UCC antecedent of STAs
- In 1994, Article 8 of the US Uniform Commercial Code was revised to provide a security entitlement system for the indirect holding system for publicly traded shares and bonds. A person acquires a securities entitlement if a securities intermediary indicates by book entry that a financial asset has been credited to the person’s securities account. (p.2)
No ownership of securities held through the intermediary
- The Official Comment to Section 8-503 of the Uniform Commercial Code states:
A security entitlement is not a claim to a specific identifiable thing; it is a package of rights and interests that a person has against the person’s securities intermediary and the property held by the intermediary. The idea that discrete objects might be traced through the hands of different persons has no place in the Revised Article 8 rules for the indirect holding system. (p. 2)
Adoption of STAs in Canada
- Since 2005, a security entitlement system (pursuant to Securities Transfer Act5) has been adopted by all the provinces. (p.2)
Failure of ITA to address
- The ITA does not accommodate the security entitlement system by failing to address germane questions, e.g.:
(1) Do dividends maintain their characterization as they work their way through the system to the end entitlement holder?
(2) Are shares in an American corporation “specified foreign property”?
(3) Is there a taxable disposition if a person delivers a share certificate to his or her broker in exchange for a security entitlement for the same number of shares? (pp. 2-3)
U.S. background and commentary preceding the provincial Securities Transfer Acts
- Since 2005, a security entitlement system (pursuant to Securities Transfer Acts) has been adopted by all the provinces. Under this system for the indirect holding of publicly traded shares and bonds, a person acquires a securities entitlement if a securities intermediary indicates by book entry that a financial asset has been credited to the person’s securities account.
- Official commentary to the U.S. U.C.C. antecedents to this system states:
A security entitlement is not a claim to a specific identifiable thing; it is a package of rights and interests that a person has against the person’s securities intermediary and the property held by the intermediary. The idea that discrete objects might be traced through the hands of different persons has no place in the Revised Article 8 rules for the indirect holding system.
Failure of ITA to accommodate STAs including in disposition definition
- It is suggested that the ITA does not accommodate the security entitlement system, by failing to address germane questions, e.g.:
(1) Do dividends maintain their characterization as they work their way through the system to the end entitlement holder?
(2) Are shares in an American corporation “specified foreign property”?
(3) Is there a taxable disposition if a person delivers a share certificate to his or her broker in exchange for a security entitlement for the same number of shares?
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