учебный год 2023 / Haentjens, Harmonisation Of Securities Law. Custody and Transfer of Securities in European Private Law

10 National securities laws compared and evaluated

investor so as to be able to exercise his rights relating thereto. But, since an issuer commonly knows only the CSD or other intermediary as the holder of its securities, it can only provide these intermediaries with information about its events.137 It is therefore of great importance that intermediaries pass on relevant information about corporate events to its customers. Second, an intermediary’s cooperation is often needed when accountholders wish to exercise their corporate rights, as intermediaries may be required to testify to the ownership of the securities concerned vis-à-vis the issuer or may be requested to act on the accountholder’s behalf.

Although the securities custody and transfer laws in none of the jurisdictions investigated restrict the passing on of corporate information and monetary funds, or hamper the exercise of accountholders’ corporate rights, in some of the jurisdictions more explicit provisions on this subject are promulgated than in others. The UCC, for instance, contains explicit provisions that require intermediaries to obtain and pass on the proceeds of the securities to the intermediary’s customers138 and to comply with accountholders’ directions concerning corporate actions and other rights connected to the accountholders’ assets.139 The Dutch relevant statute on the other hand, only refers to the obligation of an intermediary to enable its accountholders to exercise their voting rights,140 while Belgian law only refers to securities’ proceeds in the context of intermediary insolvency.141 In French legislation, explicit provisions on this subject can only be found in the context of directly held securities, the pledging of securities and in regulatory law.142

The absence of express provisions can perhaps be explained with reference to the structural organisation of the law in the European jurisdictions investigated, where these issues are considered to lie more within the scope of company law than that of securities custody and transfer law.143 However, the enjoyment of the rights attached to securities is equally important to both corporate securities and non-corporate, other financial instruments, while the indirect holding system has the potential to hamper the enjoyment of both types of instruments.144 It is therefore advisable that a modernisation of

137In the Netherlands, for example, an electronic system has therefore been set up to facilitate the transmission of issuer information directly from issuers to investors; see www.communicatiekanaal.nl, the website of the communicatiekanaal aandeelhouders (communication channel shareholders) and TIMMERMAN & DOORMAN (2005), 31.

138Cf. SEC rule 14b1-1 that provides a similar rule concerning the passing on of communications to the beneficial owners by securities firms; 17 CFR § 240.14b-1.

139UCC § 8-505(a) and UCC § 8-506(a) respectively. See Ch. 8.3.3.

140Article 15 and 39 Wge. See Ch. 7.3.4.

141KB no. 62 Article 13(2). See Ch. 5.3.7.

142Articles 5 and 38 of Decree no. 55-1595 of 7 December 1955 and art. 332-4(1) Règlement Général AMF. See Ch. 3.3.2 and 3.5.3.

143In the jurisdictions where accountholders enjoy a co-ownership interest, the right to receive and exercise the rights attached to securities can also be considered to follow from that property interest; see infra, Ch. 11.2.2.

144See also Ch. 12.3.5.

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securities custody and transfer law should stimulate jurisdictions to enact explicit provisions that address both the passing on of issuer information by intermediaries and the facilitation by intermediaries of the exercise of rights attached to securities. Fortunately, the UNIDROIT draft convention, as well as the Legal Certainty Group Advice, contain such provisions.145

10.2.8 Securities transfer

From a market stability perspective, but, albeit to a lesser extent, also from the perspective of accountholder protection, it is imperative that clear rules exist with regard to the finality of securities transfers and their requirements.146 First, market stability requires that no uncertainty exists at any time as to who has ownership rights or similar interests in transferred securities, especially in view of possible (intermediary) insolvencies. Second, it must be unequivocal until what point in time and under what circumstances securities transfers may be reversed, for instance in view of the creation of a security interest in those securities or retransferring them. The moment of and the requirements for a securities transfer will be discussed in greater detail below, while the following sections will address certain aspects of finality or the possibility of reversing securities transactions.

