[Senate Executive Report 114-15]
[From the U.S. Government Publishing Office]


114th Congress     }                               {       Exec. Rept.
                                 SENATE
 2nd Session       }                               {        114-15

======================================================================



 
   CONVENTION ON THE LAW APPLICABLE TO CERTAIN RIGHTS IN RESPECT OF 
                  SECURITIES HELD WITH AN INTERMEDIARY

                                _______
                                

               September 14, 2016.--Ordered to be printed

                                _______
                                

          Mr. Corker, from the Committee on Foreign Relations,
                        submitted the following

                                 REPORT

                    [To accompany Treaty Doc. 112-6]

    The Committee on Foreign Relations, to which was referred 
the Convention on the Law Applicable to Certain Rights in 
Respect of Securities Held with an Intermediary (Treaty Doc. 
112-6), having considered the same, reports favorably thereon 
with one declaration, as indicated in the resolution of advice 
and consent, and recommends that the Senate give its advice and 
consent to ratification thereof.

                                CONTENTS

                                                                   Page

  I. Purpose..........................................................1
 II. Background.......................................................2
III. Major Provisions.................................................3
 IV. Entry Into Force.................................................5
  V. Implementing Legislation.........................................6
 VI. Committee Action.................................................6
VII. Committee Recommendations and Comments...........................6
VIII.Text of Resolution of Advice and Consent to Ratification.........7


                               I. Purpose

    The Convention on the Law Applicable to Certain Rights in 
Respect of Securities Held with an Intermediary (the 
``Convention'') aims to establish clear rules to resolve a 
narrow but important problem with respect to determining which 
country's law applies to certain aspects of a cross-border 
securities transaction (for example, transactions in which any 
of the investors or owners, the issuers, the clearing 
corporation, and the owner's bank or broker are located in 
different countries).

                             II. Background

    In modern capital markets, investment securities are 
commonly held in electronic form by banks, securities brokers 
and central clearing depositaries collectively known as 
``securities intermediaries.'' Under the laws of many legal 
systems, when determining what law governs rights in these 
investment securities, courts apply the law of the place where 
the paper copies of the securities are physically held or, if 
the securities are entirely electronic, where they would be 
held. These determinations are often difficult to make. In the 
modern economy, electronic securities interests of increasing 
value move through intermediaries in increasingly high volumes, 
and frequently cross national borders. The value of trades and 
collateral transactions in these securities can exceed over $2 
trillion per day. Uncertainty as to what law governs the 
perfection, priority and other interests in the securities 
arising from these electronic transactions has imposed friction 
costs on securities transactions, and has limited attempts to 
reduce credit and liquidity risk exposures.
    The Convention provides uniform rules for rapidly 
determining the law applicable to certain rights in investment 
securities held through intermediaries. The primary rule of the 
Convention looks to the law in force in the jurisdiction 
expressly identified in the agreement between the investor and 
the intermediary governing the account in which the security is 
held. The Convention would provide greater legal certainty in 
this area, thereby reducing legal risk, enhancing efficiency in 
market transactions and facilitating the global flow of 
capital. The Convention deals only with choice of law issues 
and only with securities held with an intermediary and credited 
to a securities account. It does not include, and has no effect 
on the substantive law that will be applied once the choice of 
law determination has been made.
    Furthermore, the Convention is limited to international 
transactions and would apply only in situations where a 
combination of the account holder, the parties to a disposition 
of the securities, the securities account or interests therein, 
the relevant intermediary, or the issuer or issuers of the 
securities are located in different countries. Finally, account 
holders and intermediaries are not bound by the Convention's 
standard choice of law rules if they choose to take affirmative 
steps to contractually provide for alternative choice of law 
rules.
    The Convention is largely consistent with U.S. law as 
reflected in Articles 8 and 9 of the Uniform Commercial Code 
(UCC). The treaty reflects U.S. choice of law principles under 
UCC Articles 8 and 9. The UCC is not a federal statute but is a 
state law that has been uniformly adopted by the states in this 
area. As noted above, the Convention would be limited to 
transactions involving multiple countries where choice of law 
rules would be relevant.
    The Convention is supported by all relevant U.S. regulatory 
agencies, including the Department of the Treasury, the U.S. 
Securities and Exchange Commission, the Commodity Futures 
Trading Commission, and the New York Federal Reserve Bank. It 
is also supported by the National Conference of Commissioners 
on Uniform State Laws (also known as the ``Uniform Law 
Commission'').
    The Convention is also supported by securities clearance 
and settlement entities, including the Depository Trust & 
Clearing Corporation (the primary U.S. central securities 
depositary), as well as commercial market interests that 
include custodian banks, broker-dealers, securities 
intermediaries, and securities industry associations such as 
the Securities Industry and Financial Markets Association and 
the International Swaps and Derivatives Association. The 
American Bar Association has also adopted a formal resolution 
recommending U.S. ratification.
    A detailed paragraph-by-paragraph analysis of this treaty 
may be found in the Letter of Submittal from the Secretary of 
State to the President on this instrument, which is reprinted 
in full in Treaty Document 112-6. What follows is a brief 
summary of some key provisions.

