Wisconsin Legislature: SB308, s. 6

Securities intermediaries

The bill imposes a number of duties on persons who act as securities
intermediaries. Many of these duties, such as the duty to obtain payments or
distributions, the duty to exercise rights or the duty to comply with entitlement
orders, are satisfied if the securities intermediary acts with respect to the duty in the
manner required by an agreement with the entitlement holder, or, in the absence of
an agreement, if the securities intermediary exercises due care in accordance with
reasonable commercial standards. Many of these duties are also subject to the rights
of the securities intermediary arising out of a security interest in the financial assets
and to the rights of the securities intermediary granted under law, regulation, rule
or agreement due to the failure of the account holder to fulfill obligations to the
securities intermediary.

The duties of securities intermediaries created under the bill include the
following:

1. The securities intermediary must maintain a sufficient quantity of financial
assets to satisfy the claims of all of its entitlement holders. These financial assets
may be maintained directly or through one or more other securities intermediaries.

2. The securities intermediary may not grant a security interest in a financial
asset that it is required to maintain in order to satisfy the claims of an entitlement
holder, unless the entitlement holder has agreed otherwise. The bill also provides
that, to the extent necessary for a securities intermediary to satisfy all security
entitlements with respect to a particular financial asset, all interests in that
financial asset held by the securities intermediary are held for the entitlement
holders. These interests are not property of the securities intermediary and are not
subject to the claims of the creditors of the securities intermediary.

3. In the absence of a agreement to act otherwise, the securities intermediary
must exercise due care in accordance with reasonable commercial standards to
maintain financial assets held for entitlement holders.

4. The securities intermediary is required to take action to obtain a payment
of distribution made by the issuer of a financial asset. The securities intermediary
is obligated to its entitlement holder for a payment or distribution made by the issuer
of the financial asset, if the payment or distribution is received by the securities
intermediary.

5. The securities intermediary is also required to exercise rights with respect
to a financial asset if directed to do so by an entitlement holder.

6. The securities intermediary is required to comply with entitlement orders,
if the entitlement order is originated by the appropriate person, if the securities
intermediary has reasonable opportunity to assure itself that the entitlement order
is genuine and authorized and if the intermediary has had reasonable opportunity
to comply with the entitlement order. An "entitlement order" is a notification
communicated to a securities intermediary directing transfer or redemption of a

financial asset to which the entitlement holder has a security entitlement. If the
securities intermediary transfers a financial asset pursuant to an ineffective
entitlement order, the securities intermediary is required to reestablish a security
entitlement in favor of the person entitled to it and pay or credit, to the entitlement
holder's account, any payments or distributions that the person did not receive as a
result of the wrongful transfer. If this is not done, the securities intermediary is
liable to the entitlement holder for damages.

Security interests in securities

The bill also amends Article 9 of Wisconsin's UCC, which governs secured
transactions. In addition to making conforming changes to adapt the existing rules
to the new concept of a security entitlement, the bill makes some substantive changes
to the way in which security interests in financial assets are created and perfected.
The bill continues the long-established principle that a security interest in a
certificated security can be perfected by a possessory pledge; however, revised Article
9 does not require that all security interests in investment securities be implemented
by procedures based on the concept of the common law pledge. Under the revised
Article 9 rules, a security interest in securities can be created in the same fashion as
a security interest in any other form of property, that is, by agreement between the
debtor and secured party. There is no requirement of a "transfer", "delivery", or any
similar action for the creation of an effective security interest.

Under revised Article 9, a security interest may be perfected by "control". In
general, obtaining control means taking the steps necessary to place the secured
party in a position where the secured party can have the collateral sold off without
the further cooperation of the debtor. Thus, for certificated securities, a lender
obtains control by taking possession of the certificate with any necessary
endorsement. For securities held through a securities intermediary, a lender can
obtain control in 2 ways. First, the lender obtains control if it becomes the
entitlement holder; that is, has the securities positions transferred to an account in
its own name. Second, the lender obtains control if the securities intermediary
agrees to act on instructions from the secured party to dispose of the positions, even
though the debtor remains the entitlement holder. Such an arrangement suffices to
give the lender control even though the debtor retains the right to trade and exercise
other ordinary rights of an entitlement holder. Except where the debtor is itself a
securities firm, filing of an ordinary Article 9 financing statement is also a
permissible alternative method of perfection. However, this filing does not assure
the lender the same protections as for other forms of collateral, since the priority
rules under revised Article 9 provide that a secured party who obtains control has
priority over a secured party who does not obtain control.

