UCC Article 9-106 Analysis and Commentary: Control of Investment Property
1. Introduction to UCC Article 9-106: Control of Investment Property
The Uniform Commercial Code Article 9 is the primary legal framework governing secured transactions in personal property in the United States.
Within this framework, UCC Article 9-106 defines what it means to have control of a category of collateral called investment property.
In simple terms, “investment property” refers to financial assets like stocks, bonds, and related financial accounts – assets that often exist in electronic or intangible form.
Because these assets are not physical objects one can hold in hand (unlike, say, a piece of equipment or inventory), the UCC uses the concept of control to establish a secured party’s power over them.
This provision is significant because having “control” over investment property is a key factor in perfecting a security interest (making it legally effective against third parties) and often determines the priority of claims if multiple parties have interests in the same asset.
This article examines the scope of UCC Article 9-106, its key requirements for control, and why this concept is so important in secured transactions.
1.1 Definition and Scope of UCC Article 9-106
UCC Article 9-106 is titled “Control of Investment Property.” It defines the conditions under which a secured party (such as a lender or creditor) is deemed to have control over various forms of investment property.
The term investment property, as used in Article 9, encompasses a range of financial assets including securities and certain financial accounts (we will detail these types in a later section).
At its core, control in this context means that the secured party has obtained a level of authority over the asset such that they can sell, transfer, or otherwise dispose of it without further permission from the debtor (the asset’s owner).
In other words, the secured party’s interest in the investment property is firmly in place, and the debtor cannot unilaterally remove or sell that asset without regard to the secured party’s rights.
This concept is analogous to holding physical possession of tangible collateral – but for intangible or electronic assets, control serves as the functional equivalent of possession.
The scope of UCC Article 9-106 is limited to investment property only. It specifically addresses control of assets like stocks, bonds, brokerage accounts, and commodity trading accounts (other types of collateral have their own separate rules in Article 9).
By focusing on investment property, Article 9-106 provides a clear legal standard for when a secured party has dominion over these financial assets.
2. Elements of Control Under UCC Article 9-106
UCC Article 9-106 lays out specific requirements that constitute control of investment property. In essence, it provides a checklist for when a secured party is deemed to have control.
The key elements can be summarised by category of asset:
2.1 Securities (Certificated or Uncertificated) & Security Entitlements
For investment securities such as shares of stock or bonds, control is achieved in the ways described by UCC Article 8.
In short, a secured party has control if it either has possession of the certificate (for a certificated security, with any necessary indorsement to it) or is officially recorded as the owner/controller (for an uncertificated security).
In the case of securities held through an intermediary (a brokerage account, resulting in a security entitlement), control is obtained if the securities intermediary agrees to follow the secured party’s instructions regarding the asset without further consent from the entitlement holder (the debtor).
2.2 Commodity Contracts
For assets like commodity futures or options, UCC Article 9-106 provides two paths to control. First, if the secured party is itself the commodity intermediary (for example, the collateral is in an account at the secured party’s own brokerage), then it automatically has control of the commodity contracts in that account.
Second, if the secured party is not the intermediary, control can be achieved through a tri-party agreement in which the commodity customer (debtor), the secured party, and the commodity intermediary agree that the intermediary will apply any value from the commodity contract as directed by the secured party, without needing further consent from the customer.
This ensures the secured party’s instructions (for instance, to liquidate or transfer a futures position) will be honoured regardless of the debtor’s input at the time.
2.3 Securities Accounts and Commodity Accounts
UCC Article 9-106 also addresses control at the account level. A securities account (brokerage account) or a commodity account (futures trading account) is considered under the secured party’s control if the secured party has control over all the investment property in that account.
In other words, if every security entitlement in a securities account is under the secured party’s control, then the entire account is controlled by that party.
The same goes for a commodity account – control of all contracts in the account means the account itself is controlled. This “all-or-nothing” rule prevents ambiguity.
By meeting the above conditions – taking possession or being recorded as owner for securities, entering the proper agreement for assets held through intermediaries, or being the intermediary – a secured party fulfils the definition of control in UCC Article 9-106 for the respective investment property.
Once these conditions are satisfied, the secured party can exercise rights over the asset without needing the debtor’s further involvement, which is particularly important if the debtor defaults.
3. Types of Investment Property Affected
The rules in UCC Article 9-106 apply to specific categories of assets collectively defined as “investment property.”
The main types of investment property covered by this provision include:
- Certificated Securities: Stocks, bonds, or other financial instruments represented by a physical certificate.
- Uncertificated Securities: Stocks, bonds, or similar instruments that exist only as electronic records, without a physical certificate.
