2018 New Mexico Statutes
Chapter 55 - Uniform Commercial Code
Article 8 - Investment Securities
Section 55-8-110 - Applicability; choice of law.
(a) The local law of the issuer's jurisdiction, as specified in Subsection (d) of this section, governs:
(1) the validity of a security;
(2) the rights and duties of the issuer with respect to registration of transfer;
(3) the effectiveness of registration of transfer by the issuer;
(4) whether the issuer owes any duties to an adverse claimant to a security; and
(5) whether an adverse claim can be asserted against a person to whom transfer of a certificated or uncertificated security is registered or a person who obtains control of an uncertificated security.
(b) The local law of the securities intermediary's jurisdiction, as specified in Subsection (e) of this section, governs:
(1) acquisition of a security entitlement from the securities intermediary;
(2) the rights and duties of the securities intermediary and entitlement holder arising out of a security entitlement;
(3) whether the securities intermediary owes any duties to an adverse claimant to a security entitlement; and
(4) whether an adverse claim can be asserted against a person who acquires a security entitlement from the securities intermediary or a person who purchases a security entitlement or interest therein from an entitlement holder.
(c) The local law of the jurisdiction in which a security certificate is located at the time of delivery governs whether an adverse claim can be asserted against a person to whom the security certificate is delivered.
(d) "Issuer's jurisdiction" means the jurisdiction under which the issuer of the security is organized or, if permitted by the law of that jurisdiction, the law of another jurisdiction specified by the issuer. An issuer organized under the law of this state may specify the law of another jurisdiction as the law governing the matters specified in Paragraphs (2) through (5) of Subsection (a) of this section.
(e) The following rules determine a "securities intermediary's jurisdiction" for purposes of this section:
(1) if an agreement between the securities intermediary and its entitlement holder governing the securities account expressly provides that a particular jurisdiction is the securities intermediary's jurisdiction for purposes of Sections 55-8-101 through 55-8-116 NMSA 1978, that jurisdiction is the securities intermediary's jurisdiction;
(2) if Paragraph (1) of this subsection does not apply and an agreement between the securities intermediary and its entitlement holder governing the securities account expressly provides that the agreement is governed by the law of a particular jurisdiction, that jurisdiction is the securities intermediary's jurisdiction;
(3) if neither Paragraph (1) nor Paragraph (2) of this subsection applies and an agreement between the securities intermediary and its entitlement holder governing the securities account expressly provides that the securities account is maintained at an office in a particular jurisdiction, that jurisdiction is the securities intermediary's jurisdiction;
(4) if none of the preceding paragraphs applies, the securities intermediary's jurisdiction is the jurisdiction in which the office identified in an account statement as the office serving the entitlement holder's account is located; or
(5) if none of the preceding paragraphs applies, the securities intermediary's jurisdiction is the jurisdiction in which the chief executive office of the securities intermediary is located.
(f) A securities intermediary's jurisdiction is not determined by the physical location of certificates representing financial assets or by the jurisdiction in which is organized the issuer of the financial asset with respect to which an entitlement holder has a security entitlement or by the location of facilities for data processing or other record keeping concerning the account.
History: 1978 Comp., § 55-8-110, enacted by Laws 1996, ch. 47, § 14; 2001, ch. 139, § 142.
OFFICIAL COMMENTS
UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.
1. This section deals with applicability and choice of law issues concerning Article 8. The distinction between the direct and indirect holding systems plays a significant role in determining the governing law. An investor in the direct holding system is registered on the books of the issuer and/or has possession of a security certificate. Accordingly, the jurisdiction of incorporation of the issuer or location of the certificate determine the applicable law. By contrast, an investor in the indirect holding system has a security entitlement, which is a bundle of rights against the securities intermediary with respect to a security, rather than a direct interest in the underlying security. Accordingly, in the rules for the indirect holding system, the jurisdiction of incorporation of the issuer of the underlying security or the location of any certificates that might be held by the intermediary or a higher tier intermediary, do not determine the applicable law.
For securities in the indirect holding system, but not the direct holding system, this section's provisions are subject to the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary (the "Convention" or "Hague Securities Convention"), to which the United States is a party. The Convention's primary rule is highly similar to this section, though there are potential differences as well. See Comments 3 and 5 through 7 below and PEB Commentary No. 19, dated April 11, 2017.
