Georgia CHRISTOPHER MURPHY, Connecticut
RAND PAUL, Kentucky TIM KAINE, Virginia
JOHN BARRASSO, Wyoming EDWARD J. MARKEY, Massachusetts
Todd Womack, Staff Director
Chris Lynch, Democratic Staff Director
Chris Ford, Majority Chief Counsel
Margaret Taylor, Minority Chief Counsel
John Dutton, Chief Clerk
(ii)
C O N T E N T S
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Page
Garber, Hon. Judith G., Acting Assistant Secretary, Bureau of
Oceans and International Environmental and Scientific Affairs,
U.S. Department of State, Washington, DC....................... 40
Prepared statement........................................... 5
Additional questions for the record submitted by Senator
Cafdin..................................................... 23
Isakson, Hon. Johnny, U.S. Senator From Georgia.................. 1
Kim, John J., assistant legal adviser for private international
law, U.S. Department of State, Washington, DC.................. 7
Prepared statement........................................... 9
Schoenecker, John, director, intellectual property, HM.CLAUSE, on
behalf of American Seed Trade Association, Davis, CA........... 14
Prepared statement........................................... 15
Shaheen, Hon. Jeanne, U.S. Senator From New Hampshire............ 2
Prepared statement........................................... 3
Smith, Edwin E., Partner, Law Offices of Morgan, Lewis & Bockius,
LLP, Boston, MA................................................ 17
Prepared statement........................................... 19
Additional Material Submitted for the Record
Letters submitted in support of The Trearty on Plant Genetic
Resourced for Food and Argiculture............................. 25
Letters submitted in support of The Convention on the Law
Applicable to Certain Rights in Respect of Securities Held With
an Intermediary................................................ 47
(iii)
TREATIES
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Thursday, May 19, 2016
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 10:04 a.m., in
Room SD-419, Dirksen Senate Office Building, Hon. Johnny
Isakson presiding.
Present: Senators Isakson [presiding], Johnson, Gardner,
Shaheen, and Murphy.
OPENING STATEMENT OF HON. JOHNNY ISAKSON,
U.S. SENATOR FROM GEORGIA
Senator Isakson. I will call to order the hearing of the
Senate Foreign Relations Committee. We welcome our guests and
our two people to testify. I will make opening remarks, and
then I will turn it over to Senator Shaheen for her opening
remarks.
Today's hearing will review two treaties that will advance
U.S. interests in the agricultural and financial sectors, the
International Treaty on Plant Genetics and The Convention on
the Law Applicable to Certain Rights in Respect of Securities
Held with an Intermediary.
Our first treaty is the International Treaty on Plant
Genetic Resources. The plant genetic treaty was voted out of
this committee by a voice vote December 2010. Unfortunately,
the Senate did not take up the treaty before the end of the
110th Congress.
As our witnesses will explain in their testimony, our food
security and the future of United States agriculture depends on
access to the plant germplasm that will be made available
through the terms of this treaty.
The United States is the global leader in agriculture, and
I might add, parenthetically, so is my State of Georgia, so I
have a personal and parochial interest in this as well.
In fact, the multilateral germplasm system established
under the treaty is based on our own national plant germplasm
system, which has been in operation for years.
Without full participation under the treaty, our farmers
and researchers are placed in a competitive disadvantage.
Without it, they have to engage in costly, time-consuming,
bilateral negotiations to access materials that would be fully
available under the Treaty.
This treaty entered into force in 2004 and has 139 parties.
We look forward to hearing from our witnesses today on how
ratification of this treaty will help our national interests.
The second treaty we will consider is The Hague Convention.
In this treaty, we will address significant, complex and
conflicting laws and issues in global financial markets.
Financial markets have evolved over the last couple decades.
The Hague Convention represents the other step forward in the
evolution of securities law and financial markets.
The capital markets are now global with the presence of new
challenges with numerous parties trading securities across
national borders. Under the indirect system, intermediaries in
the United States manage accounts owned by people all over the
world. Although the financial transactions managed by the
intermediaries are global, the owners live in different
countries from where the law is applicable. Those accounts may
vary dramatically from one country to the next.
Determining which laws are applicable and which courts
apply brings new challenges with numerous parties trading
securities across national borders. Legal issues that once
would be resolved under U.S. law now face complex issues
regarding the choice of laws and choice of forum.
By providing a set of fallback rules for reconciliation of
conflicts of the law, The Hague Convention represents another
step forward in the evolution of securities law and financial
markets. The Hague Convention would improve upon the current
framework, providing a simpler method to resolve these
conflicts. If ratified, this convention would reduce risk in
global financial markets and reduce costs.
The United States has a natural advantage under The Hague
Convention. The Convention is based on U.S. legal principles
and the U.S. Uniform Commercial Code.
I look forward to discussing this today and look forward to
hearing from our witnesses.
I will now introduce the ranking member, Senator Shaheen.
STATEMENT OF HON. JEANNE SHAHEEN,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Shaheen. Thank you, Mr. Chairman. Thank you for
chairing this hearing. I am glad we are having this hearing
today because consideration of treaties is one of the critical
duties the Constitution assigns to the Senate, and I believe
that we need to take that duty seriously.
I am not going to repeat what Senator Isakson has said
about the treaties that we are going to be considering this
morning, but I just want to make a few points.
First, as Senator Isakson said, the Treaty has been signed
by the U.S. and ratified by 139 countries. My understanding is
that our ratification will require no changes in U.S. law.
On The Hague Securities Convention, I understand the
Convention's principles are based on our own Uniform Commercial
Code, which means they are entirely compatible with those
already in effect across the United States, and they will not
require any implementing legislation. The Uniform Law
Commission, the body instrumental in drafting the code, has
registered its strong support for ratification of the
Convention, as have all of the relevant stakeholders, including
banks, stockbrokers, investment firms, the U.S. Chamber of
Commerce.
So I will submit my full statement for the record, Mr.
Chairman, and apologize in advance that I have to leave early
to go to a markup in the Appropriations Committee.
Senator Isakson. Without objection, your remarks will be
made a permanent part of the record.
[The prepared statement of Senator Shaheen follows:]
Prepared Statement of Senator Shaheen
Thank you, Mr. Chairman.
I am glad that we are having this hearing today. Consideration of
treaties is one of the critical duties the Constitution assigns to the
Senate, and I believe we need to take that duty seriously. So thank
you, Senator Isakson, for chairing this hearing.
Global access to plant genetic resources is greatly valuable to
America's farmers, our academic institutions, our researchers, and the
private sector. With these materials, we can develop new crop varieties
that provide more nutrients, better resist pests and diseases, show
improved yields, better tolerate environmental stress, and can
therefore feed the growing number of people inhabiting this earth. The
United States is the world's largest market for seeds, as well as the
largest seed exporter.
The International Treaty on Plant Genetic Resources for Food and
Agriculture creates a global system for the management of plant genetic
resources. Ratification of this treaty will ensure the United States
can protect our national interests in the deliberations of the
International Treaty Governing Body, which establishes and manages that
global system. Once the U.S. ratifies this treaty, our companies and
agricultural researchers will be able to engage in a streamlined
exchange process for plant genetic resources rather than being forced
to negotiate separate bilateral agreements. This shift will reduce
uncertainty, logistical challenges and costs.
This treaty has already been ratified by 139 countries, and my
understanding is that ratification will require no changes to U.S.
laws.
I look forward to hearing the views of our distinguished witnesses
on the merits of the Treaty.
We have before us another important treaty: the Hague Securities
Convention, which will remove legal uncertainties for cross-border
securities transactions. I understand all of the relevant stakeholders,
including banks, broker-dealers, investment firms and the U.S. Chamber
of Commerce strongly favor its ratification.
These days, cross-border electronic transactions in stocks, bonds
and other securities are occurring in higher numbers than ever before.
However, uncertainty about what law governs the aspects of these
transactions can carry costs. The Convention resolves these
uncertainties by providing choice-of-law rules for securities and is
intended to modernize the conduct of these transactions.
I understand the Convention's principles are based on our own
Uniform Commercial Code, which means they are entirely compatible with
those already in effect across the United States and will not require
any implementing legislation. The Uniform Law Commission, the body
instrumental in drafting the code, has registered its strong support
for ratification of the Convention.
I look forward to hearing from our witnesses on the merits of this
treaty as well.
Senator Isakson. And without objection, I will note that we
are all going to be out of here pretty fast, because we have
votes coming up pretty soon. So I do not want our two witnesses
to think we are being rude or unprofessional, but we do have
votes, I think at 11 o'clock, if I am not mistaken.
So we will go right to our testimony.
I want to first, without objection, enter into the record
various letters that have been submitted by agricultural
interests and financial interests around the country in support
of the United States participation in both of the treaties we
will discuss today.
Without objection, they will become part of the record.
[The information referred to is located at the end of this
document.]]
Senator Isakson. Our first witness is the Honorable Judith
Garber, Acting Assistant Secretary for the Bureau of Oceans and
International Environmental and Scientific Affairs at the
Department of State.
We welcome you, and you will be the first to testify.
