Pending revisions to Articles 8 and 9 of the Florida UCC: an opportunity for Florida to merge onto the information superhighway.

• Author: Morrison, George T.

Our lives have been radically affected during the past 10 years by quantum advances in technology. Nowhere has this change been more profound than in the conducting of personal and business transactions electronically via the Internet. Many sophisticated investors (and, perhaps, less sophisticated investors) now trade in marketable securities with nothing more than a personal computer and a modem. Chapters 678 and 679 of the Florida Statutes (Articles 8 and 9 respectively of the Florida Uniform Commercial Code), however, were enacted at a time when an investor's interests in marketable securities were evidenced by physical stock certificates that were actually endorsed and delivered when shares were exchanged. Present law does not contemplate electronic trading of securities and also does not adequately align with and facilitate current market practices. Fortunately, proposed amendments to Articles 8 and 9 are pending in the Florida House of Representatives to be considered by the Florida Legislature in January of 1998.(1) It is hoped that Florida will soon enter the modern era and join the other 44 United States jurisdictions that have already adopted this important legislation.(2)

Florida Should Adopt the Revisions of Articles 8 and 9

Current law contemplates an antiquated system of stock holdings in which ownership changes involve the physical transfers of stock certificates and in which security interests are perfected by the possession of physical stock certificates. Specifically, Florida's current version of Article 8 reflects a "direct holding" holding system for securities whereby the beneficial owner of a security has a direct relationship with the company that issued the security.(3) As we will discover below, the securities markets in the United States operate on what has been dubbed the "indirect holding" system whereby the issuing corporation's records do not identify the beneficial owners of the corporation's stock.(4) Thus, existing Article 8 needs to be fundamentally amended so that the substantive laws of Florida reflect the realities of how marketable securities are typically transferred and held. In fact, the Bill Analysis & Economic Impact Statement pertaining to the pending revisions to Articles 8 and 9 recites that such revisions, if enacted, will 1) modernize Florida statutory law to accommodate a system of securities holdings that is already in place; 2) reflect the current use of electronic filings; and 3) set forth duties and rights regarding "securities entitlements" (to be discussed below).(5) These amendments will provide greater certainty not only with respect to the buying and selling of marketable securities but, as we will see, also with respect to the pledging of marketable securities as collateral for loans and other obligations.

The Bankruptcy/Uniform Commercial Code Committee and the Financial Institutions Committee of The Florida Bar Business Law Section established a subcommittee for the purpose of reviewing the proposed revisions to Article 8 of Florida's Uniform Commercial Code.(6) The subcommittee concluded that Florida should adopt the revisions to Article 8 and asserts that these revisions, if adopted, will, among other things:(7)

* Establish an investor's specific rights in his or her "securities account" vis-a-vis a stock broker.

* Make it easier for stock brokers to obtain secured credit on their accounts with "securities depositories."

* Reduce the possibility of stock market crashes, such as the "Black Monday" crash in October of 1987.(8)

* Give secured lenders better control over the marketable securities held in "security accounts" that are pledged as collateral for loans. The attachment and perfection rules of the present versions of Florida Articles 8 and 9 with respect to "securities accounts" are less than clear. The revisions to Article 9, however, set forth a definitive procedure whereby a secured party can (and should) perfect his or her security interest in such "security accounts" by exercising "control" over such accounts.

* Reduce the prospect of litigation with stock brokers acting as bailees for their customers.

* Reduce the possibility that the transfer rules for securities will become preempted by federal regulation.

* Facilitate individual investments through stock brokers.(9) This is because the Article 8 revisions specify with particularity the rights and responsibilities of investors and stock brokers as to the trading and pledging of securities in the electronic age, whereas present law is lacking in this regard.

For all of the foregoing reasons and more, the Florida Legislature needs to adopt the pending revisions to Articles 8 and 9 of the Florida UCC as soon as possible.(10) We are optimistic that Florida will join the other jurisdictions that have already adopted the pending revisions to Articles 8 and 9 of the UCC and adopt these revisions early in 1998. Therefore, the remainder of this article will illustrate how marketable securities will be traded and pledged in Florida once the revisions are adopted.(11)

Trading and Pledging of Marketable Securities

Before one can appreciate the necessity for the revisions to Articles 8 and 9 of the Florida UCC, one needs to understand the mechanics of how most marketable securities are traded in the United States. The scenario that follows provides an illustration of the realities of the modern securities market.

Assume that Jane Justice wants to purchase 100 shares of ABC common stock. Further, assume that these shares have actually been issued in physical form by ABC and that Jane cannot or does not desire to purchase...