The Hague Securities Convention applies broadly to all instances "involving a choice between the laws of different [nations]", and can accordingly apply by reason of any of many elements, including without limitation a non-U.S. location of a party involved in the transaction, a non-U.S. party asserting an adverse claim, non-U.S. securities being credited to the securities account, or non-U.S. law being specified by the account agreement or other transaction document. Indeed one may wish to plan all indirect holding system transactions with the Hague Securities Convention as well as UCC Article 8 in mind, because even in transactions that appear wholly domestic, international factors may in fact be present (for example, if the securities intermediary holds securities for the entitlement holder through a non-U.S. intermediary) or may later become present (for example, if a non-U.S. party acquires an interest in or asserts an adverse claim to assets credited to the account).
In each of subsections (a), (b) and (c), the phrase "local law" refers to the law of a jurisdiction other than its conflict of laws rules. See Restatement (Second) of Conflict of Laws § 4.
2. Subsection (a) provides that the law of an issuer's jurisdiction governs certain issues where the substantive rules of Article 8 determine the issuer's rights and duties. Paragraph (1) of subsection (a) provides that the law of the issuer's jurisdiction governs the validity of the security. This ensures that a single body of law will govern the questions addressed in Part 2 of Article 8, concerning the circumstances in which an issuer can and cannot assert invalidity as a defense against purchasers. Similarly, paragraphs (2), (3), and (4) of Subsection (a) ensure that the issuer will be able to look to a single body of law on the questions addressed in Part 4 of Article 8, concerning the issuer's duties and liabilities with respect to registration of transfer.
Paragraph (5) of Subsection (a) applies the law of an issuer's jurisdiction to the question whether an adverse claim can be asserted against a purchaser to whom transfer has been registered, or who has obtained control over an uncertificated security. Although this issue deals with the rights of persons other than the issuer, the law of the issuer's jurisdiction applies because the purchasers to whom the provision applies are those whose protection against adverse claims depends on the fact that their interests have been recorded on the books of the issuer.
The principal policy reflected in the choice of law rules in Subsection (a) is that an issuer and others should be able to look to a single body of law on the matters specified in Subsection (a), rather than having to look to the law of all of the different jurisdictions in which security holders may reside. The choice of law policies reflected in this subsection do not require that the body of law governing all of the matters specified in Subsection (a) be that of the jurisdiction in which the issuer is incorporated. Thus, Subsection (d) provides that the term "issuer's jurisdiction" means the jurisdiction in which the issuer is organized, or, if permitted by that law, the law of another jurisdiction selected by the issuer. Subsection (d) also provides that issuers organized under the law of a State which adopts this Article may make such a selection, except as to the validity issue specified in paragraph (1). The question whether an issuer can assert the defense of invalidity may implicate significant policies of the issuer's jurisdiction of incorporation. See, e.g., Section 8-202 [55-8-202 NMSA 1978] and Comments thereto.
Although Subsection (a) provides that the issuer's rights and duties concerning registration of transfer are governed by the law of the issuer's jurisdiction, other matters related to registration of transfer, such as appointment of a guardian for a registered owner or the existence of agency relationships, might be governed by another jurisdiction's law. Neither this section nor Section 1-105 (Revised Section 1-301) deals with what law governs the appointment of the administrator or executor; that question is determined under generally applicable choice of law rules.
3. Subsection (b) and, where the Hague Securities Convention applies, Article 2(1) thereof provide that the law governing the issues concerning the indirect holding system that are dealt with in Article 8 are principally determined by the agreement between the securities intermediary and the entitlement holder governing the securities account.
Paragraphs (1) and (2) and Hague Securities Convention Article 2(1)(a) cover the matters dealt with in the Article 8 rules defining the concept of security entitlement and specifying the duties of securities intermediaries. Paragraph (3) and Convention Article 2(1)(e) cover whether the intermediary owes any duties to an adverse claimant. Paragraph (4) and Convention Article 2(1)(a) and (d) cover whether adverse claims can be asserted against entitlement holders and others.
Subsection (e) and Hague Securities Convention Article 4 provide that the account agreement may effectively determine the applicable law for the foregoing issues in either of two ways. Most directly and doubtless most frequently, under both Subsection (e)(2) and Article 4(1), the law chosen by the parties to govern the account agreement determines the applicable law. Alternatively, Subsection (e)(1) and Article 4(1) provide mutually comparable rules that require slightly different phrasing in the agreement. Under Subsection (e)(1), if the account agreement expressly provides that a particular jurisdiction is the securities intermediary's jurisdiction for purposes of UCC Article 8, then that provision determines the applicable law, even if the agreement's overall governing law clause (if any) is different. Under Convention Article 4(1)'s comparable rule, if the account agreement expressly provides that a particular jurisdiction's law is applicable to all the issues specified in Article 2(1) of the Hague Securities Convention, then that provision determines the applicable law, even if the agreement's overall governing law clause (if any) is different. The policy is to ensure that a securities intermediary and all of its entitlement holders can look to a single, readily-identifiable body of law to determine their rights and duties.