Finality

Other than for reasons of (operational) mistakes by intermediaries,147 the reversal of entries in securities accounts is mainly prompted by the insolvency of the transferor and mala fides on the part of the transferee. The European legislature has addressed the reversal of securities transfers because of transferor insolvencies in the context of clearing and settlement systems at a relatively early stage. It acknowledged that legal uncertainty should be minimised, particularly in the context of such a vital element of modern economies and recognised that in clearing and settlement systems, an enormous amount of transactions between numerous participants is multilaterally netted on a daily basis, while the reversal of settlements in that context is cumbersome and often impossible.

145UNIDROIT draft convention Articles 5(1)(a) and 6 and Legal Certainty Group Advice, 5 and

146See, e.g., G30 2003 Plan of Action Recommendation 11 and ISSA Recommendations 2000, 20. Cf. also BENJAMIN (2003), 225.

147The (operational) mistake by the Japanese brokerage firm Mizuho, however, could not be reversed; see, e.g., CNN report of December 9 2005. But Dutch law, for instance, does allow a reversal for such a reason; cf. Tweede Kamer, 1975-1976, 13780, no. 3 MvT, 38.

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Consequently, the Settlement Finality Directive was adopted in 1998, which focuses on the entry of transfer orders into clearing and settlement systems, or, more accurately, on the enforceability of transfer orders in view of subsequent insolvency proceedings against the transferor.148 In addition, Article 9(1) SFD provides that the enforcement of security interests in collateral is insulated from the effects of insolvency proceedings commenced against a participant of a settlement system. The Financial Collateral Directive extends the insulation of the enforcement of security interests in financial collateral to all collateral takers.149

It is submitted that with regard to the specific issue of the effect of transferor insolvency on (the enforcement of) security interests in securities, no further European modernisation is needed. But, as stated above, it should more generally be certain when a credit in a securities account takes secure legal effect against the issuer, the immediate intermediary and third parties. The UNIDROIT draft convention therefore dedicates several provisions to the subject of finality in a more general way.

Under the preliminary draft convention, a debit entry and the designation of an account as collateralised can only be reversed if the entry or designation occurred without due authorisation from the accountholder, collateral taker or domestic non-convention law.150 A credit entry in a securities account on the other hand, is reversible if the (mala fide) transferee had actual or construed knowledge of an adverse claim or if his account was gratuitously credited and an adverse claim has subsequently been made.151 Furthermore, the draft convention leaves it to the participating states to determine whether the effectiveness of credit and debit entries depends on corresponding credits and debits made at other tiers.152

French law, for instance, makes the finality of a credit entry in a transferee’s securities account subject to a corresponding credit entry in the account of the transferee’s intermediary with the CSD.153 Furthermore, the precise moment of transfer and thereby its effect against third parties and the possibility of a reversal depends in some instances on whether the price of

148Cf. supra, Ch. 9.3.3.

149Article 4. But note that the Collateral Directive remains limited to certain categories of financial instruments and counterparties; Ch. 9.3.3.

150Article 11(2). The consequences of ineffectiveness or reversal are determined by domestic non-convention law; Article 11(2).

151Article 11(1)(a) and (b).

152But it also leaves it to non-convention law to determine the validity of a debit, credit or designating entry whether such entries are liable to be reversed and whether such entries are made subject to a condition; Article 11(2). See also supra, s. 10.2.5.

153Article L. 431-2 second paragraph C. mon. fin. for the sale of (admitted) financial instruments on a regulated stock exchange and Article L. 431-2 fourth paragraph C. mon. fin. for OTC transactions in admitted securities. See Ch. 6.4.3 and supra, s. 10.2.5.

