October 29, 1993
TO: SEC RULES COMMITTEE NO. 96-93
RE: INSTITUTE COMMENTS ON PROPOSED REVISION TO UCC ARTICLE 8
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For the past several months, the Institute has been reviewing the
proposed revisions to Article 8 of the Uniform Commercial Code ("Proposed
Revision") in order to identify issues of particular concern for investment
companies. In connection with this review, we previously distributed a
memorandum that to detailed the effect of the Proposed Revision on the (1)
risks of holding securities indirectly, (2) allocation of losses resulting
from a securities intermediary’s failure, (3) effect on rights of funds that
pledge or repo portfolio securities, and (4) provisions relating securities
issued by funds. (See Memorandum to SEC Rules Committee No. 63-93, dated July
13, 1993.)
The Institute recently submitted the attached comment letter to the
Reporter to the Article 8 Drafting Committee. The comment letter strongly
supports the principal changes that would be effected by the Proposed
Revision. In particular, the letter notes that the Proposed Revision will
enhance the understanding by market participants of both the nature and
limitations inherent in the rights of investors that hold securities
indirectly. In so doing, the Proposed Revision will add clarity and promote
the efficiency of the securities transfer system.
The comment letter also recommended that the Proposed Revision be
amended to (1) provide more certainty in determining when a securities
entitlement is created, (2) impose an affirmative duty on securities
intermediaries to maintain written records of any and all securities
entitlements against them, (3) enable investors to achieve a high degree of
protection for their securities entitlements, (4) eliminate the provision that
provides a securities intermediary need not perform its duties in the event of
a default, (5) clarify that for purposes of non-UCC law, an indirect holding
of securities (i.e., a securities entitlement) would not affect the character
of that investment as a "security", and (6) clarify that uncertificated
securities are an authorized investment.
The Article 8 Drafting Committee anticipates distributing a final draft
of the Proposed Revision within the next few months in order that it could be
considered and voted upon at the annual meeting of the National Conference of
Commissioners on Uniform State Laws in May 1994.
Patricia Louie
Associate Counsel
Attachment