Perfection of a Security Interest in Stock: UCC, That Escalated Quickly!

By Teresa L. Green

 I recently had the pleasure of doing a research project about secured transactions—the highlight of any lawyer’s career.[1] I quickly had the thought: well that escalated quickly.

The Uniform Commercial Code (“UCC”) has honestly provided a myriad of wonderful law to guide businesses in the right direction, especially considering how pervasive adoption has been.[2] However, several practical applications of the UCC have proven exhausting to untangle. One area has been the creation of an enforceable security interest in stocks. Historically, the UCC did not differentiate between certificated and uncertificated stocks.[3] It now does after the 2010 amendments, so let’s unpack the Oklahoma UCC treatment of perfection in stocks.

Initially, we must consider the important question of what law governs the transaction.[4] Under the Oklahoma UCC, this question branches depending on the type of stock: certificated or uncertificated. Uncertificated stock is governed by the law in the jurisdiction of the issuer.[5] Certificated stock is governed by the law where the certificate is located.[6] For example, if the certificate is sent to the secured party in Texas, Texas law will govern the perfection.

But what about the actual meat of the issue? How do I know if my security interest is perfected? This consideration not only relies on whether the stock is certificated or uncertificated, but also on the form: bearer or registered. Generally, stocks may be perfected by filing.[7] However, filing may not be the best option considering other potential issues.[8] The other method of perfecting a stock is through control. Now “bear” with me, here is where things escalate![9]

Uncertificated stocks are perfected under control if delivered.[10] However, certificated stocks depend on whether it is bearer or registered form. Certificated stocks in bearer form are perfected under control through delivery of the certificate.[11] Certificated stocks in registered form are perfected under control through delivery and endorsement or registration in the secured party’s name.[12] A common misunderstanding is that taking physical possession alone is enough. Let’s clear this up right now. It is not enough if the stock is certificated. The UCC specifically requires delivery[13]and endorsement or registration if in registered form.

Ultimately, this question is too complex to be decided by a mere blog post. There are many complications. So I leave you with the cliché: Talk to a lawyer!

[1] Insert traumatic law school experiences.

[2] Even outside of the United States—Hello Canada!

[3] Barkley Clark & Barbara Clark, The Law of Secured Transactions under the Uniform Commercial Code (3d 2011).

[4] Thank you Professor Michael Gibson of the University of Oklahoma City School of Law for drilling this important starting point into my head for three years.

[5] Okla. Stat. tit. 12A, § 1-9-305.

[6] Id.

[7] § 1-9-312(a)(permitting perfection of investment property, which includes stocks under the definition of investment property in the UCC, through filing).

[8] Like bankruptcy. However, filing should always be considered and is often an effective extra measure of protection.

[9] Take a deep breath!

[10] § 8-106(c)(noting an alternative to delivery is “the issuer has agreed that it will comply with instructions originated by the purchaser without further consent by the registered owner”).

[11] § 8-106(a)

[12] § 8-106(b).

[13] Which can be in the form of possession but there are other ways to show delivery.

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2 comments (Add your own)

Thanks, Teresa. Your research gives me a "leg up" on this frankly opaque area of the law!

Thu, June 22, 2017 @ 4:25 PM

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Wed, June 13, 2018 @ 11:40 PM

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