Bloomberg BNA Banking Report Guest Article: Treatment Of Hybrid Accounts Under Articles 8 and 9 of the UCC


Article 8 of the Uniform Commercial Code (the‘‘UCC’’) sets out the rules for evidencing and transferring financial assets held through direct registration or the indirect holding system. To utilize the indirect holding system, a customer will typically establish a relationship with a financial institution. In setting up this relationship, the customer and the financial institution will enter into a custodial or account agreement that memorializes the responsibilities of the parties and the operational and logistical aspects of the relationship and the accounts. These accounts can be established to hold a wide range of financial assets.

There are certain key concepts relating to the categorization of property rights for the indirect holding system under Article 8 of the UCC (‘‘Article 8’’). One of these key concepts is the definition of ‘‘securities entitlement.’’ An asset will consist of a security entitlement when it is both a (1) a ‘‘financial asset’’ (See UCC Section 8-102(9)), and (2) held in an Article 8 ‘‘securities account.’’ In many cases, the assets held in a securities account will consist of uncertificated equity and debt securities that are ‘‘dealt in or traded on financial markets,’’ ‘‘securities exchanges or securities markets.’’

See UCC Section 8-102(9) and (14). These types of assets are by definition a financial asset, so once they are credited to a securities account, they create ‘‘securities entitlements’’ under Article 8. In the indirect holding system, a customer’s rights are in the security entitlements to that underlying security. Official Comment 4 to UCC Section 8-501 states that ‘‘persons who hold securities through brokers or custodians have security entitlements..., rather than being treated as the direct holders of the securities.’’

Excerpted from Bloomberg BNA Banking Report, March 26, 2013. To view full article, click on the PDF linked below.

PDF - Treatment of Hybrid Accounts Under Articles 8 and 9 of the UCC

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