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the sale has been effectively delivered.154 Finally, a credit entry in a transferee’s account remains challengeable by the counterparty to the contract that initiated the transfer, while credit entries in a mala fide transferee’s account can always be challenged by a third party with a more legitimate interest.155

Under Belgian and Dutch law on the other hand, the finality of a credit entry in a transferee’s securities account is ensured as, in most instances, credits take proprietary effect, even if these credits are uncovered through a corresponding credit entry in the account of the transferee’s intermediary with the CSD.156 Moreover, the link between the transaction and the subsequent credit entry in a securities account has been released to some extent. As will be shown below in greater detail, neither under Dutch nor under Belgian law is the moment of transfer determined by (the performance of) the contract that initiated the credit, but it is not entirely certain whether a credit can be reversed because of contractual flaws. Furthermore, credit entries in a mala fide transferee’s account can always be challenged by a third party with a more legitimate interest under Belgian and Dutch law also.

In conclusion, finality is not always ensured in all European jurisdictions investigated when it does not concern situations covered by the relevant European Directives, i.e. transfers of (collateralised) securities and a subsequent transferor’s insolvency. Especially under French law, certainty in finality is not achieved because of the requirement of corresponding credits at a higher tier, because the moment of transfer depends on the delivery of the payment price and because of the requirement of the validity of the underlying contract. The last requirement probably also plays a role in determining the finality of securities transfers under the laws of Belgium and the Netherlands. In all jurisdictions examined, a credit entry in a securities account in the name of a mala fide transferee can be challenged.

The UNIDROIT draft convention leaves a large amount of discretion to the participating states and currently even allows them to make the finality of credit or debit entries subject to the requirement that a corresponding credit or debit entry is made at another tier, or any other condition.157 The Legal Certainty Group, on the other hand, has not (yet) formulated a view on the finality or validity of book-entries.158 But it is submitted that the finality of securities transfers should be subject to the fulfilment of as few conditions as possible, since every condition involves a level of uncertainty, which is

154Article L. 431-2 fifth paragraph C. mon. fin., referring to over the counter transfers of securities. See also infra.

155See Ch. 6.4.3.

156See supra, s. 10.2.5.

157Article 11(2).

158See Legal Certainty Group Advice, 6.

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unacceptable in this area of the law and economic importance.159 Other than with respect to the rule under which mala fide transferees can be challenged and which is common to all jurisdictions investigated, the laws examined should therefore be modernised to the extent indicated below, where the underlying principles of transfer law that have the potential to endanger finality, viz. consensualism and causality, as well as their applicability to book-entry securities law will be further discussed.

Negotiability

As stressed before, it is imperative from an investor protection perspective that accountholders can rely on credit entries in their securities accounts as evidence of an indisputable interest in securities. It has also been noted that from a market stability perspective, today’s practice of multilateral netting warrants the avoidance or impossibility of a reversal of securities settlements and that the economic importance of securities settlement systems requires the minimisation of legal uncertainty.160 Besides intermediary and transferor insolvencies and double bookkeeping requirements, the major threat to the finality of book-entry securities credits is the applicability of reversal rules that originate from principles of general private law.

These principles include, first, the well-founded property law principle that a transferee can only acquire what his transferor has to transfer (nemo dat quod non habet). As a result, transferees that have acquired assets a non domino, i.e. from a transferor who was not entitled to dispose of the assets transferred, are subject to challenges by the verus dominus or the third party that asserts his prior entitlement. Second, under the laws of several jurisdictions, defects in the contract that initiated a transfer of assets affect the validity of the transferee’s interests in those assets, a principle which is commonly referred to as causality. Third, French and Belgian property laws determine that interests in assets are transferred the moment when an agreement to that effect has been reached. This principle is often known as consensualism.

As a general objection of a dogmatic nature to the application of these principles, it has been argued that a ‘transfer’ of securities by book-entry is not a transfer in the traditional, private law sense. A close analysis of, especially, a securities transfer between clients of different account providers shows that the transferee does not acquire the very same (accountholder) interest which the transferor had, but obtains a new interest against his own account provider. From a strict dogmatic point of view, a securities transfer by book-entry thus involves the cancellation of the transferor’s interests and the subsequent creation of corresponding interests in the transferee’s name.

159Cf. Ch. 9.1.1.

160Cf. supra, Ch. 9.1.1.

