On April 1, 2017, the Hague Securities Convention — or by its actual name, the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary — will enter into effect in the United States. The Convention changes existing US State law relating to the choice of law governing certain contracts pertaining to securities held with an intermediary in a securities account. It does not change any substantive law. As a result, both new and existing secured transactions and conveyances involving securities held with an intermediary in a securities account should be scrutinized to be sure that the parties’ intentions are reflected, taking into account the changes wrought by the Convention.
The Convention has the status of a statute of the United States, and consequently preempts the choice-of-law rules in the Uniform Commercial Code and any related federal law. The Convention provides rules governing the choice of law relating to the liabilities and rights of an intermediary holding securities in a securities account and third parties, including the perfection and priority of a security interest in securities held in a securities account. The primary rule of the Convention is that the law governing for these purposes is that specified in the “account agreement,” if any, relating to the securities account. The Convention goes on to provide fall-back rules to determine the choice of law in the absence of an account agreement or in the absence of a specification of the governing law of the account agreement. (In negotiating significant commercial transactions, parties will generally not want to rely on fall-back rules.) The “account agreement” is clearly the custody agreement between the intermediary and the account holder. The only limit on the application of the primary rule is that the intermediary must have, at the time when the account agreement is entered into, a “qualifying office,” i.e., an office that is in the “State” specified in the account agreement and that is engaged in the business or regular activity of maintaining securities accounts. “State” is defined so that a choice in the account agreement of the law of any state of the United States will be effective if the intermediary maintains a qualifying office any state of the United States.
The Convention contains transition rules in an attempt not to require the wholesale amendment of existing security arrangements. It provides that the perfection and priority of security interests in securities held in securities accounts under pre-April-1 documentation will continue to be governed by previously-applicable law if the relevant account agreement specifies either the governing law for any of the issues within the scope of the Convention or the location of the securities account.