Our second witness today is Mr. John Kim, assistant legal
adviser for private international law at the Department of
State.
Ms. Garber, you are recognized for up to 5 minutes.
STATEMENT OF HON. JUDITH G. GARBER, ACTING ASSISTANT SECRETARY,
BUREAU OF OCEANS AND INTERNATIONAL ENVIRONMENTAL AND SCIENTIFIC
AFFAIRS, U.S. DEPARTMENT OF STATE, WASHINGTON, DC
Ms. Garber. Mr. Chairman, Ranking Member Shaheen, thank you
for the opportunity to testify today in support of the
International Treaty on Plant Genetic Resources for Food and
Agriculture.
With your permission, I have a longer statement that I
would like to submit for the record.
Senator Isakson. Without objection.
Ms. Garber. The American people depend on U.S. agriculture,
which in turn depends on stable, high yields of U.S. crops,
which in turn depend on the continual development of new crop
varieties. The crops we grow are under constant threat from
diseases and pests, droughts, and floods. Our food security and
the future of U.S. agriculture will depend on our ability to
breed resilient new crops that require less water, less
fertilizer, and less energy to grow, and still reliably produce
high-quality yields.
To develop these new crop varieties, breeders and
researchers require access to a broad spectrum of plant
germplasm. Plant germplasm includes the seeds, the bulbs, the
roots, and other propagating raw materials from which plants
can be reproduced.
These materials for plant breeding contain key traits, such
as immunity to virulent pests and diseases or tolerance for
drought. Because plant genetic diversity is spread across the
globe, U.S. access to germplasm from other countries is
critical to develop the crops we need. This means facilitating
guaranteed access to what is termed ``plant genetic resources''
is a very high priority for the United States and the
international community. This is the reason the Treaty was
established.
This treaty creates a stable legal framework for
international plant germplasm exchanges. It benefits both
research and commercial interests in the United States.
The Treaty also promotes U.S. and global food security
through the conservation and sustainable use of plant genetic
resources.
The Treaty's centerpiece is the establishment of a
multilateral system. Its purpose is to facilitate access by
public and private entities to, and benefit-sharing regarding,
certain plant genetic resources to be used for research,
breeding, and training for food and agriculture.
Currently, 64 food, feed, and grazing crops are listed in
the Treaty. Access is granted through a standard material
transfer agreement, essentially a contract that defines the
terms of access and benefit-sharing.
As a global leader in agricultural production, research,
and breeding, the United States was intensively involved in
negotiating the Treaty and the standard material transfer
agreement. President George W. Bush signed the Treaty in 2002.
And as you noted, Mr. Chairman, it entered into force in 2004
and now has 139 parties.
Throughout the Treaty's negotiating process, the United
States was firmly committed to creating a system that promotes
U.S. and global food security, protects U.S. access to genetic
resources held outside our borders, and supports research and
breeding in both the public and private sectors.
The U.S. also sought to protect the ability of
International Agricultural Research Centers, the institutions
largely responsible for the Green Revolution, which saved
hundreds of millions of lives, to continue to breed crops that
are the foundation for global food security. We were successful
in achieving these objectives.
U.S. ratification of the Treaty enjoys strong support among
stakeholders such as the American Seed Trade Association, the
American Farm Bureau Federation, the Association of Land-Grant
Universities, and the National Farmers Union.
Mr. Chairman, the Treaty is consistent with existing U.S.
practice and can be implemented under existing U.S.
authorities. The United States is already in compliance with
key provisions of the Treaty.
The Agricultural Research Service would play a major role
in domestic treaty implementation. Ratification would not
entail major policy or technical changes.
For more than 60 years, the U.S. National Plant Germplasm
System has distributed samples to plant breeders and
researchers worldwide and without restriction.
One notable example of collaboration is the crop gene bank
in Griffin. The gene bank of the Agricultural Research Service
and the University of Georgia is working to collect, conserve,
and distribute plant genetic resources for sorghum, peanut,
vegetables, cowpeas, and other crops and crop wild relatives.
Ratification of the Treaty would not only underscore
continued leadership in agricultural research, breeding, and
markets, it would also help U.S. farmers and researchers
sustain and improve their crops, and promote food security for
future generations.
Finally, it would enable the United States to effectively
guide the trajectory of the Treaty and its material transfer
agreement as they evolve to meet future challenges and changing
conditions.
Thank you for the opportunity to testify today. I would be
happy to answer any questions you may have.
[The prepared statement of Ms. Garber follows:]
Prepared Statement of Judith G. Garber
Mr. Chairman, Ranking Member Shaheen, and Members of the Committee:
Thank you for the opportunity to testify today in support of the
International Treaty on Plant Genetic Resources for Food and
Agriculture (``the Treaty'').
U.S. agriculture depends on the stable high yields of U.S. crops
which, in turn, depend on the continual development of new crop
varieties. The crops we grow are under constant threat from diseases
and pests, droughts and floods. Our food security and the future of
U.S. agriculture will depend upon our ability to breed new crops that
require fewer inputs, such as water, fertilizers, and energy, to grow;
new crops that are more resilient or resistant to pests and diseases;
and new crops that still reliably produce high-quality yields. To
develop these new crop varieties, breeders and researchers require
access to a broad spectrum of plant germplasm. Plant germplasm includes
the seeds, bulbs, roots, and other propagating raw materials from which
plants can be reproduced. These materials for plant breeding contain
key traits, such as immunity to virulent pests and diseases, or
tolerance for drought. Because plant genetic diversity is spread around
the world, the United States needs to have access to germplasm from
other countries in order to be best equipped to develop the crops we
need. This means that facilitating access to what is termed ``plant
genetic resources'' is a critical priority for the United States. It is
also a critical priority for the entire international community. This
is exactly why the Treaty was created.
Technological advances have significantly improved our ability to
identify, characterize, and utilize plant genetic materials, meaning
that now more than ever it is important for us to be able to access the
diversity of plant genetic resources outside our borders. However, U.S
researchers have found it increasingly difficult to gain access to
plant genetic resources in other countries. This Treaty establishes a
stable legal framework for international plant germplasm exchanges,
benefitting both research and commercial interests in the United
States, and promoting U.S. and global food security through the
conservation and sustainable use of plant genetic resources for food
and agriculture.
The centerpiece of the Treaty is the establishment of a
``Multilateral System'' for access to, and benefit-sharing regarding,
certain plant genetic resources to be used for research, breeding, and
training for food and agriculture. The Multilateral System currently
applies to 64 food, feed and grazing crops that are maintained by
International Agricultural Research Centers or that are under the
management and control of national governments and in the public
domain. Access to germplasm in the multilateral system is granted
through a Standard Material Transfer Agreement (SMTA), a contract that
defines the terms of access and benefit-sharing.
As a global leader in agricultural production, research and
breeding, the United States was intensively involved in negotiating the
Treaty and the SMTA, which accompanies every transfer of materials
under the multilateral system. President George W. Bush signed the
Treaty in 2002. It entered into force in 2004 and now has 139 Parties
including Australia, Brazil, Canada, Japan, and the EU. President Bush
forwarded the Treaty to the Senate for consideration in July 2008,
after negotiation of the SMTA was completed.
Throughout the Treaty negotiating process, the United States was
firmly committed to creating a system that promotes U.S. and global
food security, protects U.S. access to genetic resources held outside
our borders, and supports research and breeding in both the public and
private sectors. The United States also sought to protect the ability
of the International Agricultural Research Centers--the institutions
largely responsible for the ``Green Revolution'' which saved hundreds
of millions of lives--to continue to breed crops that are the
foundation for global food security. We were successful in achieving
these objectives.
U.S. ratification of the Treaty enjoys broad stakeholder support,
including support from major U.S. companies as well as prominent
industry organizations such as the American Seed Trade Association, the
American Farm Bureau Federation, the National Farmers Union, the
National Association of Wheat Growers, the National Corn Growers
Association, the Biotechnology Industry Organization, and the
Intellectual Property Owners of America. In addition, the Association
of Public Land-grant Universities also supports ratification.
U.S. stakeholders strongly support ratification because it would
guarantee U.S. users what is known as ``facilitated access,'' that is,
access on consistent terms for little or no cost, to plant genetic
materials held by other Treaty Parties. Currently U.S. entities are at
a disadvantage, as they are not assured access to these resources due
to our non-party status. When they do gain access, they sometimes have
to engage in lengthy ad hoc negotiations of terms of access, and those
terms are not always as favorable as those in the SMTA. If the United
States were a Party to the Treaty, U.S. users would have guaranteed
access under the SMTA, and the United States could ensure that any
revisions to the SMTA were consistent with U.S. interests.
The Treaty is consistent with existing U.S. practice and can be
implemented under existing U.S. authorities. The United States is
already in compliance with key provisions of the Treaty. The
Agricultural Research Service, in its capacity as manager of the
National Plant Germplasm System, would play a major role in domestic
Treaty implementation. Ratification would not entail major policy or
technical changes to current National Plant Germplasm System
operations. For more than 60 years, the U.S. National Plant Germplasm
System has distributed samples of germplasm to plant breeders and
researchers worldwide and without restriction. One notable example of
collaboration is the Agricultural Research Service-University of
Georgia crop genebank in Griffin, Georgia, which is working to collect,
characterize, conserve, and distribute plant genetic resources for
sorghum, peanut, vegetables, cowpeas, and other crops and crop wild
relatives.
