UCC Article 9-305 Analysis and Commentary: Law Governing Perfection and Priority of Security Interests in Investment Property

1. Introduction

UCC Article 9-305 establishes which jurisdiction’s law governs the perfection and priority of security interests in certain types of collateral known collectively as investment property.

In secured transactions, determining the correct governing law is crucial because the requirements for perfecting a security interest and resolving priority conflicts can vary from state to state.

UCC 9-305 provides clarity by specifying a uniform choice-of-law rule for different forms of investment property, ensuring that all parties know which state’s law will decide if a security interest is perfected and whose interest has priority.

2. Scope of Investment Property under UCC Article 9-305

Before diving into the specifics of UCC 9-305, it is important to understand what qualifies as investment property in UCC terminology.

Article 9 defines investment property broadly to include several related asset types: certificated and uncertificated securities (e.g. stocks or bonds, whether held in paper form or electronic form), security entitlements and securities accounts (interests in securities held through intermediaries, such as brokerage accounts), and commodity contracts and commodity accounts (for example, futures positions held in a commodity trading account).

In essence, investment property covers both directly held securities and indirectly held investment assets through financial intermediaries.

UCC 9-305 applies whenever a creditor takes a security interest in any of these forms of collateral, dictating which jurisdiction’s law will govern the key issues of perfection and priority for that interest.

3. General Choice-of-Law Rules in UCC 9-305(a)

Subsection (a) of UCC 9-305 lays out the general rules for which state’s law governs a security interest in each category of investment property.

These rules distinguish among different types of investment property and tie the governing law to a location or legal jurisdiction associated with that property.

In summary, UCC 9-305(a) provides four main choice-of-law rules:

3.1 Certificated Securities

If the collateral is a certificated security (a security represented by a physical certificate), the law of the jurisdiction where that security certificate is located governs the perfection, the effect of perfection or nonperfection, and the priority of the security interest.

Thus, if a stock certificate is physically held in State A, State A’s law will determine how a security interest in that certificate can be perfected (for example, by the secured party taking possession of the certificate) and how competing claims to the certificate would have priority.

3.2 Uncertificated Securities

If the collateral is an uncertificated security (a security recorded only on the issuer’s books, without a physical certificate), the law of the issuer’s jurisdiction (generally the state under whose law the issuer is organized) governs perfection, the effect of perfection or nonperfection, and priority of a security interest in that security.

For example, if a corporation incorporated in Delaware issues shares electronically (no certificates), then Delaware law will govern the perfection and priority of a security interest in those shares.

UCC Article 9-305 - It designates which jurisdiction’s law governs perfection and priority of security interests in investment property, based on the method by which control is achieved. UCC 9 305

3.3 Security Entitlements and Securities Accounts

If the collateral is a security entitlement or a securities account (which arises when a debtor holds securities through a broker or other securities intermediary in the indirect holding system), the law of the securities intermediary’s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority of the security interest.

The “securities intermediary’s jurisdiction” is typically specified in the account agreement or determined by default rules in UCC 8-110.

For instance, if a brokerage account agreement designates New York as the securities intermediary’s jurisdiction, then New York law will govern how a security interest in the securities carried in that account is perfected and whose interest has priority.

3.4 Commodity Contracts and Commodity Accounts

If the collateral is a commodity contract or a commodity account (such as a futures contract or a commodity trading account), the law of the commodity intermediary’s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority of the security interest.

This rule is analogous to the entitlement rule above, but applied to commodities. In practice, one must apply the law of the state identified as the commodity intermediary’s jurisdiction to know how to perfect an interest in the commodity account and how priority disputes will be resolved.

Each of these rules in UCC 9-305(a) anchors the governing law to the place most closely connected with the collateral – whether it is the location of a tangible certificate or the legal jurisdiction of an issuer or intermediary.

This design ensures that the legal framework governing the collateral itself also governs the security interest in that collateral. It spares parties from having to navigate multiple states’ laws for one piece of collateral and avoids inconsistent outcomes.

4. Determining the Commodity Intermediary’s Jurisdiction (UCC Article 9-305(b))

For securities accounts, the “securities intermediary’s jurisdiction” can often be identified by the account agreement or by UCC 8-110.

For commodity accounts, which lack an Article 8 analog, UCC 9-305(b) provides a clear hierarchy of criteria to determine the commodity intermediary’s jurisdiction for purposes of applying the above rule.

The criteria, in order of priority, are:

Express designation in agreement: If the commodity account agreement expressly states that a particular jurisdiction is the commodity intermediary’s jurisdiction for UCC Article 9 purposes, then that jurisdiction’s law governs perfection and priority for any security interest in the account.

Governing law of the account agreement: If no UCC-specific jurisdiction is stated, but the agreement has a general choice-of-law clause selecting a state’s law to govern the agreement, then that chosen state is the commodity intermediary’s jurisdiction.