                         III. Major Provisions

    As noted above, the Convention is largely consistent with 
U.S. law, specifically the choice of law rules of Articles 8 
and 9 of the Uniform Commercial Code, which are very similar to 
those of the Convention. Therefore, according to administration 
testimony before the Foreign Relations Committee, not only 
would the Convention require minimal adjustment for U.S. 
investors and financial institutions, it would help globalize 
the UCC choice of law rules, thereby simplifying the planning 
for transactions that involve multiple jurisdictions.
    The Convention, does, however, differ from the choice of 
law rules in the UCC in certain minor respects. First and 
foremost, under Article 4, the Convention has a ``Qualifying 
Office'' test while the UCC Articles 8 and 9 choice of law 
rules do not. The administration observes that this is 
generally not an obstacle for U.S. banks, brokers or other 
securities intermediaries, as under current industry practice, 
they would normally require that the governing law of the 
account agreement be that of a jurisdiction in which they 
maintain an office. In response to a question from the 
Chairman, the administration stated further:


          In fact, the Qualifying Office test arguably may be 
        viewed as a modest improvement to current U.S. law 
        because it requires some minimal connection between the 
        intermediary and the governing law that is chosen. The 
        Convention also sets forth the consequences of a change 
        in the governing law of an agreement. This is a very 
        rare occurrence. Moreover, parties already can amend 
        the governing law in their account agreements under UCC 
        Articles 8 and 9 wholly apart from the Convention.