The U.S. Department of Agriculture has long been recognized as the
world leader in plant germplasm conservation and distribution. If the
United States were to ratify the Treaty, U.S. entities would gain
guaranteed access to plant genetic resources covered by the Treaty's
Multilateral System. This guaranteed access is critical to the efforts
of researchers and plant breeders to develop new crop varieties that
are more nutritious, that are resistant to pests and diseases, that
show improved yields of high-quality products, and that are better able
to tolerate environmental stresses. The emergence of new plant breeding
tools only heightens the importance of open access to plant genetic
resources.
Ratification of the Treaty would not only underscore our continued
leadership in agricultural research, breeding, and markets; it would
also help U.S. farmers and researchers sustain and improve their crops
and promote food security for future generations. Finally, it would
enable the United States effectively to guide the trajectory of the
Treaty and its Material Transfer Agreement as they evolve to meet
future challenges and changing conditions.
Thank you for the opportunity to testify today. I would be happy to
answer any questions.
Senator Isakson. Thank you, Ms. Garber.
Mr. Kim?
STATEMENT OF JOHN J. KIM, ASSISTANT LEGAL ADVISER FOR PRIVATE
INTERNATIONAL LAW, U.S. DEPARTMENT OF STATE, WASHINGTON, DC
Mr. Kim. Chairman Isakson, Ranking Member Shaheen, members
of the committee, I appreciate this opportunity to testify
today in support----
Senator Shaheen. Mr. Kim, could you just pull your
microphone a little closer, so we can hear a little better?
Mr. Kim. Okay, excuse me. I will start again.
Chairman Isakson, Ranking Member Shaheen, members of the
committee, I appreciate this opportunity to testify today in
support of The Hague Convention on the Law Applicable to
Certain Rights and Respective Securities Held with an
Intermediary.
The Convention was adopted by The Hague Conference on
Private International Law on July 5, 2006, and was signed by
the United States and Switzerland that same day. Switzerland
and Mauritius have ratified the Convention. The Convention will
enter into force after the deposit of a third instrument of
ratification.
Many countries are looking to the United States, upon whose
law the Convention largely was based, to become a party before
they take action.
In brief, the rules in the Convention provide a narrow
technical fix to a serious problem in cross-border securities
markets that has already been fixed domestically through
adoption by all U.S. States of Articles 8 and 9 of the Uniform
Commercial Code.
The Convention, if widely adopted, would basically extend
current U.S. law and practice to the global financial markets.
In particular, the rules in the Convention solve the current
quandary of determining which country's law apply to certain
aspects of a cross-border transaction in which the issuer, the
clearing corporation, the security owner's bank or broker, and
the owner may be located in different countries.
First, I would like to provide some brief background
explaining the nature of the problem that the Convention is
designed to address. Over the years, financial markets have
moved from a system of direct holding of security certificates
or recordings on a share registry to a system of securities
clearance, settlement, and ownership where the ownership
information is held electronically as a book entry.
This so-called indirect system consists of one or more
tiers of intermediaries between the issuer and the owner. These
so-called intermediated securities are maintained through
clearing corporations for the accounts at banks and brokers,
which in turn maintain accounts for the customers.
In the movement toward book entry systems, it has become
increasingly difficult for financial market participants to
determine which country's law would apply to transactions
involving securities held through these systems that involve
different countries. It is crucial that market participants be
able to identify the relevant law easily and with certainty for
a variety of purposes, including, among many others, ensuring
the perfection of interest in the intermediated securities.
This problem affects U.S. banks and financial institutions
every day and increases legal uncertainty and raises costs.
The Uniform Law Commission and the American Law Institute
addressed this problem within the United States by revising the
UCC in 1994. The rules and the Convention are based on the
rules contained in UCC Articles 8 and 9.
Second, I would like to turn to the solution to this
problem provided by the Convention.
The Convention's focus is important but narrow. It deals
with intermediated securities, but not securities directly held
by the investor from the issuer. The Convention does not
prescribe substantive law. Rather, it simply selects a
governing law for certain issues related to an intermediated
securities transaction, thereby providing legal certainty on
issues. These issues include the legal rights and obligations
of the intermediary, and the resolution of priority conflicts
among the buyer, the secured party, and a judgment lien
creditor, if there are conflicting claims to the securities.
The primary role of the Convention for determining the
applicable law is to look to the law of the jurisdiction whose
law governs the account agreement between the customer and the
intermediary. Virtually all book entry systems are covered by
an account agreement, and a very large majority of those
agreements specify governing law.
Third, the Convention is consistent with and is largely
based on U.S. law. The Convention generally follows the
approach to choice of law for the indirect holding system
already contained in Article 8 of the UCC. In particular, UCC
Article 8 permits the intermediary and the customer to
determine the law that governs a transaction by express
agreement.
My last and perhaps most important point is that we expect
that there will be many benefits of U.S. ratification of the
Convention. The Convention would contribute to the practical
need in the large and growing global financial markets for
greater legal certainty as to the laws applicable to interests
in securities held through indirect holding systems.
It would reduce the cost of cross-border security
transactions for securities investors, market actors, and
custodians. U.S. businesses and individuals would benefit, in
particular, because the Convention sets forth modern rules,
which already their domestic transactions, and extend those
rules more globally, thereby reducing costs and enhancing
certainty.
As the Convention was largely based on U.S. law, and given
this country's significant role in cross-border transactions,
other countries are looking to the leadership of the United
States. If United States becomes a party, we expect that many
other countries, including Canada, as well as countries in
Asia, South America, and Africa, will be encouraged to join the
Convention and adopt the same rules on choice of law.
Thank you, Mr. Chairman, Ranking Member. I am happy to
answer any questions.
[The prepared statement of Mr. Kim follows:]
Prepared Statement of John J. Kim
Chairman Isakson, Ranking Member Shaheen, and Members of the
Committee, I appreciate this opportunity to testify today in support of
the Hague Convention on the Law Applicable to Certain Rights in Respect
of Securities Held with an Intermediary (``the Convention'').
The Convention was adopted by the Hague Conference on Private
International Law on July 5, 2006, and it was signed by the United
States and Switzerland that same day. The Convention will enter into
force after the deposit of the third instrument of ratification.
Switzerland and Mauritius have ratified the Convention. Many countries
are looking to the United States, upon whose law the Convention largely
was based, to become a party before they take action.
In brief, the rules in the Convention provide a narrow, technical
fix to a serious problem in cross-border securities markets that has
already been fixed domestically through adoption by all U.S. states of
Articles 8 and 9 of the Uniform Commercial Code (UCC). The Convention,
if widely adopted, would basically extend current U.S. law and practice
to the global financial markets.
In particular, the rules in the Convention solve the current
quandary of determining which country's law applies to certain aspects
of a cross-border transaction in which the investor or owner, the
issuer, the clearing corporation, and the owner's bank or broker may be
located in different countries. As a result, the Convention (1) reduces
the legal and systemic risks in cross-border investment securities
transactions; (2) reduces costs; and (3) facilitates capital flows.
My statement will consist of three parts. First, I will provide
some background on the Convention explaining the nature of the problem
that the Convention was designed to address. Second, I will explain how
the Convention addresses the problem and briefly run through its basic
provisions. Third, I will indicate the Convention's relation to
domestic law and its importance to U.S. banks, brokers and others.
i. background--the nature of the problem
Historically, owners of securities had a direct relationship with
the issuer. Investors or owners would either have physical possession
of the securities certificates, or be recorded on the issuer's share
registry. The location of the certificate or registry was readily
identifiable.
Over time, however, financial markets have expanded and moved to a
system of securities clearance, settlement, and ownership where the
ownership information is held electronically and indirectly as a book
entry. This so-called ``indirect system'' consists of one or more tiers
of intermediaries between the issuer and the owner. These so-called
``intermediated'' securities are maintained through clearing
corporations (or central securities depositories) for the accounts of
banks, brokers, and other financial institutions which in turn maintain
accounts for their customers (the beneficial owners of the securities).
The owners do not appear on any registry maintained by the issuer, nor
do they have actual possession of certificates.
In the movement towards book-entry systems, it has become
increasingly difficult for financial market participants to determine
which country's law would apply to transactions involving securities
held through these systems that involve different countries. (For
example, suppose that a New York broker holds stock issued by Japanese
and Singapore companies for a South American customer.) Also, these
cross-border transactions take place very quickly and in huge volumes.
Many countries' legal systems have not kept up with the book-entry
system, and their rules remain different than those in the United
States. This problem affects U.S. financial institutions every day, and
increases legal uncertainty and raises costs associated with the often-
complicated determination of which country's law may apply.
