UCC Article 9-206 Analysis and Commentary: Security Interest Arising in Purchase or Delivery of Financial Asset

1. Introduction to UCC Article 9-206

UCC Article 9-206 of the Uniform Commercial Code’s Article 9 (Secured Transactions) establishes specific rules for security interests arising in certain financial asset transactions.

It defines circumstances under which a security interest automatically attaches to particular assets when those assets are purchased or delivered under specified conditions.

This provision ensures that parties such as securities brokers or others delivering financial assets have a legally recognized collateral interest to secure payment obligations owed to them.

By delineating these special cases, UCC 9-206 supplements the general framework of Article 9, providing clarity and protection for transactions involving securities and similar financial assets.

2. Security Interest in Financial Asset Purchases (Subsections (a) and (b)) of UCC Article 9-206

UCC 9-206(a) and (b) of UCC Article 9-206 address situations where a person buys a financial asset through a securities intermediary (for example, an investor purchasing stock through a broker) and receives the asset before paying for it.

This rule applies when the buyer is obligated to pay the intermediary for the asset at the time of purchase and the intermediary credits the financial asset to the buyer’s securities account before receiving that payment.

When these conditions are met, a security interest automatically attaches in favour of the securities intermediary, using the purchased asset (specifically, the buyer’s security entitlement in that asset) as collateral.

Under UCC 9-206(b), this security interest secures the buyer’s obligation to pay the purchase price of the financial asset. In practical terms, if the buyer fails to pay as agreed (for instance, if a payment does not go through), the intermediary can resort to the asset in the account to recover the unpaid amount.

This mechanism – often informally referred to as a “broker’s lien” – protects the intermediary by providing a temporary collateral interest until the buyer’s payment is received.

The security interest arises by operation of law, without the need for the customer to sign a separate security agreement at that moment.

Once the buyer pays in full and the purchase price obligation is satisfied, the intermediary’s lien on the asset effectively dissolves, as there is no further debt to secure.

This provision reflects common practice in the securities industry. Brokers frequently credit customers’ accounts with securities immediately upon purchase (even if the customer’s actual payment is still in process, such as a check that hasn’t cleared).

UCC 9-206 ensures the broker isn’t exposed to risk during this interval by automatically giving the broker a secured interest in the securities in case the payment obligation is not met.

3. Security Interest in Delivery-Versus-Payment Transactions (Subsections (c) and (d))

UCC 9-206(c) and (d) cover transactions where one party delivers a financial asset in physical form to another party under an agreement that the asset is delivered against payment.

This scenario typically involves certificated securities or other financial instruments in paper form being exchanged between parties who are in the business of dealing in such assets (for example, two financial institutions settling a trade of bonds or money market instruments).

The agreement provides that the deliverer will hand over the security only in exchange for the agreed payment, reflecting a delivery-versus-payment arrangement.

If a deliverer transfers a certificated security (or similar financial asset represented by a physical document) to a buyer or the buyer’s agent under these conditions, a security interest immediately attaches to that asset in favor of the deliverer at the moment of delivery.

According to UCC 9-206(d), this security interest secures the deliverer’s right to receive payment for the asset.

In effect, even though the deliverer has parted with possession of the certificate or instrument, the deliverer retains a lien on it until paid.

If the buyer fails to make the payment as promised, the deliverer can exercise rights in the delivered asset (for example, reclaiming it or otherwise treating it as collateral to satisfy the unpaid obligation).

This rule ensures that sellers or intermediaries who deliver assets are not left unprotected during the brief window between delivering the asset and receiving payment. It bolsters the common understanding in financial markets that a delivery of a security in these contexts is conditional upon full payment.

By operation of law, UCC 9-206 provides the person making the delivery with a security interest, so that the risk of non-payment is mitigated.

Once the payment is made in accordance with the agreement, the obligation is fulfilled and the deliverer’s security interest falls away (since its purpose – securing the payment – has been achieved).