Location of maintaining office: If the agreement does not specify a jurisdiction under the first two tests, but it expressly identifies an office in a particular jurisdiction where the commodity account is maintained, then the law of that jurisdiction applies.

Location of servicing office (from account statements): If the agreement is silent on the above, and account statements for the commodity account identify an office that services the account, then the commodity intermediary’s jurisdiction is the state where that office is located.

Chief executive office of the intermediary: If none of the above criteria applies, the jurisdiction of the commodity intermediary’s chief executive office governs.

This hierarchy ensures that one can always determine a single governing law for perfection and priority of a security interest in a commodity account.

These rules closely parallel those for securities accounts (see UCC 8-110(e) for analogous provisions).

Notably, the first criterion allows the parties themselves to fix the governing jurisdiction by agreement, giving a secured party and intermediary the ability to establish certainty upfront about which state’s law will apply.

UCC Article 9-305- Which jurisdiction's law governs perfection and priority of security interests in investment property?

5. Exception – When the Debtor’s Location Governs Perfection (UCC 9-305(c))

Subsection (c) of UCC 9-305 provides an important exception to the above rules: in certain cases, the law of the debtor’s own location (determined under UCC UCC 9-307) will govern perfection of a security interest in investment property, rather than the law of the collateral’s location or intermediary.

This exception covers three scenarios:

Perfection by filing: If a security interest in investment property is perfected by filing a financing statement (instead of by possession or control), the perfection is governed by the law of the jurisdiction where the debtor is located. This is consistent with Article 9’s general rule that filing is governed by the debtor’s location.

Automatic perfection for intermediaries: If a security interest in investment property is automatically perfected upon attachment because the secured party is a securities intermediary, broker, or commodity intermediary (for example, a broker-dealer’s security interest in a customer’s account that arises by operation of law under UCC 9-309), then the law of that intermediary-debtor’s location governs perfection.

In essence, subsection (c) tells us that when perfection does not involve any tangible collateral or explicit control arrangement – as with filing or automatic-perfection situations – the law of the debtor’s home base controls the question of whether the interest is perfected. It is important to note, however, that this exception pertains only to the law governing perfection.

The law governing the effect of perfection and priority in an investment property collateral still comes from subsection (a)’s rules. In other words, while a secured party might file in the debtor’s state to perfect its interest, the priority of that interest relative to others (especially those perfected by control) will ultimately be determined under the law of the jurisdiction specified in UCC 9-305(a) for that type of collateral.

This ensures that a secured party who perfects by control under the investment property’s own jurisdiction is not disadvantaged in a priority contest against another party who perfected by filing.

6. Alignment with Article 8 and Policy Rationale

The choice-of-law rules in UCC Article 9-305 were deliberately crafted to mirror the principles found in UCC Article 8, which governs the substantive rights in securities and other investment property.

By aligning Article 9’s secured transactions rules with Article 8’s framework, UCC 9-305 ensures that the same jurisdiction’s law governs both the underlying investment property and any security interest in that property.

For example, the law that governs the validity and transfer of an uncertificated security (typically the issuer’s state of incorporation) also governs how a pledge of that security is perfected and has priority.

Similarly, the law governing a securities account (often chosen in the account agreement with the intermediary) also governs the perfection and priority of a security interest in that account.

This one-to-one alignment avoids the potential confusion of having different states’ laws apply to closely related issues.

It prevents a scenario where, say, one state’s law governs the securities account itself while another state’s law governs the lien on that account – a situation that could lead to conflicting results. Instead, all relevant questions about the collateral and the security interest are handled under a single, coherent legal regime.

Another policy rationale behind UCC Article 9-305’s approach is that it anchors the legal analysis in the jurisdiction with the closest and most logical connection to the collateral.

Using the law of the certificate’s location, the issuer’s jurisdiction, or the intermediary’s jurisdiction means applying the law of the place where the critical records and relationships are centered.

This makes the rules more intuitive and the outcomes more likely to reflect the expectations of parties. In summary, UCC 9-305’s design maximizes legal consistency and predictability by ensuring the governing law for perfection and priority is the one most naturally linked to the collateral.

7. Conclusion

UCC Article 9-305 provides a clear, authoritative framework for determining which state’s law governs the perfection and priority of a security interest in investment property.

It achieves a careful balance by tailoring the choice-of-law rule to the type of collateral, aligning those rules with the asset’s own legal context (and with Article 8’s established principles), yet also carving out sensible exceptions for cases of filing and automatic perfection.

The result is a set of rules that gives secured parties and other stakeholders certainty about which jurisdiction’s law will apply, without speculation or ambiguity.

By eliminating conflicts and keeping the legal analysis within one familiar jurisdiction for each class of investment property, UCC 9-305 strengthens the uniformity and reliability of secured transactions involving securities and related investment assets.