That is why the Uniform Law Commission (ULC) and the American Law
Institute in 1994 addressed this problem domestically in revising the
UCC. The rules in the Convention reflect the modern finance law of the
United States in Articles 8 and 9 of the UCC, adopted by all U.S.
states and the District of Columbia. The Convention would bring this
modern approach to the global markets.
ii. the proposed solution
I turn now to the solution to this problem that is provided by the
Convention.
The Convention's focus is important but narrow. It deals with
intermediated securities but not securities directly held by the
investor from the issuer. The Convention does not prescribe substantive
law for securities intermediaries, and it has no effect on regulatory
law. The Convention simply selects a governing law for certain issues
related to an intermediated securities transaction, thereby providing
legal certainty on the law applicable to those issues, and avoiding the
need to comply with the laws of multiple jurisdictions for the same
transaction.
The issues covered by the Convention include the legal rights and
obligations of the intermediary; the legal nature and effect of a
disposition of the investor's interest in the securities by the
investor's bank or broker, to a buyer or a secured lender; and how
priority conflicts among the buyer, the secured party and a judgment
lien creditor are resolved if there are conflicting claims to the
securities.
The primary rule of the Convention for determining the applicable
law is to look to the law of the jurisdiction whose law governs the
account agreement between the customer and the intermediary. Virtually
all book-entry systems are covered by an account agreement, and the
very large majority of those agreements specify a governing law.
Under the Convention, some minimal nexus must be established for
the choice of that law, such as an office (a place of business) of the
intermediary that performs certain functions in the chosen jurisdiction
dealing with securities, even if those functions are unrelated to any
particular securities account. This is generally not an issue for U.S.
banks or brokers. They would normally require that the governing law of
the account agreement be that of a jurisdiction in which they maintain
an office.
If the applicable law cannot be determined pursuant to an agreement
between the customer and the intermediary, certain fallback provisions
in the Convention would ultimately apply the law of the jurisdiction in
which the intermediary is organized.
iii. relation to u.s. domestic law
Turning now to the third part of my presentation, the Convention is
consistentwith, and was largely based on, U.S. law.
The Convention generally follows the approach to choice of law for
the indirect holding system contained in Article 8 of the UCC. Article
8 was specifically revised in 1994 to reflect the increasing use of
securities accounts without physically identifiable securities or
issuer share registries. In particular, UCC Article 8 permits the
intermediary and the customer to determine the law that governs the
transaction by express agreement.
As previously noted, the Convention has no effect on regulatory law
or the jurisdictional scope or mandate of any banking, securities, or
other regulators.
Federal law does not cover these types of commercial transactional
matters, so there is no federal law that would be displaced. In
addition, the Convention would not affect any other legal rules or
contractual provisions that are not specified in the Convention.
UCC Articles 8 and 9 will continue to cover any issues not covered
by the Convention and issues related to securities held directly by the
investor or owner.
There are some minor differences between the Convention and UCC
Articles 8 and 9, relating to perfection by filing, and regarding the
consequences of a change in the governing law of the agreement (which
would be a rare occurrence). Also, UCC Article 8, while permitting the
intermediary and the customer to select the applicable law, does not
contain a ``qualifying office'' rule.
None of these differences are significant, and none of the
interested U.S. industry associations or the ULC has indicated any
difficulty with these differences. These minor differences are not
expected to create any difficulties for U.S. practices under UCC
Articles 8 and 9.
The Administration has proposed that the Convention be self-
executing. No federal or state legislation would be required to
implement the Convention. This method of domestic implementation was
supported by the ULC. There is no need to craft federal legislation
that would intersect with Articles 8 and 9 of the UCC since the terms
of the Convention itself would do that adequately.
Finally, the Convention does not permit reservations, and the
Administration has not proposed any understandings or declarations.
iv. benefits of u.s. ratification
My last and perhaps most important point is that I hope the Senate
will appreciate the many benefits of U.S. ratification of the
Convention.
The Convention would contribute to the practical need in the large
and growing global financial markets for greater legal certainty as to
the laws applicable to interests in securities held through indirect
holding systems, and would reduce the costs of cross-border securities
transactions for securities investors, market actors, and custodians.
As a result, the Convention would facilitate the flow of capital to
both developed and emerging markets.
In addition to the aforementioned benefits to the United States,
U.S. banks and brokers would benefit in particular because the
Convention sets forth modern rules with which U.S. intermediaries
already are familiar and are generally applying. Further, U.S.
investors would benefit. For example, many Americans have pension funds
or 401(k) accounts, and these pension funds have large holdings in
securities that are managed under the book-entry systems I have
described. Widespread adoption of the Convention would enhance
harmonization and lower the costs of cross-border transactions
involving these funds.
It is therefore not surprising that industry trade associations
such as the International Swaps and Derivatives Association, the
Securities Industry and Financial Markets Association, the Association
of Global Custodians, and the Trade Association for the Emerging
Markets (EMTA) have written to this Committee indicating their support
for U.S. ratification. Also, notably, the President of the ULC sent a
letter to this Committee supporting U.S. ratification of the
Convention.
In view of the successful development of UCC Articles 8 and 9 in
the United States, and given this country's significant role in cross-
border securities transactions, other countries are looking to U.S.
leadership on the Convention.
If the United States becomes a party, we expect that many other
countries, including Canada, as well as countries in Asia, South
America, and Africa, will be encouraged to join the Convention and
adopt the same rules on choice of law for cross-border securities
transactions. As other countries proceed to adopt the Convention, legal
certainty will continue to increase for all securities transactions,
including those carried out by banks, brokers and other market
participants in the United States.
Senator Isakson. Thank you very much, Mr. Kim.
We will have an opening round of 5-minute questions. I will
start on that.
Ms. Garber, your recognition of the University of Georgia
was duly noted. I want to tell you how much I appreciate that.
[Laughter.]
Senator Isakson. They do have a great agriculture extension
service throughout the State and a great research center in
Griffin, which you acknowledged in your remarks, which I
appreciate.
That brings me, actually, to the key question that I have
been asking, given the genetically modified organisms issue. It
used to be in Asia, but now it seems like the Europeans are
using it as well. Will our participation in this treaty help us
in having GMOs recognized as being safe and secure as a
component part of our agricultural products? Or does it have
anything to do with that?
Ms. Garber. Thank you for that question, Senator.
This treaty deals with the particular product or plant
material, the building blocks of plants, but it does not deal
with the particular processes or techniques that were used to
create any particular seed or bulb or propagating material, so
it is completely neutral on the question of genetically
modified organisms. It just deals with access and the
particular seeds or tubers or bulbs or plant propagating
material.
Senator Isakson. Carrying that same thought a little bit
further, in terms of trade agreements, we have TPP that is
pending in the United States Senate, and hopefully TTIP will be
pending at some time in the next Congress, in terms of Europe
and Scandinavia, will it be of any help to us?
One of our problems in trade around the world is people
will use standards in their country for health and safety and
security and/or financial standards, Mr. Kim, in their country
to be a reason why they do not want to have free and fair and
open trade with United States.
Will this help us, either one of those treaties, by getting
into them and having a more level playing field?
Ms. Garber. This treaty is distinct from that, but what
this treaty does do is it creates a level playing field in
terms of guaranteed access for our public and private plant
breeders, as well as our agricultural researchers.
Senator Isakson. Mr. Kim, like most Americans who are not
attorneys and not bankers or financial services personnel, I
have always been worried about losing a stock certificate, but
I am even more worried about an electronic recording of stock
ownership that I can never touch, feel, and put in a safety
deposit box.
Our participation in this financial Convention with The
Hague, will that help in assuring people that their ownership
is secure and safe in the event of a cyberattack or some other
electronic problem?
Mr. Kim. Senator, this convention will certainly enhance
the global financial markets by introducing legal certainty as
to the choice of law in a situation where there is currently no
certainty. When there are many different countries involved,
people do not know which law applies, and they often try to
comply with many different laws.
So it would reduce legal and systemic risk, and reduce
costs. I think that would be good for U.S. investors, as well
as U.S. banks and brokers, and will enhance the integrity of
the indirect holding system through which much of our
securities trade proceeds.
Senator Isakson. To that point, and I want to make sure I
am right on this, the laws governing financial transactions in
the residence of the owner of the account under this convention
will be the laws that govern handling the financial services of
that account. Is that correct?
In other words, if I have a financial manager in the United
States of America, and I am a resident of the United States of
America, and there is a question about an account transfer,
this would guarantee the determination that U.S. law prevailed?
Is that right?
Mr. Kim. In practical reality, yes, because almost all U.S.
banks or brokers and U.S. residents would choose U.S. law to
govern their account agreements.
Senator Isakson. Thank you very much, Mr. Kim.
Thank you very much, Ms. Garber.
Senator Shaheen?
Senator Shaheen. Thank you.
Ms. Garber, can you talk about how and whether the treaty
would help address the challenges of global food insecurity?
Ms. Garber. Thank you for that question, Senator.
