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Risk Management Blog

UCC & Corporate Due Diligence

Resource Guide for Legal and Financial Professionals

Examining Issues with Control Agreements for Pledged Securities Accounts

UCC, Due Diligence, Revised Article 9

We are pleased to welcome back attorney Bennett Cohen of Illinois law firm Cohen, Salk and Huvard, P.C. as a guest blogger! Over the next few weeks, Mr. Cohen will share his expertise on the topic of control agreements for pledged securities accounts.

Examining Issues with Control Agreements for Pledged Securities Accounts – Introduction

Control agreements for pledged securities accounts come in all shapes and sizes, and it is necessary to have a basic understanding of what to look for when reviewing these agreements, so perhaps looking at this article can give you an idea of what to look out for. These agreements are typically among the owner/pledgor (“Pledgor”) of the securities account (“Securities Account”), the securities intermediary (i.e., broker or bank where the securities account is maintained, “Broker”) and the lender (“Lender”). There are a wide range of business risks posed by some of the existing industry control agreement forms, and since securities accounts are increasingly becoming part of the collateral for commercial loans, we felt that this would be a worthy topic for bank loan officers and employees.

First, let’s briefly review the steps in the perfection of a security interest in a Securities Account which is classified under Revised Article 9 of the Uniform Commercial Code (the “Code”) as “investment property”.

The Code provides that taking “control” over a Securities Account is the preferred method of perfection of a security interest in a Securities Account. A secured party can also perfect its security interest by filing a UCC financing statement against the Pledgor covering the Securities Account but such UCC filing will be primed by a secured party who takes “control” of the Securities Account. A UCC filing is a useful perfection method for lenders who are taking a second priority security interest in a securities account and cannot obtain subordinate “control” of such account because either the senior lender or the Broker will not allow such subordinate security interest.

Generally, a lender perfecting a security interest in a Securities Account by “control” must:

(a) enter into a written security agreement executed by the Pledgor of the Securities Account being pledged; and

(b) obtain a written three-party control agreement signed by the Pledgor, the Broker and the Lender, containing adequate “control” language (described below). An alternative method of “control” is titling the securities account in the Lender’s name (which alternative method can be problematic and is outside the scope of this article).

Be sure to check back next week as Mr. Cohen dives further into control agreements for pledged securities accounts. Looking for more educational resources? Visit the First Corporate Solutions resource library to download documents related to corporate transactions, UCC filing, lien searching and more.