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Investment Security

Securities purchased for investment purpose are investment securities.  Certificates or documents indicating a person’s interest in a business or having lent money to a company or a government entity is known as investment security.  Common investment securities are: equity securities and debt securities.  Common stocks come under equity securities.  Securities such as bank notes, treasury bills and bonds come under debt securities.  The issuer is the entity or corporation that issues securities.

Various commercial transactions are governed by the Uniform Commercial Code (UCC), which is a set of standardized state laws governing financial contracts.  The UCC contains nine articles.  Article.8 of the UCC deals with secured loans.  Thus any transaction in investment securities is dealt with in Article 8 of the UCC.  The ownership aspect pertaining to investment securities is also governed by Article 8 of the UCC.

According to the UCC, certificated securities governed by the UCC are negotiable instruments [i].  However, statements, notices, or the like, sent by the issuer of uncertificated securities and instructions are neither negotiable instruments nor certificated securities [ii].

In an action on a security, each signature on a certified security is a necessary endorsement, on an initial transaction statement, or on an instruction, is admitted [iii].  When a signature is admitted or established, production of the security entitles a holder to recover on it.  However a defendant can challenge the validity of a security.  Admission of signature gives rise to the presumption that statements in documents concerning the time of its issuance is true.  Moreover, when signatures on initial transaction statements are admitted or established, the facts stated in the statement are presumed to be true.  If a defendant objects, plaintiff has the burden of establishing that s/he or some person under whom s/he claims, is a person against whom the defense or defect is ineffective.  A person obligated to transfer securities may transfer any certified security to the transferee or a person designated by the transferee [iv].  A security interest in an uncertified security can be evidenced by the registration of pledge to the secured party or a person designated by him/her.  There can be no more than one registered pledge of an uncertificated security at any time.  The registered owner of an uncertificated security is the person in whose name the security is registered, even if the security is subject to a registered pledge. The rights of a registered pledgee of an uncertificated security are terminated by the registration of release [v].

An issuer includes a person who places or authorizes the placing of his/her name on a certified security [vi].  Moreover, with respect to obligations on or defenses to a security, a guarantor is an issuer to the extent of his/her guaranty.  And with respect to registration of transfer, pledge, or release, the issuer means a person on whose behalf transfer books are maintained.

The UCC explains the rights acquired by a purchaser [vii].  Upon transfer of a security to a purchaser, the purchaser acquires rights in the security which  transferor had to convey unless the purchaser’s rights are limited rights.  A transferee of a limited interest acquires rights only to the extent of the interest transferred.  The creation or release of a security interest in a security is the transfer of a limited interest in that security.

A bona fide purchaser is a purchaser for value in good faith and without notice of any adverse claim [viii]. When the sale of a security is made on an exchange or through a broker, the selling customer fulfills his duty to transfer at the time s/he places a certified security in the possession of a selling broker or a person designated by the broker [ix].  A transferor’s duty to transfer a security under a contract of purchase is not fulfilled until:

  • the transferor places a certified security in form to be negotiated by the purchaser in the possession of the purchaser or of a person designated by the purchaser;
  • the transferor causes an uncertified security to be registered in the name of the purchaser or a person designated by the purchaser; or
  • on a purchaser’s requests, causes an acknowledgment to be made to the purchaser that a certificated or uncertified security is held for the purchaser [x].

When a certified security is presented to an issuer with a request to register transfer, pledge, or release, the issuer shall register the transfer, pledge, or release as requested.  An issuer under a duty to register is liable to the person presenting a certified security for loss resulting from any unreasonable delay in registration or from failure or refusal to register the transfer, pledge, or release [xi].

[i] U.C.C. § 8.105

[ii] U.C.C. § 8.308; 8.408

[iii] U.C.C. § 8.105(3)

[iv] U.C.C. § 8.107

[v] U.C.C. § 8.108

[vi] . U.C.C. § 8.201

[vii] U.C.C. § 8.301

[viii] U.C.C. § 8.302

[ix] U.C.C. § 8 314.

[x] U.C.C. § 8.314

[xi] U.C.C. § 8 401

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