This treaty would absolutely help address the challenge of
global food security. So many regions of the world that suffer
from global food insecurity, such as in Africa, South Asia, or
the Caribbean, suffer from low agricultural productivity. What
this treaty does is it provides guaranteed access for those who
are trying to produce new plant varieties that will be stronger
and more resistant to part of the undercurrent reasons why we
have low agricultural food productivity or, for example, pests
and diseases that may affect certain crops.
So by providing the system of access, it enhances not only
the food security of the United States, but food security
globally.
Senator Shaheen. Thank you.
Mr. Kim, you pointed out that the Convention was signed in
July 2006, which is almost a decade ago, that there are only
two countries that have actually ratified it today. So why is
it taking so long?
Mr. Kim. Thank you, Senator, for the question.
Other countries are looking to the United States for
leadership on this convention, as this convention was based on
our law and rules, and in view of the significant role that the
United States plays in global markets.
U.S. ratification of this convention would lead to the
entry into force of the Convention, and we believe that would
create momentum to encourage other countries to join the
treaty.
I have had conversations with the Canadians. We have heard
voices from Japan and Korea that they are very interested in
what the United States does with The Hague Securities
Convention.
Senator Shaheen. I understand that. That makes sense to me.
But why has it taken so long for the Convention to come before
the Senate?
Mr. Kim. Well, the treaty transmittal package was submitted
by President Obama in May 2012.
Senator Shaheen. So we have been slow to take it up?
Mr. Kim. Well, it has been before the committee, certainly,
but I am sure there have been many other priorities and has
taken some time.
Senator Shaheen. I guess what I am trying to get at is,
given that we heard that the stakeholders seem to all be
supportive, have there been objections coming from some areas
that are not apparent, that we need to better understand?
Mr. Kim. Thank you, Senator.
No, we are not aware of any opposition or objections posed
to this convention. It has near universal support. Almost every
industry trade association has written to the committee in
support of U.S. ratification of the Convention, as has the
Uniform Law Commission, which promulgates the UCC. They have
all written in support of the Convention.
I think it is high time we take action. Thank you.
Senator Shaheen. Thank you.
Thank you, Mr. Chairman.
Senator Isakson. I would comment, Senator Shaheen, that it
is understandable why Mr. Kim works for a diplomatic agency of
the government. [Laughter.]
Senator Shaheen. He did that very well.
Senator Isakson. The answer to his question is that it is
our fault, number one, that it is so late in coming up. I would
compliment Chairman Corker and Senator Cardin on the fact that
we are having this hearing, which I think sends a clear signal
that we are ready to take action. But I appreciate your
diplomacy very much in answering the question.
Senator Johnson?
Mr. Johnson. No questions.
Senator Isakson. Senator Murphy?
Senator Murphy. No questions.
Senator Isakson. See, you did so good, nobody even has a
question. Thank you very much for your testimony, we are going
to move to our second panel.
For members, we will leave the record open until the end of
business on Monday for questions or additional comments, and
would ask the witnesses from the first panel to be sure to
reply quickly, if you do receive any additional questions from
the committee.
It is now my privilege to recognize our second panel. We
have two witnesses. The first is Mr. John Schoenecker, director
of intellectual property at the American Seed Trade
Association. Our second witness is Mr. Edwin Smith, partner at
the Law Offices of Morgan, Lewis & Bockius.
We recognize Mr. Schoenecker for his comments up to 5
minutes.
STATEMENT OF JOHN SCHOENECKER, DIRECTOR, INTELLECTUAL PROPERTY,
HM.CLAUSE, ON BEHALF OF AMERICAN SEED TRADE ASSOCIATION, DAVIS,
CA
Mr. Schoenecker. Thank you, Mr. Chairman and members of the
committee. I would just point out that I work for HM.CLAUSE, a
vegetable seed company out of Davis, California.
But I want to thank you for the opportunity to testify
today in support of the International Treaty on Plant Genetic
Resources for Food and Agriculture, which I will call the
treaty. I am here on behalf of the members of the American Seed
Trade Association. Founded in 1883, ASTA represents over 700
companies engaged in plant breeding, production, and
distribution of many seed types, including grains, oil, seeds,
rice, cotton, vegetables, flowers, forages, cover crops, and
grasses, what we in the vegetable seed business like to call
everything from asparagus to zucchini.
ASTA members are research-intensive companies in the
business of discovery, development, and marketing of seed
varieties with enhanced production and end-use qualities.
As you know, our global food system is highly
interdependent. For example, 70 percent of the food we eat and
grow in the U.S. comes from crops that are not native to the
U.S. As such, not all plant genetic resources needed to improve
these crops are found in the U.S. The treaty is an agreement
that aims to address this and enhance global food security by
providing access to, and exchange of, the plant materials
required to improve seed varieties.
A notable example of the impact of plant breeding, which
our previous speaker talked about, is the Green Revolution. It
demonstrates that you need all these sources of plant genetics
to be successful. It was credited with feeding millions and
saving countless lives.
The wheat of Dr. Norman Borlaug was developed based on
varieties from the United States, Japan, and Mexico, which in
turn thrived in India and Pakistan.
In the days of Dr. Borlaug, all plant breeders enjoyed much
freer access to global plant genetic resources. However,
certain countries began restricting access to their germplasm,
and the treaty was drafted to stabilize the situation, with the
U.S. playing a key role in its development. The intent was to
establish rules and standards to facilitate access and provide
benefit-sharing for the global seed resources needed for
agriculture.
Recently, the implementation of the Nagoya Protocol under
the Convention on Biological Diversity, or CBD, is further
threatening the global exchange of germplasm.
With ratification of the treaty, the U.S. would be able to
resume its leadership position, enhance the treaty's
functioning, and greatly diminish the uncertainty created by
Nagoya and the CBD.
Our national plant germplasm system is one of the best in
the world. It stores, maintains, and distributes worldwide over
a half-million accessions, but almost 2 million more are held
in seed banks outside the U.S.
Access to this crop diversity is equally important to all
sectors of agriculture, including organic, conventional,
public, and private. Lack of access means lost opportunities to
improve yield, enhance nutrition, better adapt crops to
changing weather, and to address the threats posed by evolving
pests and diseases.
As we know, U.S. farmers are global leaders in
productivity. Secure access to global plant material will
enable public and private breeders working with organic,
biotech, and conventional varieties to benefit from the treaty
and to supply the best seeds to growers, so they can produce
more of the best food tomorrow and well into the future.
As noted, we came close to ratification in 2010 when this
committee submitted the treaty and recommended ratification.
Today, support for ratification remains broad and committed.
More than 80 companies and organizations representing plant
breeders, academics, and seed users have expressed support to
the committee for ratification. These groups include the
American Farm Bureau Federation, American Society of Plant
Biologists, Association of Public and Land Grant Universities,
National Corn Growers Association, National Cotton Council, and
the National Farmers Union, to name a few.
The treaty provides a simple and noncontroversial solution
for a pressing problem. As a specialized system to exchange
plant materials, the treaty puts all member countries on a
level playing field and provides all plant breeders with clear
terms and conditions of use.
No new U.S. laws are required to implement the treaty, and
no new appropriations are needed. In fact, most of the
obligations of the treaty are currently being met by the U.S.
system.
With this, and on behalf of the American seed trade and
farmers and researchers who support the treaty, I urge the
committee to recommend ratification and support passage in the
Senate. This access is critical and will greatly assist the
U.S. seed industry in developing new varieties to benefit the
U.S. farmer and consumer, and enhance global security food
security.
Thanks for this opportunity to comment, Mr. Chairman.
[The prepared statement of Mr. Schoenecker follows:]
Prepared Statement of John Schoenecker
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify today in support of the
International Treaty on Plant Genetic Resources for Food and
Agriculture (the Treaty). I am here on behalf of my company HM.CLAUSE
and the American Seed Trade Association which was founded in 1883.
ASTA's broad membership includes over 700 companies engaged in plant
breeding, production, and distribution of seed varieties including
grains, oilseeds, rice, cotton, vegetables, flowers, forages, cover
crops and grasses. ASTA members are research-intensive companies in the
business of discovery, development and marketing of seed varieties with
enhanced agronomic and end-use qualities. Ratification of the Treaty by
the U.S. has always been an important issue for the American seed
industry. Since its inception, the Treaty has been considered the
preferred mechanism for plant breeders to move seed and plant materials
between countries in order to improve varieties for the world's
farmers.
Many people are not aware of the highly interdependent nature of
our global food system. Seventy percent of the food we eat and grow
comes from crops that are not native to the U.S. The resources to
improve these crops have been brought into the U.S over time. The
Treaty is an agreement that aims to enhance global food security
through the continued access and exchange of materials used to improve
seeds for farmers. Perhaps the most notable example of the impact of
exchanging plant materials is the Green Revolution which is credited
with saving millions of lives. The wheat that Norman Borlaug developed
was based on a combination of materials from the U.S., Japan and Mexico
which, in turn, thrived in India and Pakistan. We still use relatives
of that wheat today in our breeding programs. There are many examples
across crops. In vegetables, some disease and pest resistance in
carrots has come from materials from South America and Europe. Green
beans have disease resistance from French seed banks bred into
commercial varieties.