The bill also provides for certain security interests in financial assets to be
created as a result of the purchase or delivery of a financial asset. If a person buys
a financial asset through a securities intermediary in a transaction in which the
buyer is obligated to pay the purchase price to the securities intermediary at the time
of the purchase and if the securities intermediary credits the financial asset to the
buyer's securities account before the buyer pays for the financial asset, then the
securities intermediary has a security interest in the buyer's securities entitlement

to secure the buyer's obligation to pay. The perfected security interest arises by
operation of law; no security agreement is necessary and no steps need be taken in
order to perfect the security interest. A similar provision creates a security interest
in a certificated financial asset to secure the buyer's obligation to pay for the
certificated financial asset. This provision covers situations where the certificated
financial asset is delivered pursuant to an agreement between persons in the
business of dealing with such financial assets and the agreement class for "delivery
versus payment".

Other changes

The bill significantly changes the few provisions in current Article 8 that deal
with clearing corporations. The bill repeals provisions of current Article 8 that
address the issue of who may act as a clearing corporation or as a custodian bank,
as well as the provisions which deal with how a clearing corporation should conduct
its operations. These issues are largely addressed under federal securities laws.

The bill simplifies the provisions in current Article 8 governing uncertificated
securities. For example, under current Article 8, an issuer who issues uncertificated
securities is required to send paper transaction statements when the issuer registers
a transfer of the uncertificated securities on its books. These requirements exist
under current Article 8 even though no such requirements apply to transfers made
by securities intermediaries. This bill repeals the transaction statement
requirements for issuers of uncertificated securities.

The bill repeals Wisconsin's uniform act for the simplification of fiduciary
securities transfers. In general terms, this act assumed that an issuer would be
liable to an adverse claimant if the issuer had notice of an adverse claim. Under the
act, a corporation or transfer agent registering a security in the name of a person who
is a fiduciary or who is described as a fiduciary is not bound to inquire into the
existence, extent or correct description of the fiduciary relationship, and thereafter
the corporation and its transfer agent may assume without inquiry that the newly
registered owner continues to be the fiduciary until the corporation or transfer agent
receives written notice that the fiduciary is no longer acting as such with respect to
the particular security. Since, under revised Article 8, notice of an adverse claim does
not impose duties on an issuer of securities, the bill repeals the simplification of
fiduciary security transfers act.

The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows:

SB308, s. 1 1Section 1. 71.02 (2) (e) of the statutes is amended to read:

SB308,6,32 71.02 (2) (e) Retention of professional services of brokers, as defined in s.
3408.303 408.102 (1) (c), and of attorneys and accountants located in this state.

SB308, s. 2 4Section 2. 112.06 of the statutes is repealed.

SB308, s. 3

1Section 3. 112.07 (1) of the statutes is amended to read:

SB308,8,22 112.07 (1) Notwithstanding any other provision of the statutes, any fiduciary,
3as defined in s. 112.01 (1) (b), who is holding securities in a fiduciary capacity, any
4bank or trust company holding securities as a custodian or managing agent, and any
5bank or trust company holding securities as custodian for a fiduciary may deposit or
6arrange for the deposit of such securities in a clearing corporation as defined in s.
7408.102 (1) (c) (e). When the securities are so deposited, certificates representing
8securities of the same class of the same issuer may be merged and held in bulk in the
9name of the nominee of the clearing corporation with any other such securities
10deposited in that clearing corporation by any person regardless of the ownership of
11the securities, and certificates of small denomination may be merged into one or more
12certificates of larger denomination. The records of the fiduciary and the records of
13the bank or trust company acting as custodian, as managing agent or as custodian
14for a fiduciary shall at all times show the name of the party for whose account the
15securities are so deposited. Ownership of, and other interests in, the securities may
16be transferred by bookkeeping entry on the books of the clearing corporation without
17physical delivery of certificates representing the securities. A bank or trust company
18which deposits securities pursuant to this section shall be subject to such rules and
19regulations as, in the case of state chartered institutions, the division of banking and,
20in the case of national banking associations, the comptroller of the currency may
21from time to time issue. A bank or trust company acting as custodian for a fiduciary
22shall, on demand by the fiduciary, certify in writing to the fiduciary the securities
23deposited by the bank or trust company in a clearing corporation pursuant to this
24section for the account of the fiduciary. A fiduciary shall, on demand by any party
25to a judicial proceeding for the settlement of the fiduciary's account or on demand by

1the attorney for such a party, certify in writing to the party the securities deposited
2by the fiduciary in the clearing corporation for its account as such fiduciary.