    Satisfying the Qualifying Office test requires more than a 
mere agency presence. Without a true function in the 
maintaining of securities accounts, the Qualifying Office test 
would not be met. Article 4(1) of the Convention requires that 
the office be ``engaged in a business or other regular activity 
of maintaining securities accounts.'' Additionally, Article 
4(2)(d) makes explicit that the requirement is not satisfied 
merely because an office ``engages solely in representational 
functions or administrative functions, other than those related 
to the opening or maintenance of securities accounts, and does 
not have authority to make any binding decision to enter into 
any account agreement.''
    Therefore, the Convention is expected to have very minimal 
impact on current and future practices in the United States 
regarding account agreements. The administration has assured 
the committee that ``[i]mplementing and adapting to the 
Convention's choice of law regime should be relatively easy for 
U.S. investors and financial institutions, and global market 
participants should be attracted to U.S. law in view of the 
clear and workable rules in UCC Articles 8 and 9.
    Additional minor differences between the Convention and 
existing U.S. law include: (a) fall-back choice of law rules 
that differ slightly from those of UCC Article 8, (b) differing 
rules on perfection of security interests by filing under two 
narrow and easily planned-for circumstances, and (c) slight 
differences from UCC Article 9 in the way the Convention 
protects interests acquired before an amendment to the 
governing law set forth in an account agreement.
    With respect to perfection of security interests by filing, 
the administration has informed the committee they do not 
expect the Convention to disrupt current U.S. industry 
practices under Article 9 of the UCC, including with respect to 
the perfection of security interests. UCC Article 9 permits a 
security interest in intermediated securities to be perfected 
by either of two principal means: the filing of a financing 
statement or the secured party's obtaining ``control'' of the 
securities. The Convention allows for both of these means of 
perfection.
    In the case of perfection by control, both the Convention 
and UCC Articles 8 and 9 permit the applicable law to be 
determined either by the law governing the account agreement, 
or by a more focused clause in the agreement addressing the 
issues specified in Article 2(1) of the Convention, including 
the requirements for perfection. In the case of the Convention, 
the Qualifying Office test must also be met.
    In the case of perfection by filing, the UCC Article 9 
choice of law rules provide that the jurisdiction in which the 
investor is ``located'' (as determined under UCC Article 9) is 
the jurisdiction whose substantive law governs perfection by 
filing. This is the case regardless of the law specified in the 
account agreement. If perfection is by the filing of a 
financing statement rather than control, Article 12 of the 
Convention, dealing with multi-unit countries, then becomes 
relevant to minimize any disruption of U.S. practices.
    Article 12 permits the UCC Articles 8 and 9 choice of law 
rules to continue to be effective within the United States for 
purposes of determining the law governing perfection by filing. 
The administration has provided the committee with the 
following example:


          [If] the account agreement is governed by New York 
        law, the Convention would generally require that New 
        York law govern issues of perfection. But, if the 
        investor were a Delaware corporation, Article 12 then 
        supplements the Convention's general choice of law rule 
        and permits New York's UCC Articles 8 and 9 choice of 
        law rules to continue to be effective within the United 
        States for purposes of determining the law governing 
        perfection by filing. As a result, applying New York's 
        UCC Article 9 choice of law rules, Delaware law would 
        still govern perfection by filing as it does in the 
        absence of the Convention. There generally would be no 
        change in U.S. practice for perfection by filing.


    The administration notes, however, that there are two 
limited circumstances in which the Convention would affect the 
UCC Articles 8 and 9 choice of law rules for perfection by 
filing:


          If the account agreement is governed by the law of a 
        non-UCC-jurisdiction, the availability of perfection by 
        filing would be determined by the law of the non-UCC 
        jurisdiction, not UCC Article 9. For example, if the 
        investor was a Delaware corporation but the account 
        agreement was governed by English law, perfection by 
        filing would be determined under English law. The UCC 
        Article 9 choice of law rules for perfection by filing 
        would not be relevant. We would expect, though, that 
        U.S. intermediaries would typically insist on the law 
        of a UCC jurisdiction to govern their account 
        agreements. Moreover, we would expect global market 
        investors generally to be attracted to choose the law 
        of a state of the United States to govern their account 
        agreements given the clear and workable rules of UCC 
        Articles 8 and 9.
          If the law of a UCC jurisdiction governs the account 
        agreement and the investor is located in a non-UCC 
        jurisdiction for purposes of UCC Article 9, the 
        availability of perfection by filing would be 
        determined by the law of the chosen UCC jurisdiction 
        rather than by the law of the non-UCC jurisdiction. For 
        example, if the investor was a company that UCC Article 
        9 determines to be located in Ontario and the account 
        agreement was governed by New York law, Article 12 of 
        the Convention would not be applicable. That is because 
        New York's UCC Article 8 and 9 choice of law rules do 
        not point to another jurisdiction within the United 
        States; they point to Ontario. Accordingly, under the 
        Convention, New York law, the law chosen in the account 
        agreement, would determine perfection by filing, and a 
        financing statement would need to be filed in New York. 
        That outcome differs from the outcome under the UCC 
        Articles 8 and 9 choice of law rules by which, in the 
        example, perfection by filing would be determined by 
        Ontario law. We believe that this change in the 
        location for the filing of a financing statement can be 
        easily addressed by the secured party investigating the 
        governing law of the account agreement.