No country, including the U.S., is self-sufficient when it comes to
seed for the future. U.S. seed banks store, maintain and distribute
over 560,000 crop varieties. However, over two million more crop lines
and their relatives are held in seed banks outside of the U.S. Public
and private plant breeders once enjoyed much freer access to seeds for
research and development. However, certain countries began restricting
access to their germplasm and the Treaty was drafted to try to
stabilize this situation. The U.S. played a key role in negotiations
leading up to the creation of the final text of the Treaty during the
Bush Administration. The intent was to create international rules and
standards around access and benefit sharing with regard to seed used
for agriculture. Recently, the implementation of the Nagoya Protocol
(Nagoya) under the Convention on Biological Diversity (CBD) is further
threatening our ability to exchange germplasm globally. With
ratification, the U.S. would be able to resume its leadership position
to enhance the functioning of the Treaty and greatly diminish the
uncertainty created by the CBD and Nagoya.
Currently, the Treaty has 139 Contracting Parties, many of which
are important sources of seed exchange and also competitors of the
U.S., including all EU countries, India, Brazil and Japan. If those
countries chose to, they could restrict access to their germplasm to
only other contracting parties. Without ratification, U.S. agriculture
could then be at a huge disadvantage.
Access to crop diversity is equally important to all sectors of
agriculture including organic, conventional, public and private. Lack
of access to global crop diversity will lead to lost opportunities to
better adapt crops to changing weather and drought, and to address the
threats posed by evolving pests and diseases. Improving yields will
help us feed a growing global population. In the vegetable sector we
are looking for new crop characteristics to enhance nutritional
content, improve flavors and extend shelf-life to reduce food waste.
Responding to these agricultural challenges requires a much deeper
understanding of individual crop varieties, which have been developed
under diverse conditions across the globe, and their wild ancestors.
High throughput DNA sequencing technologies and bioinformatics tools
provide new opportunities for university researchers to mine
international collections of regional plant materials. These
collections can be characterized and leveraged to provide important
agronomic, nutritional, and other traits of societal value that can be
utilized through traditional plant breeding. This work is hindered when
the mechanism to exchange materials isn't in place, and instead has to
be negotiated on an ad hoc basis.
The Treaty will benefit public and private breeders working on a
variety of crop types, in addition to U.S. farmers who are already
global leaders in productivity. As a specialized system to exchange
plant materials, the Treaty puts all member countries on a level
playing field and provides their plant breeders with clear terms and
conditions. Secure access to global materials will enable U.S.
researchers and the broader industry to supply the best seeds to our
customers to grow more of the best food for tomorrow and into the
future.
Support for ratification is broad. More than 80 companies,
organizations and universities representing plant breeders, academics
and seed users have expressed support for ratification to the
Committee. In addition to ASTA, these groups include American Farm
Bureau Federation, American Society of Plant Biologists, Crop Science
Society, Association of Public and Land-grant Universities' Board on
Agriculture Assembly, National Corn Growers Association, National
Cotton Council, National Farmers Union and National Wheat Growers
Association.
The Treaty provides a simple and non-controversial solution for a
pressing problem. We came close to completing the ratification process
in 2010 when the Treaty was passed by this Committee. No new laws are
required to implement the Treaty in the U.S. and no new appropriations
are needed. In fact, most of the obligations of the Treaty are already
being met by the U.S. systems that are already in place.On behalf of
the American Seed Trade and the farmers and researchers who also
support the Treaty, I urge the Committee to recommend ratification and
support passage in the Senate. After ratification, the U.S. can resume
the leadership role it once played guiding the system that supports all
seed research and development to the benefit of U.S. farmers and
consumers, as well as food security around the world.
Senator Isakson. Thank you very much.
Mr. Smith?
STATEMENT OF EDWIN E. SMITH, PARTNER, LAW OFFICES OF MORGAN,
LEWIS & BOCKIUS, LLP, BOSTON, MA
Mr. Smith. Chairman Isakson and members of the committee,
thank you for the opportunity to testify before you today on
The Hague Securities Convention.
I am a partner in the law firm of Morgan, Lewis & Bockius,
where I regularly represent clients in cross-border
transactions and insolvencies, including transactions that
would be covered by the Convention. I am also a Uniform Law
commissioner, and I participated in the drafting of revisions
to the Uniform Commercial Code.
I appreciate the opportunity to appear before you today to
express my support for the Convention. The Convention would
solve a vexing problem for market participants in cross-border
security transactions. That problem is determining which
country's law applies to security interests and property rights
in intermediated securities.
The problem arises from the fact that the owner of the
security, the holder of the security interest in the
securities, the issuer of the securities, and the location of
the securities, may all be in different countries.
Currently, each country has its own choice of law rules
that govern these transactions, and the lack of uniformity
creates real uncertainty and risk for market participants in
the financial system.
To solve this problem, the Convention would establish clear
choice of law rules that are based largely on the choice of law
rules in the Uniform Commercial Code that is in effect
throughout the United States. By ratifying the Convention, the
United States would take an important step that would not only
facilitate international commerce by preventing disputes over
property rights and securities, but it would also help mitigate
potential systemic risk created by the lack of clarity over the
governing law for cross-border security transactions.
To demonstrate the importance of the Convention, let me
give you an example drawn from a real situation on which I had
to advise a client. A customer of a U.S. bank custodian owned
securities of a Japanese issuer. The U.S. bank custodian held
those securities for the customer. The customer wanted to
pledge those securities, grant a security interest in those
securities, to secure a loan from the bank.
The pledge would work very well under U.S. law. The
custodian's interest in the securities would be protected from
creditors of the customer that try to use U.S. courts to reach
the securities. In this case, there would be very little
additional cost to the customer.
The problem is that these were securities issued by a
Japanese issuer. Could a creditor of the customer ignore the
effective pledge under U.S. law and try to reach those
securities in Japan? The answer, it turned out, based on advice
from Japanese counsel, was yes.
Now, how can that be? It is because we learned that a court
in Japan would apply traditional conflict of law rules. Their
rule would look to the location of the asset to determine which
country's law governs whether the pledge is a good one. Since
the securities were issued by Japanese issuers, they were
viewed to be located in Japan.
Without them undertaking steps to get a good pledge under
Japanese law, the securities could be reached by a creditor of
the customer who has a passport to go to Japan and can bring a
lawsuit there.
Moreover, if the customer became a debtor under the U.S.
bankruptcy code, there would not even need to be an actual
creditor who goes to Japan for the pledge to be vulnerable. The
customer's bankruptcy trustee likely would have the rights of
any creditor who could go to Japan to attach the securities,
even if the creditor did not actually do so.
Well, would the pledge then be protected if the lender went
through the steps of protecting the pledge under both U.S. and
Japanese law? Not necessarily. If the securities were evidenced
by stock certificates, a court in Japan or another country
might view the applicable law to be the country where the
certificates were located. And if the securities were held
through a clearing corporation, it might view the applicable
law to be where the clearing corporation operates.
Under current law, neither the bank nor the custodian could
be sure where a lawsuit could be brought or what country's law
might apply. The uncertainty creates risk, and risk reduces the
availability and increases the cost of credit for the customer.
The situation would be even worse if there were multiple
pledges of securities of different issuers in different
countries being pledged, because then you are multiplying the
governing laws that could possibly apply.
The Convention would solve this troublesome problem. It
would create a simple conflict of law rule that points to the
law of the country whose law governs the custody agreement
between the bank custodian and the customer, so long as the
bank custodian has an office in that country that generally
deals with securities. That law would be readily apparent from
the agreement.
The Convention also mitigates systemic risk by facilitating
the resolution of financial institutions in case of financial
distress or market failure by making the receiver's or
trustee's job easier in determining which governing law
applies.
Then we also talked about the fact that this convention is
totally consistent with U.S. law, in terms of choice of law
rules.
So in conclusion, the convention creates significant
benefits with little practical downside. For that reason,
market participants, with no opposition of which I am aware,
urge its ratification.
Thank you very much. I would be happy to answer any
questions any of you may have.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Edwin E. Smith
Chairman Isakson, Ranking Member Shaheen, and the members of the
committee, thank you for the opportunity to testify before you today on
the Hague Securities Convention. I am a partner at the law firm of
Morgan, Lewis and Bockius LLP, where I regularly represent clients in
cross-border transactions and insolvencies, including transactions that
would be covered by the Convention. I am also a Uniform Law
Commissioner and have participated in the drafting of revisions to the
Uniform Commercial Code. I appreciate the opportunity to appear today
to express my support for the Hague Securities Convention.
The Hague Securities Convention, formerly known as the Convention
on the Law Applicable to Certain Rights in Respect of Securities Held
with an Intermediary (the ``Convention''), was promulgated in 2006 by
the Hague Conference on Private International Law and has been adopted
thus far by Mauritius and Switzerland. The Convention has been signed
by the United States but has not been ratified. The Convention requires
that at least three countries adopt the Convention for the Convention
to go into effect. If the United States were to ratify the Convention,
the Convention would then go into effect among the adopting countries,
and many more countries would likely follow the lead of the United
States in adopting the Convention.