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It is therefore classified as novation, rather than transfer, so that the principles of nemo dat, causality and consensualism find no application.161

In addition, it is submitted that these principles should not (always) apply to book-entry securities transfers as they diminish the certainty which a credit entry in a securities account must provide. As a result of the nemo dat quod non habet rule for instance, accountholders in whose name securities are credited are exposed to the risk of being challenged by domini veri or dispossessed owners with (allegedly) better rights. On practical as well as dogmatic grounds, however, this rule is not always applied in the jurisdictions investigated. First, a successful claim by a prior entitlement holder presupposes the possibility of tracing the securities transferred from the prior entitlement holder, via a transferor, to the transferee. But in modern, anonymised stock-market environments, this possibility is virtually non-existent.

Second, the laws of all jurisdictions investigated protect bona fide transferees, i.e. transferees that were not or should not have been aware of the adverse claim of a prior entitlement holder, against claims of prior entitlement holders.162 In the US legal literature, this exception to the nemo dat quod non habet principle is commonly referred to as the negotiability principle. It has been codified in UCC Article 8, so that it protects bona fide transferees, as well as takers of security interests in book-entry securities.163 Under Dutch law, bona fide transferees, as well as bona fide pledgees of book-entry securities are protected under specific provisions of the relevant statute, which are inspired by similar rules of general property law.164

Under Belgian and French law, general private law would not protect bona fide accountholders as its protection provision arguably applies to the possessors of tangible assets only.165 But recent Belgian legislation has explicitly extended its application to good faith transferees of book-entry securities.166 Moreover, as a matter of Belgian and French general private law, assets must be sufficiently individualised to be the object of any

161See, e.g., BENJAMIN (2000), 155, n.38, GOODE (2003-2), 215, n.40, DALHUISEN & VAN SETTEN (2003), 124, HAENTJENS (2004-1), 478481, SCHIM (2006), 133 et seq. Yet neither this position, nor all of its (dogmatic) consequences are generally accepted, and the following sections will therefore assume the usual ‘transfer’ analysis. See also infra, s. 11.2.3.

162In fact, it was this need for the protection of bona fide acquirers of securities that caused German lawyers (notably Savigny) to consider securities as tangibles in the mid 19th century; see MICHELER (2006), 37-42.

163UCC §§ 8-502, 8-510(a) and 8-510(b). See Ch. 8.4.2.

164Compare Articles 19 and 20 Wge with articles 3:88 and 3:238 BW. But these provisions protect fewer good faith acquirers than, for instance, UCC Article 8, as they do not extend to good faith transferees when the prior transfer was invalid because the original transferor lacked the power of disposal; see HAENTJENS (forthcoming, 2007), comm. at arts. 19 and 20.

165See Ch. 5.3.2 and 6.3.4 respectively.

166Applicability of Articles 2279 and 2280 BW through KB no. 62 Article 19, Article 475bis W. Venn. and the Act of 2 January 1991 Article 13 bis. See Ch. 5.3.2.

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proprietary claim and therefore, transferees whose securities have been commingled with other securities (for instance in an intermediary’s omnibus account with the higher tier) cannot be challenged by prior entitlement holders. Finally, under both French and Belgian law, a similar protection must be assumed to apply to pledgees that have been credited with collateralised securities in their (pledge) account.167

As a corollary to the rule that protects bona fide transferees, transferees that were or should have been aware of an adverse claim by a prior entitlement holder are not protected, but remain, as mala fide transferees, subject to the claims asserted by the holders of an older right. As to these transferees, the nemo dat quod non habet principle thus remains applicable. It is submitted that because of fairness considerations, the improbability of its application and its connection with general principles of private law, this rule represents a justifiable threat to the finality of credit entries in securities accounts.168

However, it would be advisable that the circumstances under which credit entries in a mala fide transferee’s account can be successfully challenged are made explicit. The UNIDROIT draft convention therefore contains such express provisions, while the Legal Certainty Group’s advice also proposes the harmonisation of the rule and its application.169 Of the European jurisdictions investigated, these proposals will probably affect French law most, where the legal position is least clear.170

Causality

In the previous sections, it has been argued that transfers of securities by book-entry should not be made subject to the principle of causality. In other words, defects in the contract that initiated a transfer of book-entry securities should not affect the validity of the transferee’s interests in those securities. The argument was advanced that such a transfer system unacceptably threatens the finality of credit entries in a securities account, both from an investor protection and market stability perspective. This argument can be supplemented by two others.

