April 3, 2017 - On March 27th, the LSTA hosted a webinar on the Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary presented by experts, Sandra Rocks of Cleary, Edwin Smith of Morgan Lewis, and Steve Weise of Proskauer Rose. As of April 1, 2017, the US became one of three countries bound by the Hague Securities Convention (only Mauritius and Switzerland are also now similarly bound); however, other countries are expected to follow suit and ratify the Convention in the coming months. The purpose of the Hague Securities Convention is to unify conflicts of laws principles to reflect market reality in the way securities are held today. Over the past 50 years, there has been a movement from holding, transferring, and pledging securities through the physical possession of security certificates or recording ownership on the issuer’s books to intermediated holding systems where interests in the securities are held, transferred, and pledged through book-entries to securities accounts. With the growth of volume of cross-border securities transactions, it is critical that investors must be able to determine in advance with certainty what law governs the nature of their interests in securities pledged through intermediaries. The Convention applies to all securities credited to a securities account held with an intermediary and all cases involving a choice of law between the laws of different countries; it does not apply to directly-held securities, and nor does it provide choice of law rules for other types of collateral. Thus, for example, when the accountholder, issuer, or intermediary are located in different countries, the choice of law rules of the Convention are likely to be implicated (notably, the Convention applies whether or not the applicable law is that of a jurisdiction that has adopted the Convention). As such, transacting parties should now always consider the possibility that the Convention will apply. The issues specified to which the Convention’s choice of law rules determine applicable law include the nature of the rights acquired in securities held with an intermediary, the nature and effects against the intermediary and third personsof a disposition of, or the creation or transfer of an interest in, securities held with an intermediary which includes perfection, priority and duties of an intermediary to third parties asserting an interest in securities held with that intermediary, and the requirements for realisation of an interest in intermediated securities. The Convention’s Article 4(1) sets out its primary conflict of law rule to determine the law applicable to those issues; there are two parts to that primary rule. First, the primary rule provides that those issues’ applicable law is the law in force in the State (ie, nation) expressly agreed in the account agreement as the State whose law governs the account agreement or, if the account agreement expressly provides that another law is applicable to all such issues, that other law. Second, the primary rule provides that the law designated in accordance with the primary rule applies only if the relevant intermediary has, at the time that the account agreement is entered into, a physical office in that State specified in the account agreement that is engaged in a business or other regular activity of maintaining securities accounts. Our experts provide many examples of where parties will need to file to perfect their interest, sample language to select the applicable law under the Convention which must be part of the account agreement, and tips relating to giving opinions.
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