Get Full Government Meeting Transcripts, Videos, & Alerts Forever!
Get email alerts on the Uc Custody And Priority topic
No spam. Unsubscribe anytime.
Lawyers, policy advocates clash over proposed rollback of UCC Article 8 priority rules
Summary
A bill to restore pre‑1998 Uniform Commercial Code language on securities entitlement and creditor priority drew sharply divided testimony: some witnesses said the change would protect investors in systemic failures, while bankers and UCC practitioners warned it would disrupt markets and reduce access to credit.
The Banking Committee heard competing expert views on a proposal to amend Connecticut’s Uniform Commercial Code (Article 8) to reverse a 1990s revision that, critics say, prioritizes secured creditors in certain custodial control situations.
Proponents including David Webb and David Ice (testifying as private citizens with long finance‑sector experience) argued the 1994–98 revision enabled secured creditors to claim customer securities in complex insolvency scenarios and called the change “Armageddon planning” that favors big banks, not investors. They cited Lehman Brothers‑era disputes and said dematerialization of certificates shifted practical control of securities away from investors into long, opaque custody chains.
Opponents including Connecticut UCC practitioner Jim Schollwolf (testifying for the Uniform Law Commission delegation) and other legal experts said section 8‑5‑11(a) already protects investor priority in most circumstances and that proposed repeal of subsection (b) would cause market harm by discouraging lenders who rely on predictable priority rules. Schollwolf said “control” is a defined legal concept in Article 9 and requires voluntary agreements by the account holder; elimination of the carve‑out, he said, would reduce liquidity and credit availability for borrowers who use securities as collateral.
Why it matters: The debate touches investor protection, custody plumbing and how states balance protections with market functioning. Supporters said the change would protect individual investors and institutional owners (including pension funds) in the event of a major insolvency; opponents warned that an abrupt state‑level rollback would leave Connecticut out of sync with other states and could make lenders and custodians reluctant to offer certain credit facilities.
Key technical points: Witnesses disagreed about the practical reach of the 8‑5‑11(b) exception and whether margin accounts are implicated. Experts opposing the bill said margin accounts and other securities‑for‑loan arrangements are governed by contractual control agreements and are not swept by subsection (b). Proponents emphasized cases where custodians allegedly pledged pooled client assets and lenders asserted control in insolvency, producing contested priority disputes.
Quotes: “If you question your intermediary, the first person you speak with may not understand this, but the reality is that in the event of insolvency of an intermediary in the financial system, the investor has no right to take their securities back out of that insolvency,” testified David Webb.
Ending: Committee members asked technical questions and indicated they would continue to consult the Uniform Law Commission, the judiciary committee and subject‑matter experts before considering statutory changes. No committee vote was taken at the Feb. 27 hearing.