Where the Hague Securities Convention applies, the foregoing provisions of an account agreement effectively determine the applicable law only if the intermediary, at the time of the agreement, had an office in the designated jurisdiction (which may be anywhere in the United States if the account agreement specifies a state of the United States) that is engaged in a regular activity of maintaining securities accounts (a "Qualifying Office"). However, because the policy of this section and the Convention is to enable parties to determine, in advance and with certainty, what law will apply to transactions governed by this Article, the validation of the parties' selection of governing law by agreement is not conditioned upon a determination that the jurisdiction whose law is chosen bear a "reasonable relation" to the transaction. See Section 4A-507 [55-4A-507 NMSA 1978]; compare Section 1-105(1) [55-1-105 NMSA 1978] (Revised Section 1-301(a)). That is also true with respect to the similar provisions in Subsection (d) of this section and in Section 9-103(6) [55-9-103 NMSA 1978]. The remaining paragraphs in Subsection (e) and Convention Article 5 contain additional default rules for determining the applicable law.
The Hague Securities Convention applies regardless of whether the law that it designates is that of a nation adhering thereto, though of course the Convention itself is the law only of adhering nations. The Convention applies to account agreements entered into before as well as after the Convention's effectiveness in the United States. However, for pre-Convention agreements that specify that a state of the United States is the securities intermediary's jurisdiction for purposes of UCC Article 8 and that do not expressly refer to the Convention, Article 16(3) preserves the agreements' intended effect, by treating them as providing that the specified state's law is applicable to all the issues specified in Article 2(1), if the Qualifying Office test is met. There is no doubt that the Convention, like UCC Article 8, applies to multiple tier holding arrangements, such as where the account holder holds through a broker which in turn holds through a clearing corporation.
Subsection (f) makes explicit a point that is implicit in the UCC Article 8 description of a security entitlement as a bundle of rights against the intermediary with respect to a security or other financial asset, rather than as a direct interest in the underlying security or other financial asset. The governing law for relationships in the indirect holding system is not determined by such matters as the jurisdiction of incorporation of the issuer of the securities held through the intermediary, or the location of any physical certificates held by the intermediary or a higher tier intermediary. Hague Securities Convention Article 6 is in accord.
4. Subsection (c) provides a choice of law rule for adverse claim issues that may arise in connection with delivery of security certificates in the direct holding system. It applies the law of the place of delivery. If a certificated security issued by an Idaho corporation is sold, and the sale is settled by physical delivery of the certificate from Seller to Buyer in New York, under Subsection (c), New York law determines whether Buyer takes free from adverse claims. The domicile of Seller, Buyer, and any adverse claimant is irrelevant.
5. The following examples illustrate how a forum applying these rules would determine the governing law:
Example 1. John Doe, a resident of Kansas, maintains a securities account with Able & Co. Able is incorporated in Delaware. Its chief executive offices are located in Illinois. The office where Doe transacts business with Able is located in Missouri. The agreement between Doe and Able provides that it is generally governed by the law of New York but also that Illinois is the securities intermediary's (Able's) jurisdiction for purposes of UCC Article 8 and that Illinois law is applicable to all the issues specified in Article 2(1) of the Hague Securities Convention. Through the account, Doe holds securities of a Colorado corporation, which Able holds through Clearing Corporation. The rules of Clearing Corporation provide that the rights and duties of Clearing Corporation and its participants are governed by New York law. Subsection (a) specifies that a controversy concerning the rights and duties as between the issuer and Clearing Corporation is governed by Colorado law. Subsections (b) and (e) specify that a controversy concerning the rights and duties as between the Clearing Corporation and Able is governed by New York law, and that a controversy concerning the rights and duties as between Able and Doe is governed by Illinois law. Even if other facts cause the Hague Securities Convention to apply (see Comment 1), the Convention does not change the Subsection (b) and (e) results, if at the time of the respective agreements Clearing Corporation and Able had offices in the United States engaged in a regular activity of maintaining securities accounts. The Convention does not apply to the Subsection (a) result.
