Father Knows Best: Revised Article 8 and the Individual Investor
101 Pages Posted: 21 Mar 2019
Date Written: April 1, 2000
Most states, including New York State, have adopted a major revision of Article 8 of the Uniform Commercial Code (Revised Article 8), along with related amendments to Article 9 (Revised Article 9). The Department of the Treasury has also adopted Revised Article 8 for the market in Treasury securities, preempting certain provisions of the laws of any state that has not adopted Revised Article 8. In 1994, the adoption of Revised Article 8 by both the American Law Institute (ALl) and the National Conference of Commissioners of Uniform State Laws (NCCUSL) was the culmination of a process that began in 1988. Although the supporters of Revised Article 8 have stoutly maintained that it is primarily a clarification of 1977 Article 8 and that the proposed changes are insignificant, Revised Article 8 actually includes major changes that should be of concern to all individual investors in America's securities markets. Without significant amendments to certain sections of Revised Article 8, individual investors will be profoundly disadvantaged.
This Article uses New York State to test the validity of the arguments made for Revised Article 8, in part, because New York City is the national center of the securities industry. Revised Article 8 clarifies the conflict of laws rules as compared to those in 1977 Articles 8 and 9. When dealing with securities entitlements, which are described below, New York law would be relevant either because choice of law provisions in contracts drafted by securities intermediaries normally specify New York law or because the chief executive office of most major securities intermediaries is located in New York. The amount of written material generated in support of adopting Revised Article 8 in New York, which is greater than in other states, also makes New York a useful test case.
In addition, this Article functions as a case study of the relative impact of industry groups and consumers, referred to in this article as "individual investors," on the UCC revision process. Recently, a great deal has been written criticizing the revision process both for its procedures and for the substantive proposals generated by these procedures. Professor Edward L. Rubin has been one of the most eloquent of these critics, combining a mastery of UCC Articles 3 and with an insider's view of what occurred during the recent revision process of these two Articles. The revision process, however, has also attracted its defenders. This is, of course, not a new debate.
Practicing attorneys from major law firms dominated the revision process that led to Revised Article 8. These law firms, in turn, have major clients in the broker-dealer and banking industries. The Securities and Exchange Commission (SEC) and the Federal Reserve Board also played major roles. These federal agencies, however, are not satisfactory surrogate representatives of individual investors. This Article focuses on the SEC in examining whether the history of the relationships between these federal agencies and their regulated industries supports the view that individual investors, in fact, were adequately represented.
A handful of academics, most notably Professor James S. Rogers, the reporter for Revised Article 8, played a role in the revision process. Professor Rogers has claimed that there was no need for designated representatives of individual investors because many lawyers involved were "generalists" who "studied and commented upon drafts" and "whose natural inclination was to examine each issue from the perspective of any possible impact on their own interests as investors." As this Author does not share Professor Rogers' further conclusion "that there is nothing in Revised Article 8 that is adverse to the interests of individual investors," this Author takes little comfort from the fact that attorneys, who did not see their role as one of representing individual investors and who often lacked the expertise to properly evaluate Revised Article 8, commented on the proposal.
This Article suggests that consumer representatives need to be involved in the UCC revision process in a meaningful way. Writing to groups that represent consumers is a necessary, but insufficient, measure to encourage consumer involvement. As this Author is well aware from having written on Revised Article 8, an understanding of the issues raised by revisions involves studying a number of complex and interrelated areas of law. For example, to make an assessment of Revised Article 8, one must, at a minimum, evaluate economic studies of systemic risk in general and of clearance and settlement of securities trades in particular; the Securities Investor Protection Act, the federal scheme that provides some protection resembling insurance to individual investors; and the SEC's regulatory regime to protect individual investors, particularly the net capital, hypothecation and segregation (of customers' securities and cash) rules. Furthermore, Revised Article 8 itself, although much more clearly conceptualized and drafted than prior versions, is hardly a relaxing read. Faced with such recondite and complex issues, what consumer representative will invest the hundreds, if not thousands, of hours necessary to understanding these disparate but related areas of law? Many other legal battlefields exist where the legal issues facing consumers are most familiar to lawyers, and where there is a history of pro-consumer commentary and activism. Given the limited financial and human resources of legal groups representing consumers, it is not surprising that Revised Article 8 attracted little commentary.
Funding is needed for consumer representatives to participate in the revision process. These consumer representatives must participate from the very beginning, rather than being invited to comment at a later point in the drafting process. This proposal is hardly revolutionary. Beyond the time and resources that major law firms devoted to the Revised Article 8 revision process, the SEC and the Federal Reserve devoted considerable resources to studying problems in the settlement and clearance of securities. At no time, however, did anyone publicly suggest that individuals other than representatives of the regulated industries, their attorneys or their regulators, might appropriately be involved in framing the issues. And, as every good attorney knows, framing the issues is more than half the battle.
Suggested Citation: Suggested Citation