Has the Broker subordinated its statutory first priority security interest in the Securities Account to the Lender’s security interest in the Securities Account?
UCC, Due Diligence, Revised Article 9We’re continuing our examination of control agreements for pledged securities accounts with guest blogger Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. See the introductory post here and the follow-up post, Is there adequate “control” language in the control agreement?
Has the Broker subordinated its statutory first priority security interest in the Securities Account to the Lender’s security interest in the Securities Account?
Some control agreements fail to provide that the Broker subordinates its security interest in the Securities Account to the Lender’s security interest in the Securities Account. This subordination is absolutely essential for a Lender because a Broker’s security interest in the Securities Account automatically primes the Lender’s security interest in the Securities Account under Code Section 9-328(3).[1] Most subordination provisions will necessarily carve-out for the Broker the right to charge the Securities Account for (a) payment for assets purchased in the Securities Account, and (b) normal commissions and service fees due the Broker for the Securities Account.
It should be noted that a recent TD Ameritrade control agreement form we reviewed did not contain a subordination provision. If the Securities Account is not a margin account and the Broker does not otherwise extend credit to the Pledgor (or provide Pledgor with credit card or check-writing privileges), the absence of a subordination provision may not be fatal. However, the best practice is to require this standard subordination provision in the control agreement.
[1] All customer agreements we’ve reviewed between the Pledgor and the Broker contain the Pledgor’s grant of a security interest in the Securities Account to the Broker which automatically gives the Broker a first priority security interest in the Securities Account.
Next week we’ll continue our guest blog series with attorney Bennett Cohen on control agreements for pledged securities accounts. Looking for more educational resources? Just tell us what information you’re looking for by emailing communications@ficoso.com and we’ll send it out.