SB308, s. 4 3Section 4. 199.12 (4) (d) of the statutes is amended to read:

SB308,8,84 199.12 (4) (d) The name of any corporation in which the candidate holds a
5security, as defined under s. 112.06 (1) (f), the current market value of which is $3,000
6or more and the dollar value of such security. In this paragraph, "security" includes
7any share of stock, bond, debenture, note or other security issued by a corporation
8which is registered as to ownership on the books of the corporation.

SB308, s. 5 9Section 5. 401.105 (2) (d) of the statutes is amended to read:

SB308,8,1010 401.105 (2) (d) Section 408.106 408.110 on applicability of ch. 408.

SB308, s. 6 11Section 6. 401.206 (2) of the statutes is amended to read:

SB308,8,1412 401.206 (2) Subsection (1) does not apply to contracts for the sale of goods (s.
13402.201) nor of securities (s. 408.319 408.113) nor to security agreements (s.
14409.203).

SB308, s. 7 15Section 7. 405.114 (2) (intro.) of the statutes is amended to read:

SB308,8,2016 405.114 (2) (intro.) Unless otherwise agreed when documents appear on their
17face to comply with the terms of a credit but a required document does not in fact
18conform to the warranties made on negotiation or transfer of a document of title (s.
19407.507) or of a certificated security (s. 408.306 408.108) or is forged or fraudulent
20or there is fraud in the transaction:

SB308, s. 8 21Section 8. Chapter 408 of the statutes is repealed and recreated to read:

SB308,8,2422 CHAPTER 408
23 Uniform commercial code —
24 Investment securities

SB308,8,2525 subchapter I

SB308,9,1

1GENERAL MATTERS

SB308,9,3 2408.101 Short title. This chapter may be cited as uniform commercial code
3— investment securities.

SB308,9,4 4408.102 Definitions. (1) In this chapter:

SB308,9,75 (a) "Adverse claim" means a claim that a claimant has a property interest in
6a financial asset and that it is a violation of the rights of the claimant for another
7person to hold, transfer or deal with the financial asset.

SB308,9,108 (b) "Bearer form", as applied to a certificated security, means a form in which
9the security is payable to the bearer of the security certificate according to its terms
10but not by reason of an endorsement.

SB308,9,1211 (c) "Broker" means a person defined as a broker or dealer under the federal
12securities laws, but without excluding a bank acting in that capacity.

SB308,9,1313 (d) "Certificated security" means a security that is represented by a certificate.

SB308,9,1414 (e) "Clearing corporation" means:

SB308,9,1615 1. A person that is registered as a "clearing agency" under the federal securities
16laws;

SB308,9,1717 2. A federal reserve bank; or

SB308,9,2218 3. Any other person that provides clearance or settlement services with respect
19to financial assets that would require it to register as a clearing agency under the
20federal securities laws but for an exclusion or exemption from the registration
21requirement, if its activities as a clearing corporation, including promulgation of
22rules, are subject to regulation by a federal or state governmental authority.

SB308,9,2323 (f) "Communicate" means to:

SB308,9,2424 1. Send a signed writing; or

SB308,10,2

12. Transmit information by any mechanism agreed upon by the persons
2transmitting and receiving the information.

SB308,10,63 (fm) "Endorsement" means a signature that alone or accompanied by other
4words is made on a security certificate in registered form or on a separate document
5for the purpose of assigning, transferring or redeeming the security or granting a
6power to assign, transfer or redeem it.

SB308,10,107 (g) "Entitlement holder" means a person identified in the records of a securities
8intermediary as the person having a security entitlement against the securities
9intermediary. If a person acquires a security entitlement by virtue of s. 408.501 (2)
10(b) or (c), that person is the entitlement holder.

SB308,10,1311 (h) "Entitlement order" means a notification communicated to a securities
12intermediary directing transfer or redemption of a financial asset to which the
13entitlement holder has a security entitlement.

SB308,10,1414 (i) 1. "Financial asset", except as otherwise provided in s. 408.103, means:

SB308,10,1515 a. A security;

SB308,10,1916 b. An obligation of a person or a share, participation, or other interest in a
17person or in property or an enterprise of a person, which is, or is of a type, dealt in
18or traded on financial markets, or which is recognized in any area in which it is issued
19or dealt in as a medium for investment; or

SB308,10,2220 c. Any property that is held by a securities intermediary for another person in
21a securities account if the securities intermediary has expressly agreed with the
22other person that the property is to be treated as a financial asset under this chapter.