The Convention addresses certain important conflict of laws issues
that arise under current law when securities are held with a bank,
broker or clearing corporation through the so-called ``indirect holding
system.'' The uncertainty under current law on these issues creates
significant risks for securities customers, banks, brokers, clearing
corporations and third party lenders. The Convention, if widely
adopted, would resolve these issues. Ratification of the Convention by
the United States is supported by the American Bar Association, the
Association of Global Custodians, the International Swaps and
Derivatives Association, the Securities Industry and Financial Markets
Association and the Uniform Law Commission. The United States should
ratify the Convention.
I will first explain why the United States should ratify the
Convention and then briefly describe the indirect holding system,
explain the conflict of laws problems that arise under current law and
describe how the Convention will solve those problems without
disrupting current practices in the United StatesThe Indirect Holding
System
In the indirect holding system, the registered owner of securities
of an issuer is typically a clearing corporation, such as Depository
Trust Company, Clearstream or Euroclear. The clearing corporation
maintains accounts that reflect that the interests in the securities
are for the benefit of a bank or broker. The ultimate beneficial owner
of the securities may be a customer of the bank or broker. So, if a
retail securities customer says ``I own IBM securities,'' what the
customer really means in the indirect holding system is that the
customer has a right to the securities against the customer's bank or
broker and that the bank or broker has a right to the securities
against the clearing corporation.
the conflict of laws problems under current law
The Problems in General
The cross-border holding of securities in the indirect holding
system raises conflict of laws issues that are not easily resolved
under the current law. Securities may be issued by a company located in
Country A to a clearing corporation located in Country B which holds
the securities for a bank or broker in Country C and that in turn
credits interests in the securities to the account at the bank or
broker of a customer located in Country D. A third party lender to the
customer, relying on recourse to the securities in extending credit to
the customer, may even be located in Country E. Current law is very
unclear as to which country's laws govern the following issues:
The disposition of the customer's interest in the securities by the
bank or broker to a buyer of the securities with or without the
customer's consent;
The perfection steps that need to be taken for a customer to grant
a security interest in the customer's interest in the
securities to the bank or broker or to a third party lender to
the customer;
The right of a judgment creditor of the customer to attach or levy
on the interest of the customer in the securities;
Whether any interest in the securities obtained by the buyer,
secured party or judgment lien creditor extends to dividends
and other distributions on the securities;
How the priority conflict among the buyer, the secured party and
the judgment lien creditor is resolved if they all claim an
interest in the securities; and
How any transfer of an interest in the securities is characterized
for purposes of determining whether the transfer is a sale or
merely creates a security interest that secures an obligation.
Under current law, the resolution any of these conflict of laws
issues--i.e., determining which jurisdiction's substantive law applies
to the issue--may depend upon where any litigation raising the issue is
brought. The court in the country in which the litigation is brought
would apply the conflict of laws rules of that country. Those rules
might point to the substantive law of that country or to the
substantive law of another country to resolve the issue. However, if
litigation were brought in a court of another country, the court in
that other country may, using its conflict of laws rules, apply its own
substantive law or the substantive law of an entirely different country
to resolve the issue.
An Example
To illustrate, let's assume that a bank located in New York acts as
a securities custodian. The bank custodian credits to an account of its
customer an interest in securities issued by an issuer in Country X and
held by a clearing corporation for the account of the custodian. A
third party lender extends credit to the customer, obtains a security
interest in the customer's interest in the securities under New York
law to secure the repayment of the credit and takes all appropriate
steps under New York law to perfect the security interest. Later, a
creditor of the customer obtains a judgment against the customer and
seeks a judgment lien on the customer's interest in the securities.
Under New York's conflict of laws rules, so long as the custody
agreement designates New York as the ``securities intermediary's
jurisdiction'' or, absent that designation, is governed by New York
law, New York substantive law will determine how the creditor obtains
the judgment lien and how the priority conflict between the lender as
secured party and the judgment lien creditor is resolved. Applying New
York substantive law, the attachment of the lien must be made by
service of process on the custodian. And, under New York substantive
law, the lender, holding a perfected security interest in the
securities, prevails over the judgment lien creditor.
However, if the creditor brings a lawsuit against the customer in
Country X, the court in Country X will apply its own conflict of laws
rules. It is possible that the conflict of laws rules of Country X may
follow a very common rule that looks to the situs of the asset (often
referred to as lex re sitae). Under that conflict of laws rule, the
issues are resolved under the substantive law of the jurisdiction in
which the securities are viewed to be located. Let's say that under the
law of Country X securities issued by an issuer located in Country X
are themselves viewed to be located in Country X. In that case, the
substantive law of Country X will determine how the creditor obtains
the judgment lien and how the priority conflict between the lender as
secured party and the judgment lien creditor is resolved. The creditor
may under the substantive law of Country X attach the securities by
serving process on the issuer in Country X. Moreover, any judgment lien
of the creditor arising from the service of process may under the
substantive laws of Country X have priority over the lender's security
interest if the lender has not previously taken steps under the law of
Country X for its security interest in the securities to obtain
priority over a subsequent judgment lien. (A similar analysis would
apply if, under the conflict of laws rules of Country X, the securities
were viewed to be located in Country Y where the clearing corporation
is located or where share certificates for the securities are
physically held.)
This problem is especially acute under United States bankruptcy
law. If the customer were to become a debtor under the U.S. Bankruptcy
Code, the customer's bankruptcy trustee would have the hypothetical
status of a creditor who has obtained a judgment lien against the
customer's interest in the securities at the time of the commencement
of the bankruptcy case. If the lender's security interest in the
customer's interest in the securities would not prevail over a judgment
lien under applicable non-bankruptcy law, the security interest will be
set aside in the bankruptcy case, and the lender will be treated as a
general unsecured creditor of the customer. It is unclear under the
Bankruptcy Code whether the bankruptcy trustee's status as a
hypothetical judgment lien creditor could be that of a hypothetical
judgment lien creditor in Country X. If that were the case, then the
bankruptcy trustee could set aside the lender's security interest and
treat the lender as a general secured creditor even though the lender's
security interest in the customer's interest in the securities would
have been senior to the judgment lien under New York's substantive law.
As a result, for the lender to have confidence that its security
interest would be given priority over the lien of the judgment lien
creditor or even would not be set aside in the customer's bankruptcy
case, the lender would need to comply with not only New York
substantive law but also the substantive law of Country X. The lender's
doing so will involve additional expense that may decrease the
availability or increase the cost of credit to the customer. Moreover,
if the lender were extending the credit to the customer based on a
security interest in securities issued by issuers or held through
clearing corporations in numerous countries, the costs of complying
with the substantive law that might be applicable under the conflict of
laws rules of each country in which litigation might be brought could
be prohibitive.
how the convention would address the problems
The Convention would address these problems by creating a single,
uniform conflict of laws rule that would apply the substantive law of
the country whose law is chosen by the custody or securities account
parties to govern their agreement or, alternatively, to govern the
issues covered by the Convention. The only limitation is that the
chosen law must be that of a country in which the relevant bank, broker
or clearing corporation maintains an office for dealing in securities--
often referred to as the ``Qualifying Office'' test.
In our example, if the United States and Country X had adopted the
Convention and litigation were brought in Country X and so long as the
custodian and the customer have agreed that the custody agreement or,
alternatively, the issues covered by the Convention are governed by New
York law, Country X would apply New York substantive law to determine
how the creditor obtains the judgment lien and how the priority
conflict between the lender as secured party and the judgment lien
creditor is resolved.
Accordingly, the Convention, by applying a single, uniform conflict
of laws rule would simplify very complex conflict of laws issues that
arise under current law, provide greater certainty for transacting
parties, dramatically reduce transaction costs and potential litigation
claims, and provide a basis for increasing the availability and
reducing the cost of credit. The Convention would also, by resolving
the relevant conflict of laws issues, reduce risks in the entire cross-
border securities clearance and settlement system that could arise in
resolving competing claims in times of financial crisis.
no disruption of current practices in the united states
Adoption of the Convention would not in any material respect
disrupt current practices in the United States. The Convention is
largely consistent with the domestic commercial law in the United
States, namely Article 8 of the Uniform Commercial Code as adopted in
every state of the United States and the District of Columbia. Article
8 contains choice of law rules that are substantially the same as the
conflict of laws rules of the Convention. The main difference is that
Article 8 does not have a Qualifying Office test. However, this
difference is expected to have little effect in practice.
If the Convention were to become effective, it would apply to pre-
effective date transactions. Nevertheless, on account of interpretive
rules contained in the Convention, it should not be necessary in most
cases for pre-effective date agreements to be modified to account for
the Convention. Even so, many private parties have already been
inserting into their contracts a clause that would address the
Convention if the Convention were to come in effect.
Senator Isakson. Thank you for your testimony. I have only
two questions to ask.
One is, on all treaties, there is usually some question
about U.S. ceding sovereignty. Have you heard of any objection
in either case on these two treaties to the sovereignty
question of the United States?