First, the application of the causality principle, as does the application of the nemo plus principle, presupposes a possibility of tracing the securities transferred from transferor to the transferee. But it may be reiterated that the modern, anonymised stock market environment virtually prevents such tracing, as a consequence of which transferors seldom know their

167Act of 2 January 1991 Article 7(3) and Article 470(2) W. Venn. for dematerialised securities, KB no. 62 Article 9(1)(2) for immobilised securities. See Ch. 5.3.2. In French legislation, on the other hand, no explicit provisions to that effect can be found.

168See also infra, Ch. 11.2.3.

169UNIDROIT draft convention Article 12 and Legal Certainty Group Advice, 6.

170Cf. MAFFEI (2005), 249.

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transferees. Second, the application of the causality principle to book-entry transfers of securities is dogmatically questionable. It is submitted that the proprietary position of an accountholder, i.e. the effectiveness of an accountholder’s interests against third parties, should not depend on a contract entered into with an unknown party, but solely on a credit entry in a securities account held with an intermediary.

Third parties may rely on a credit entry as an expression of the relationship of a transferee (or transferor, for that matter) with his intermediary, and deficiencies in the contract between a transferor and a transferee should have as little to do with that relationship between a transferee and his intermediary, as events in the chain of settlement with the transferor – transferee relationship. Moreover, as noted above, an analysis of a transfer of securities by book-entry shows that the transferor’s interests in the securities concerned are not transferred, but his interests are extinguished by the debit entry in his securities account, while the transferee’s interests of the same quantity and quality are created correspondingly by the credit entry.

A so-called abstract system of transfer, i.e. a system in which defects in the contract between transferor and transferee may give rise to contractual claims, but do not affect the validity of credit entries made as a result of that contract, would therefore better serve market stability and accountholder protection, while being dogmatically correct, as well as being more in line with current market practice. It is submitted that these considerations outweigh the interests of the transferor and his (general) creditors, who may still assert contractual claims against the transferee and probably against the

transferor’s intermediary also. Such a system seems to be effective in the US.171

Under French and Belgian law, however, a transfer of property is traditionally linked to the contract that initiated the transfer. The general property laws of these countries provide that the moment when assets are transferred coincides with the moment when the contract is concluded,172 but also that the validity of the contract determines whether the transfer is (proprietarily) challengeable. In French case law, challenges by transferors/counterparties to a securities transfer have thus been honoured on several occasions, as a consequence of which the transfer in question had to be reversed and the credit entries undone.173 Under Belgian law, on the other hand, a credit entry in a transferee’s account renders a securities transfer

171E.g. Ennis v. Phillips, 890 So.2d 313, 55 UCC Rep. Serv. 2d 407 (Fla. Dist. Ct. App. 4th Dist. 2004). See Ch. 8.4.2. It is also a general principle of German law; DROBNIG (2004-1),

172See also infra.

173See Ch. 6.4.3.

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unchallengeable by third parties,174 but the clearing of the transfer by CCP or CSD has also been argued to achieve that effect. In Dutch legal literature also, it is very much debated whether a general provision of property law applies to securities transactions, requiring a flawless contractual relationship between transferor and transferee for the transfer to have proprietary effect, but that seems to be the current law.175

The UNIDROIT draft convention does not require its participating states to amend their laws with regard to this issue, whilst the Legal Certainty Group has not formulated a view.176 Yet it is reiterated that the finality of securities transfers should be subject to the fulfilment of as few conditions as possible, and that a flawless contractual relationship between transferor and transferee should not be one of them.177 As a consequence, Dutch and French law should be amended so as to introduce an abstract system of transfer in the context of securities transactions by book-entry. Belgium’s law might require clarification in this respect.