Example 2. Same facts as to Doe and Able as in Example 1. Through the account, Doe holds securities of a Senegalese corporation, which Able holds through Clearing Corporation. Clearing Corporation's operations are located in Belgium, and its rules and agreements with its participants provide that they are governed by Belgian law. Clearing Corporation holds the securities through a custodial account at the Paris branch office of Global Bank, which is organized under English law. The agreement between Clearing Corporation and Global Bank provides that it is governed by French law. Subsection (a) specifies that a controversy concerning the rights and duties as between the issuer and Global Bank is governed by Senegalese law. Prior to United States implementation of the Hague Securities Convention, Subsections (b) and (e) had the effect in a U.S. forum that a controversy concerning the rights and duties as between Global Bank and Clearing Corporation was governed by French law, that a controversy concerning the rights and duties as between Clearing Corporation and Able was governed by Belgian law, and that a controversy concerning the rights and duties as between Able and Doe was governed by Illinois law. Under the Convention, the Subsection (b) and (e) results are unchanged, if at the time of the respective agreements Global Bank, Clearing Corporation and Able had offices in France, Belgium and the United States, respectively, engaged in a regular activity of maintaining securities accounts. The Convention does not apply to the Subsection (a) result.
Example 3. John Doe, a resident of Kansas, maintains a securities account with Able & Co. Able is organized in Switzerland and has its chief executive offices there. The agreement between Doe and Able provides that New York is the securities intermediary's jurisdiction for purposes of UCC Article 8. The agreement was entered into before the Hague Securities Convention's effectiveness in the United States, does not expressly provide that New York or any other law is applicable to all the issues specified in Article 2(1) of the Hague Securities Convention, and does not otherwise expressly refer to the Convention. Through the account, Doe holds securities of a Japanese issuer. Roe, who lives in Japan, claims ownership of the securities and seeks to hold Able liable for not transferring the asset to Roe. Because the agreement between Doe and Able was entered into before the Convention's effectiveness in the United States, Convention Article 16(3) specifies that the controversy between Roe and Able is governed by the law of New York, but only if at the time of the agreement between Doe and Able, Able had an office in the United States engaged in a regular activity of maintaining securities accounts.
6. To the extent that this section or the Hague Securities Convention do not specify the governing law, general choice of law rules apply. For example, suppose that in Examples 1 or 2 in the preceding Comment, Doe enters into an agreement with Roe in which Doe agrees to transfer all of his interests in the securities held through Able to Roe. Neither UCC Article 8 nor the Convention deals with whether such an agreement is enforceable or whether it gives Roe some interest in Doe's security entitlement. This section and the Convention specify what jurisdiction's law governs the issues that are dealt with in UCC Article 8 or listed in Convention Article 2(1) respectively. UCC Article 8, however, does specify that securities intermediaries have only limited duties with respect to adverse claims. See Section 8-115. Subsection (b)(3) of this section and Convention Article 2(1)(e) provide that Illinois law governs whether Able owes any duties to an adverse claimant. Thus, because Illinois has adopted Revised Article 8, Section 8-115 as enacted in Illinois determines whether Roe has any rights against Able.
7. The UCC choice of law provisions concerning security interests in securities and security entitlements are set out in Section 9-305, and within its scope the Hague Securities Convention also applies to such transactions.
"Adverse claim" Section 8-102(a)(1) [55-8-102 NMSA 1978]
"Agreement" Section 1-201(3) [55-1-201 NMSA 1978]
"Certificated security" Section 8-102(a)(4)
"Entitlement holder" Section 8-102(a)(7)
"Financial asset" Section 8-102(a)(9)
"Issuer" Section 8-201 [55-8-201 NMSA 1978]
"Person" Section 1-201(30)
"Purchase" Section 1-201(32)
"Securities intermediary" Section 8-102(a)(14)
"Security" Section 8-102(a)(15)
"Security certificate" Section 8-102(a)(16)
"Security entitlement" Section 8-102(a)(17)
"Uncertificated security" Section 8-102(a)(18)
The 2001 amendment, effective July 1, 2001, in Subsection (e), substituted the language beginning "governing the securities" and ending "55-8-116 NMSA 1978" for "specifies that it is governed by the law of a particular jurisdiction" in Paragraph (1); added present Paragraph (2) and renumbered the remaining paragraphs and updated the internal references accordingly.
Law reviews. — For article, "Attachment in New Mexico - Part II," see 2 Nat. Resources J. 75 (1962).
Am. Jur. 2d, A.L.R. and C.J.S. references. — Conflict of laws as to title and transfer of corporate stock, 131 A.L.R. 192.
Statutory requirements respecting issuance of corporate stock as applicable to foreign corporations, 8 A.L.R.2d 1185.
Construction and effect of U.C.C. art. 8, dealing with investment securities, 21 A.L.R.3d 964, 88 A.L.R.3d 949.