Mr. Schoenecker. Not I, Mr. Chairman.
Mr. Smith. No, Mr. Chairman.
Senator Isakson. That is the right answer, and that is a
good answer. Thank you very much.
The second question is, I am a Swedish--and I am Swedish,
so I can use that as an example. This is a hypothetical. I am a
Swede who owns stock in a U.S.-based corporation. I take a
legal action against that company. If we are a member of this
treaty, that guarantees that the legal action would be governed
under the laws of who? Sweden or the United States?
Mr. Smith. The convention does not deal with that issue,
Mr. Chairman. It does not deal with actions against the issuers
of the securities. It just deals with who has property rights
of the securities.
So all of the normal rules dealing with rights of action
against an issuer of securities, or security law disclosures,
are not impacted at all by this convention.
Senator Isakson. So in that same example, if I was the
corporation and had a question with the owner of the stocks,
U.S. law would govern any action I took against the owner? Is
that correct?
Mr. Smith. It would govern any action dealing with whatever
property rights the investor had in the securities.
Senator Isakson. Which is why this is so important to
domestic companies in the United States of America.
Mr. Smith. It is. It is, Mr. Chairman. That is why it is
important for mutual funds, 401(k)s, for lots of investors who
want certainty on what law governs their property rights.
Senator Isakson. Mr. Schoenecker, I have been told many
times, and heard in many hearings, that we have about a 90-day
supply of food available in the world, at any given point in
time. It is the most important commodity we have for nutrition
and security and safety.
This will help enhance the food security of the United
States and the rest of the world. Am I correct?
Mr. Schoenecker. Absolutely, without a doubt.
Crop varieties and productivity of agriculture is
fundamental to having reasonable access under clear terms to
these resources, so that we can build new varieties to solve
problems and increase productivity for farmers in the U.S. and
around the world.
Senator Isakson. We appreciate both of your willingness to
be here today to testify. I hope you will not take all the
Senators leaving as any affront to your testimony. In fact, it
is acknowledgment that we needed to have done what we are doing
now a long time ago.
I will do everything I can to expedite the hearing and
passage of this legislation from the subcommittee to the full
committee.
We will keep the record open for 5 days until the end of
the business day on Monday, if anybody has additional
questions. I would ask both of you to try to respond as quickly
as possible, if you get any additional questions from the
committee.
Senator Isakson. Unless there are any other comments, we
will stand adjourned, and I thank everybody for their
testimony.
[Whereupon, at 10:43 a.m., the hearing was adjourned.]
Additional Material Submitted for the Record
Responses to Questions Submitted to Judith G. Garber by Senator Corker
Question. In its transmittal documents, the Administration
suggested the Senate include in its resolution of consent to
ratification an understanding with respect to U.S. laws on intellectual
property laws and the operation of Article 12.3(d). Please explain why
this recommended understanding is necessary.
Answer. Article 12.3(d) of the Treaty states that recipients shall
not claim intellectual property rights that limit access to the plant
genetic materials in the form received from the Multilateral System.
Our understanding would underscore that an invention derived from
material obtained from the Multilateral System could be patented or
protected by plant variety protection. For example, if corn germplasm
is taken from the Multilateral System and used to create a new corn
hybrid that is distinct from the original material, intellectual
property protection would be available for the new variety. Similarly,
a modified gene sequence or modified extract from the corn or a method
of use of material isolated from plant genetic materials from the
Multilateral System could also be patentable. A number of other
Parties, including Japan, the United Kingdom and Germany, have
submitted similar declarations; no country has submitted a declaration
to the contrary.
Question. It is my understanding that, because the U.S. has not
ratified the Treaty, U.S. citizens may not take full advantage of the
rights provided under the Standard Materials Transfer Agreement. U.S.
agriculture must instead negotiate for plant germplasm under the Nagoya
Protocol to the Convention on Biological Diversity which came into
effect in October 2014. It is also my understanding that the Convention
on Biological Diversity requires a benefit sharing arrangement,
negotiated on a bilateral contractual basis, in order to exchange
germplasm. United States industry and public researchers have raised
concerns about requirements under the Nagoya Protocol, such as the
necessity of obtaining government-issued proof of prior informed
consent to acquire materials, and have characterized such compliance
issues as posing significant logistical problems, and likely to be both
cumbersome and costly.
Please describe the difficulties and challenges presented to U.S.
agriculture by the requirements of the Nagoya Protocol.
Answer. Because the United States is not a party to the Treaty,
U.S. users do not have guaranteed access to plant genetic resources for
food and agriculture from other nations under the terms of the
International Treaty on Plant Genetic Resources for Food and
Agriculture and the Standard Material Transfer Agreement (SMTA). U.S.
users therefore often must negotiate access and the terms of transfer
on a case-by-case basis. Some U.S. entities seeking access to foreign
genetic resources have been subjected to burdensome terms and
conditions. These circumstances threaten to impede U.S. government and
stakeholders' access to and use of genetic resources, their ability to
conduct research and even, in some cases, to obtain overseas patents,
public funding, or market access. In some cases, countries cite their
domestic legislation implementing the Nagoya Protocol when imposing
terms of access and benefit sharing on U.S. industry and other users.
However, with regard to covered plant genetic resources for food and
agriculture, if the provider's and user's countries both are Party to
the Treaty, then access to those resources is governed by the Treaty
and guaranteed to be under the terms of the Standard Material Transfer
Agreement. Being a Party to the International Treaty on Plant Genetic
Resources for Food and Agriculture would therefore offer U.S.
researchers and breeders guaranteed access, on the predictable terms of
the SMTA, to the covered plant germplasm collections of the other 140
Parties.
Question. It is my understanding that the Treaty covers the
exchange of plant materials that are used in traditional breeding
within a single species. Is the Treaty related in any way to the
development or use of transgenic biotech crops?
Answer. The focus of the Treaty is on propagating materials (e.g.,
seeds and cuttings)--the building blocks for crop improvement--as
opposed to specific technologies or traits. The Treaty is neutral on
the question of genetically modified organisms and does not address the
regulation of genetically engineered crops, genetically modified
organisms, or biotechnology. However, being a Party to the Treaty would
benefit all breeders--regardless of whether they use techniques of
biotechnology, techniques of conventional breeding, or a combination--
by ensuring access on predictable terms to genetic resources that are
important to researchers and breeders seeking to improve plant
varieties and ensure food security.
Question. Explain how the treaty's benefit sharing regime will
work. How will payments made to the treaty's Trust Account be allocated
and for what purposes will they be used?
Answer. The centerpiece of the Treaty is the Multilateral System
under which a Party provides access to other Parties and its users,
upon request, to listed plant genetic resources held in national and
international gene banks and collections.
As part of the Multilateral System, the Treaty provides for non-
monetary benefit sharing that is consistent with longstanding USDA and
USAID work to advance agricultural progress and support global food
security. The Treaty also established a Benefit Sharing Fund. If an
entity using the Standard Material Transfer Agreement commercializes a
product containing plant genetic material covered by the Treaty, the
entity can choose either to make the product freely available for
further research and breeding, or can pay a relatively small royalty
into the Fund. Contracts with royalty provisions are already in
widespread use commercially for such plant genetic material, and the
rate specified by the Treaty is well within range of terms used by
agricultural industry. The Fund supports projects to improve on-the-
ground efforts to conserve plant genetic resources for food and
agriculture, especially in developing countries. This in turn promotes
global food security.
The Treaty's Governing Body oversees the Fund, which is managed by
the Treaty's Secretariat. As a Party to the Treaty, the United States
would be able to participate in decisions regarding operation of the
Fund and block consensus on any proposals contrary to U.S. interests.
The Administration's policy on the appropriate uses of these funds will
include consideration of consistency with the Treaty's objectives, as
well as efficiency, effectiveness and accountability in the use of such
funds.
Question. What is the relationship between this Treaty and the
Convention on Biological Diversity (CBD) which the U.S. has not
ratified? Does ratification of this Treaty imply acceptance of any of
the obligations under the CBD?
Answer. This Treaty and the Convention on Biological Diversity
(CBD) are separate instruments, with separate implementation. Joining
the Treaty does not imply acceptance of or incur any obligation for the
United States under the CBD.
Question. If the United States becomes a party to the treaty, what
financing commitments will the U.S. be adopting with respect to
capacity-building resources for the conservation and use of
agricultural biodiversity globally and for the implementation of the
MLS provisions by developing countries.
Answer. The Treaty does not obligate Parties to contribute specific
amounts of financial resources for national activities in developing
countries for the conservation and sustainable use of plant genetic
resources. Further, there are no mandatory contributions from Parties
to the Treaty. The Treaty is funded through voluntary contributions
from Parties and other sources. There are no plans to make voluntary
financial contributions toward the Treaty's budget at this time.
=======================================================================
Letters Submitted in Support of
The Treaty on Plant Genetic
Resources for Food and Agriculture,
Treaty Doc. 110-19
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Letters Submitted in Support of
The Convention on the Law Applicable to
Certain Rights in Respect of Securities
Held With an Intermediary,
Treaty Doc. 112-6
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