4. UCC Article 9-206’s Interaction with Other Provisions of Article 9

UCC 9-206 operates alongside the general rules of Article 9, and several other provisions are relevant to its application:

4.1 Attachment and Enforceability (UCC Article 9-206’s Relation to UCC 9-203)

UCC 9-203 is the primary provision on when a security interest attaches and becomes enforceable. Typically, it requires an agreement (like an authenticated security agreement) describing the collateral, among other things.

However, UCC 9-203(c) explicitly makes UCC 9-203(b) “subject to” certain other sections, including UCC 9-206.

This means the usual requirement for a signed security agreement is overridden in the scenarios covered by 9-206. When the conditions of 9-206(a) or (c) are met, the security interest attaches automatically by statute, even without a traditional security agreement in place. In other words, the law itself supplies the enforceable interest to the broker or deliverer.

Once attached under 9-206, the security interest has the same legal effect as any other attached security interest under Article 9 – it is enforceable against the debtor/buyer and can be enforced upon default, just as if the debtor had signed a security agreement granting such interest.

4.2 Perfection of the Security Interest and UCC Article 9-206

After attachment, a secured party typically must perfect the interest to have priority over third parties.

UCC 9-206 works in tandem with the Article 9 perfection rules to ensure these security interests are protected without additional actions:

(a) In the securities intermediary scenario (subsection (a)), the collateral is a security entitlement (investment property) in the customer’s account.

A securities intermediary in control of that account can perfect its security interest by control. UCC 9-314 provides that taking control is a method of perfection for security interests in investment property (UCC Article 9-305), and Article 8 (UCC 8-106) defines what constitutes control of a security entitlement.

Because the intermediary by definition maintains the account, it already has the ability to exercise control over the security entitlement. Thus, the intermediary’s security interest is perfected at the moment of attachment without further action.

This form of perfection (by control) is very robust under Article 9’s priority scheme, meaning the intermediary’s interest will generally have priority over other claimants to the same securities.

(b) In the delivery-against-payment scenario (subsection (c)), the deliverer’s security interest is one of the types of interests that the UCC deems automatically perfected upon attachment.

UCC 9-309 lists several security interests that are perfected when they attach, and it includes the security interest of a deliverer in collateral under UCC 9-206(c).

The rationale is that the deliverer may not retain possession of the instrument (having handed it over), and filing a financing statement for such a short-lived lien would be impractical.

Automatic perfection means that from the moment the deliverer’s lien attaches, it is effective against third parties without any filing or further steps. This protects the deliverer’s interest during the gap between delivery and payment.

While automatically perfected security interests can, in certain cases, be subordinate to other perfected interests (for example, another party who might take control of the asset could potentially gain priority), the deliverer’s interest remains legally valid and enforceable in the interim, ensuring the deliverer is not an unsecured creditor in that situation.

By integrating with these other provisions, UCC 9-206 ensures that the secured parties in these scenarios (brokers and deliverers) are covered by the normal Article 9 rules in terms of enforceability and priority, even though the security interests arise without the typical formalities.

The provision essentially creates an exception to the general attachment requirements and immediately plugs these interests into the Article 9 framework of perfection and priority. It is a clear example of the UCC providing a self-executing protection to facilitate common commercial practices.

5. Conclusion

UCC Article 9-206 provides a specialised yet critical set of rules within secured transactions law in the U.S.

In summary, when a broker or securities intermediary delivers investment property to a buyer before receiving payment, or when a dealer delivers a security under an agreement calling for simultaneous payment, the law automatically gives that party a security interest to secure the unpaid obligation.

This analysis shows that UCC 9-206 ensures the party delivering the value (whether securities or other financial assets) has a temporary but effective collateral security interest to back up the payment duty of the other side.

This provision carves out sensible exceptions to the usual requirements (like needing a signed security agreement) and leverages existing concepts like control and automatic perfection to protect the relevant parties.

The result is a provision that upholds commercial expectations: brokers can confidently credit securities knowing they have a lien for payment, and sellers can deliver instruments knowing they retain an interest until paid.