Consensualism

As has been stated above, the general property laws of several countries determine that interests in assets are transferred the moment when a contract to that effect has been concluded (solo consensu), a transfer regime that is commonly known as consensualism. It has been repeated that both from an investor protection and market stability perspective, the highest level of legal certainty is required with regard to the reversibility of credit entries in securities accounts. It is submitted that factual and legal reality in this context should coincide and that, therefore, a transfer of securities should take proprietary effect, i.e. be effective against third parties, neither earlier, nor later than the crediting of a transferee’s account.178

Thus, a regime of transfer law in which interests in securities are transferred the moment when a credit entry is made in a transferee’s account, or the socalled traditional regime, is to be preferred over the consensual regime when applied to securities transfers by book-entry. Under Dutch law, transfer of (interests in) property is generally effected by the delivery of that property. In the case of book-entry securities, delivery is considered to occur through credit entries in the transferee’s securities account.179 Under US law also, a

174KB no. 62 Article 6(3) for immobilised securities and Article 468(2) W. Venn. and the Act of 2 January 1991 Article 6(1) for dematerialised securities; see Ch. 5.4.2.

175Article 3:84 BW; see Ch. 7.4.2.

176UNIDROIT draft convention Article 9 and see Legal Certainty Group Advice, 6.

177DROBNIG (2004-1), 739.

178Cf. DROBNIG (2004-1), 726-733, who advocates that both generally and in view of a possible future European Civil Code, the traditional regime is to be preferred over the consensual regime of transfer.

179Articles 17 and 41 Wge; see Ch. 7.4.2.

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transfer of indirectly held securities is effected when the transferee acquires a security entitlement, which results in a credit to a securities account.180

Under French and Belgian general sales law, on the other hand, property is transferred the moment when parties agree on the price and object of the sale.181 But French securities law derogates from this principle, in that sales and the subsequent transfers of book-entry securities are governed by different rules. Transfers of securities that take place via a regulated stock exchange as well as transfers of securities that are neither admitted to the CSD’s system of custody nor transferred via a regulated stock exchange are effected by a credit entry in the transferee’s securities account.182 Over the counter transfers of admitted securities on the other hand, take place the moment the transfer has become irrevocable under the rules of the settlement system concerned.183 It has been argued that under Belgian law property interests in fungible securities are transferred the moment when credit entries are made in the transferee’s securities account, but the more generally accepted view seems to be that those interests are already transferred when the transaction is cleared by the CCP/CSD.184

Again, the UNIDROIT draft convention does not require its participating states to amend their laws with regard to this issue, but the Legal Certainty Group has explicitly stated that, in its view, no harmonisation would be needed regarding the moment of transfer.185 However, a diversity of rules that determine the moment of transfer inevitably leads to situations in which neither the transferor nor the transferee or, perhaps even worse, both transferor and transferee are entitled to the same securities at the same time.186 Moreover, it is reiterated, once again, that from both an investor protection and market stability perspective, legal certainty should be ensured to the maximum extent possible. Especially with regard to such an essential issue as the transfer of securities, factual and legal reality should coincide, and the transfer laws of the jurisdictions that do not in principle adhere to a traditional regime where it concerns book-entry securities transfers should therefore be modernised.

Fortunately, under Dutch law and in most securities transfers under French law, securities transfers take proprietary effect the moment when a transferee’s account has been credited. In a minority of securities transfers

180UCC § 8- 501(b). See Ch. 8.4.2.

181Articles 1583 C. civ. (France) and 1583 BW (Belgium). See Ch. 6.4.1 and 5.4.1, respectively.

182Articles L. 431-2 C. mon. fin. and L. 228-1 ninth paragraph C. com. respectively. See Ch.

183Art. L. 431-2 fourth paragraph C. mon. fin.

184See Ch. 5.4.2.

185UNIDROIT draft convention Article 9 and see Legal Certainty Group Advice, 4.

186See Ch. 12.3.7.

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