- Security Entitlements: The rights of an investor in securities held through a securities intermediary.
- Securities Accounts: Brokerage accounts that hold securities or security entitlements. The account itself is treated as collateral if all assets in it are controlled.
- Commodity Contracts: Contracts for the sale or purchase of commodities for future delivery (such as futures contracts or options on commodities).
- Commodity Accounts: Accounts with a commodity intermediary (like a futures commission merchant) that hold commodity contracts.
By identifying these types of assets, Article 9 makes clear when the control rules of UCC Article 9-106 are relevant.
If collateral falls into one of the above categories of investment property, then establishing control per Article 9-106 becomes a central consideration for a secured party.
4. Methods of Obtaining Control
How does a secured party actually obtain control over investment property? UCC 9-106 outlines the legal mechanisms, which typically translate into a few practical methods:
4.1 Possession or Direct Ownership
For assets that can be held or registered directly, the secured party can obtain control by taking possession or becoming the registered owner.
For a certificated security, this means taking physical possession of the certificate (with any required indorsement or assignment to the secured party).
For an uncertificated security, this means having the issuer register the secured party (or its nominee) as the owner, or obtaining an agreement from the issuer that it will comply with the secured party’s instructions without the debtor’s further consent.
In both cases, the secured party effectively steps into a position of direct holding or ownership, giving it immediate authority over the asset.
4.2 Control Agreements with Intermediaries
For investment property held through intermediaries – such as securities in a brokerage account or futures in a commodity account – the primary method is a control agreement – see also UCC Article 9-305.
This is a contract among the debtor (account holder), the secured party, and the intermediary (broker or bank) in which the intermediary agrees to follow the secured party’s instructions regarding the account’s assets without further consent from the debtor.
For example, a brokerage firm might agree to let a secured party directly instruct sales or transfers of assets in the debtor’s account. By entering into such an agreement, the secured party gains the necessary authority over the investment property, satisfying the definition of “control” under UCC Article 9-106.
4.3 Being the Intermediary
If the secured party is itself the intermediary holding the asset, control is automatic. In other words, when the collateral is held in an account at the secured party’s own institution, the secured party already has the power to dispose of or deal with the asset by virtue of its role.
For instance, if a bank is the secured party and the collateral is a securities account at that same bank’s brokerage division, the bank (as the brokerage) inherently has control over that account’s contents. No separate agreement is needed in such cases.
Once control is obtained by any of these methods, the secured party’s interest in the investment property is perfected and enforceable to the fullest extent allowed under the law.
5. Role of Control in Secured Transactions under UCC Article 9-106
Control plays a critical role in the Article 9 framework, especially in terms of perfection and priority of security interests in investment property:
5.1 Perfection of the Security Interest
Perfection is how a secured party makes its interest effective against third parties. While filing a financing statement is one way to perfect a security interest, obtaining control is an alternative (and often superior) method for investment property.
When a secured party gains control under the standards of UCC Article 9-106, the security interest is perfected immediately.
This signals to the world (and other potential creditors) that the secured party’s claim on the asset is firmly established.
5.2 Priority over Competing Claims
Priority determines whose rights come first if multiple parties have security interests in the same asset. The UCC explicitly gives a security interest perfected by control a higher priority than one perfected by other means (such as by filing alone).
In practice, this means that if one creditor perfects by filing and another perfects by control, the one with control will have first rights to the collateral if the debtor defaults.
Article 9’s priority rules favour the secured party who has taken control, reflecting the greater certainty and immediacy of their grip on the asset.
Control has a practical benefit: it enables quicker and smoother enforcement. A secured party with control can readily dispose of or transfer the collateral upon the debtor’s default without obstacles, since they either physically hold the asset or have the contractual right to direct its handling. This reduces delay and uncertainty in recovering the debt from the collateral.
Conclusion: UCC Article 9-106
UCC Article 9-106: control of investment property, provides a clear framework for how a secured party can establish control over financial assets like securities and commodity accounts.
It bridges the gap between traditional notions of possession and the realities of modern finance where assets are often electronic and held by intermediaries.
For anyone dealing with secured transactions involving stocks, bonds, or trading accounts, understanding UCC Article 9-106 is essential. It spells out the steps needed to secure and perfect an interest in such collateral and highlights the advantages of doing so.
The key takeaway is that by obtaining control – through possession, registration, or appropriate agreements – a secured party significantly strengthens its legal position.
Control not only perfects the security interest but also gives the secured party priority over others and the ability to act swiftly if enforcement becomes necessary.