                          IV. Entry Into Force

    The treaty will enter into force on the first day of the 
month following the expiration of three months after the 
deposit of the third instrument of ratification, acceptance, 
approval or accession. Currently, the Republic of Mauritius and 
the Swiss Confederation have ratified the treaty. With deposit 
of its instrument of ratification, the United States would be 
the third country, bringing the treaty into force among the 
ratifying countries. Under Article 19 of the treaty, the 
Convention shall enter into force for both the United States 
and the other ratifying countries on the first day of the month 
following the expiration of three months after the deposit of 
the U.S. instrument of ratification.

                      V. Implementing Legislation

    The executive branch has indicated that the United States 
currently has all necessary authority to implement the treaty. 
Accordingly, no new legislation is necessary or is being sought 
in conjunction with the treaty. The Resolution of Advice and 
Consent to Ratification includes a Declaration stating that the 
treaty is self-executing.

                          VI. Committee Action

    The committee held a hearing to consider the treaty on May 
19, 2016.\1\ The hearing was chaired by Senator Isakson. The 
committee considered the treaty on June 23, 2016, and ordered 
the treaty favorably reported by voice vote, with a quorum 
present and without objection, with the recommendation that the 
Senate give advice and consent to its ratification, as set 
forth in this report and the accompanying resolution of advice 
and consent to ratification.
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    \1\To view the published transcript of the May 19, 2016 hearing (S. 
Hrg. 114-324), see: https://www.govinfo.gov/browse/content/pkg/CHRG-
114shrg20973/pdf/CHRG-114shrg20973.pdf
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              VII. Committee Recommendations and Comments

    The committee believes the Convention would provide 
significant benefits for U.S. investors and financial 
institutions, notably increased legal certainty in cross-border 
transactions and a reduction in legal and systemic risk, 
without having to adapt to a new legal framework and therefore 
recommends the Senate give its advice and consent to 
ratification. Further, by providing predictability in these 
transactions, the Convention would reduce costs and facilitate 
capital flows. The Convention would not contradict any federal 
or state laws or common practices in the United States.
    The committee believes the Convention will provide a 
narrow, technical fix to a serious problem in cross-border 
securities markets in an appropriate and narrowly tailored 
manner. Because the Convention reflects much of the Uniform 
Commercial Code, the Convention would in many respects extend 
current U.S. law and practice to the global financial markets.
    The committee has included a proposed declaration in the 
resolution of advice and consent, which states that the 
Convention is self-executing. This declaration is consistent 
with statements made in the Letter of Submittal from the 
Secretary of State to the President on this instrument. The 
Senate continues to include statements regarding the self-
executing nature of treaties in resolutions of advice and 
consent in light of the Supreme Court decision, Medellin v. 
Texas, 128 S.Ct. 1346 (2008). The committee continues to 
believe that a clear statement in the resolution is warranted. 
A further discussion of the committee's views on this matter 
can be found in Section VIII of Executive Report 110-12.\2\
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    \2\To view Exec. Rept. 110-12, see: https://www.gpo.gov/fdsys/pkg/
CRPT-110erpt12/pdf/CRPT-110erpt12.pdf
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              VIII. Text of the Resolution of Advice and 
                        Consent to Ratification

    Resolved (two-thirds of the Senators present concurring 
therein),

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO AN UNDERSTANDING AND A 
                    DECLARATION.

    The Senate advises and consents to the ratification of the 
Convention on the Law Applicable to Certain Rights in Respect 
of Securities Held with an Intermediary, adopted at The Hague 
on July 5, 2006, and signed by the United States on that same 
day (the ``Convention'') (Treaty Doc. 112-6), subject to the 
declaration of section 2.

SEC. 2. DECLARATION.

    The advice and consent of the Senate under section 1 is 
subject to the following declaration:
          The Treaty is self-executing.









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