SB308,10,2523 2. As context requires, "financial asset" means either the interest itself or the
24means by which a person's claim to it is evidenced, including a certificated or
25uncertificated security, a security certificate or a security entitlement.

SB308,11,3

1(j) "Good faith", for purposes of the obligation of good faith in the performance
2or enforcement of contracts or duties within this chapter, means honesty in fact and
3the observance of reasonable commercial standards of fair dealing.

SB308,11,64 (L) "Instruction" means a notification communicated to the issuer of an
5uncertificated security which directs that the transfer of the security be registered
6or that the security be redeemed.

SB308,11,87 (m) "Registered form", as applied to a certificated security, means a form in
8which:

SB308,11,99 1. The security certificate specifies a person entitled to the security; and

SB308,11,1110 2. A transfer of the security may be registered upon books maintained for that
11purpose by or on behalf of the issuer, or the security certificate so states.

SB308,11,1212 (n) "Securities intermediary" means:

SB308,11,1313 1. A clearing corporation; or

SB308,11,1514 2. A person, including a bank or broker, that in the ordinary course of its
15business maintains securities accounts for others and is acting in that capacity.

SB308,11,1816 (o) "Security", except as otherwise provided in s. 408.103, means an obligation
17of an issuer or a share, participation or other interest in an issuer or in property or
18an enterprise of an issuer:

SB308,11,2119 1. Which is represented by a security certificate in bearer or registered form,
20or the transfer of which may be registered upon books maintained for that purpose
21by or on behalf of the issuer;

SB308,11,2322 2. Which is one of a class or series or by its terms is divisible into a class or series
23of shares, participations, interests or obligations; and

SB308,11,2424 3. Which:

SB308,12,2

1a. Is, or is of a type, dealt in or traded on securities exchanges or securities
2markets; or

SB308,12,43 b. Is a medium for investment and by its terms expressly provides that it is a
4security governed by this chapter.

SB308,12,55 (p) "Security certificate" means a certificate representing a security.

SB308,12,76 (q) "Security entitlement" means the rights and property interest of an
7entitlement holder with respect to a financial asset specified in subch. V.

SB308,12,98 (r) "Uncertificated security" means a security that is not represented by a
9certificate.

SB308,12,11 10(2) Other definitions applying to this chapter and the sections in which they
11appear are:

SB308,12,1212 (a) "Appropriate person" — s. 408.107 (1).

SB308,12,1313 (b) "Control" — s. 408.106.

SB308,12,1414 (c) "Delivery" — s. 408.301.

SB308,12,1515 (d) "Investment company security" — s. 408.103 (2).

SB308,12,1616 (e) "Issuer" — s. 408.201.

SB308,12,1717 (f) "Overissue" — s. 408.210 (1).

SB308,12,1818 (g) "Protected purchaser" — s. 408.303 (1).

SB308,12,1919 (h) "Securities account" — s. 408.501 (1).

SB308,12,21 20(3) In addition, ch. 401 contains general definitions and principles of
21construction and interpretation applicable throughout this chapter.

SB308,12,24 22(4) The characterization of a person, business or transaction for purposes of
23this chapter does not determine the characterization of the person, business or
24transaction for purposes of any other law, regulation or rule.

SB308,13,4

1408.103 Rules for determining whether certain obligations and
2interests are securities or financial assets. (1) A share or similar equity
3interest issued by a corporation, business trust, joint stock company or similar entity
4is a security.

SB308,13,11 5(2) An "investment company security" is a security. In this chapter,
6"investment company security" means a share or similar equity interest issued by
7an entity that is registered as an investment company under the federal investment
8company laws, an interest in a unit investment trust that is so registered, or a
9face-amount certificate issued by a face-amount certificate company that is so
10registered. "Investment company security" does not include an insurance policy or
11endowment policy or annuity contract issued by an insurance company.

SB308,13,16 12(3) An interest in a partnership or limited liability company is not a security
13unless it is dealt in or traded on securities exchanges or in securities markets, its
14terms expressly provide that it is a security governed by this chapter or it is an
15investment company security. However, an interest in a partnership or limited
16liability company is a financial asset if it is held in a securities account.