Control Agreements from the Secured Party’s Perspective – Perfecting Security Interests in a Securities Account

Banking and Financial Institutions

By Banking and Financial Institutions

Any secured party, e.g. a bank, making a loan inevitably wants as much control over its collateral as the borrower is willing to give, and the law allows. In a declining real estate market, an obvious source of collateral for lenders may include a borrower’s securities account. But, taking a securities account as collateral adds an additional element to the loan process by bringing a new party to the table – the financial intermediary.

As people in the industry know all too well, different forms of collateral require different procedures to properly perfect their security interests. Real property, for example, is relatively straight forward; a secured party in Missouri records a properly executed deed of trust with the recorder of deeds office in the county in which the property is located. Investment property (stocks, bonds, mutual funds, brokerage accounts, etc.) are a different animal altogether. Under the Uniform Commercial Code (the “UCC”), a securities account is classified as investment property (UCC § 9-102(a)(49)). Most investors do not maintain physical possession of their certified securities (stock certificates or bonds); rather, these are held by their financial intermediaries. Understanding that your borrower will not have the ability to hand you its certified security for this reason, a creditor wishing to obtain its highest priority should perfect its security interest in investment property by control (UCC § 9-314(a)).

The secured party gains control over the securities account when the owner of the account instructs the securities intermediary, after the secured party has rights in the account, that the intermediary shall comply with the secured party’s orders without consent of the owner.

Put more simply, for a lender to perfect its security interest in a securities account two steps are required: (1) execute a written security agreement whereby the borrower acknowledges its pledge of the account (rights to the account); and (2) enter into a written three-party agreement among the lender, borrower, and financial intermediary (borrower’s instructions to the intermediary).

The most efficient method of gaining control in a securities account is by use of a control agreement (alternatively, the borrower may agree to have the securities titled in lender’s name). Most control agreements start with the secured intermediary’s, e.g. a securities or brokerage firm, standard control agreement form. The financial intermediary has two primary goals with this document: (1) accommodate its client so that the borrower may use its account as collateral for a loan; and (2) limit its own liability for entering into this transaction. When representing a secured party, this leaves significant room for improvement from the bank’s attorney’s perspective.

Aside from the typical concerns in a contract – jurisdiction, venue, notice provisions, etc. – below are a few issues a secured party should consider when taking a securities account as collateral:

  1. Is the securities account properly identified? Here, the name of the borrower, the financial intermediary, and the secured party, in addition to the account number, should all be clearly identified.
  2. Does the financial intermediary agree to comply with instructions from the secured party, even if it is to the borrower’s detriment?
  3. What representations and warranties does the intermediary provide? The intermediary should, at a minimum, represent and warrant that: (a) it will provide copies of all statements and trade confirmations to lender; (b) notify lender if anyone makes a claim to the account, and that there are no current claims to the account other than those of lender and the financial intermediary; (c) the account is held in borrower’s name; (d) the statement provided to lender is accurate at the time the control agreement becomes effective; (e) the account does not contain any financial asset registered in borrower’s name, payable to borrower’s order, or specifically endorsed to borrower, which has not been endorsed to the intermediary, lender, or in blank; and (f) neither borrower nor the intermediary shall terminate the account.
  4. Who has priority as between the financial intermediary and lender? The lender should insist the intermediary subordinate its set-off rights in the account to the rights of lender.
  5. What is the current value of the account? Lender may require borrower’s account maintain a minimum value.

Understanding that a secured party’s highest form of priority is for a secured lender to take control is the first step properly securing such an account. Realizing that you are not relegated to using a broker’s pre-printed control agreement enables the lender to further enhance its position.


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