Legislative Principle 5: The Convention provides that an intermediary may only dispose of intermediated securities with the authorisation of the person(s) affected by the disposition.
The law may provide for other cases of authorised dispositions, and it should establish the consequences of unauthorised dispositions. The law should also determine whether and in what circumstances a book entry is invalid, reversible, or conditional, and the consequences thereof.
1. Core Convention principles and rules The core principles and rules are the following:
Debits of securities to a securities account, designating entries or the removal of designating entries or any other disposition of intermediated securities may only be made with the authorisation of the person(s) negatively affected by the disposition. Article 15(1)(a)-(d).
Such authorisation may also be contained in the non-Convention law. Article 15(1)(e).
The non-Convention law and, to the extent permitted by the non-Convention law, the account agreement or the uniform rules of a SSS determine the consequences of dispositions lacking the required authorisation.
Article 15(2).
This corresponds with the Convention’s general rule that non-Convention law determines whether and in what circumstances a debit, credit, designating entry or removal of a designating entry is invalid, is liable to be reversed or may be subject to a condition, and the consequences thereof. See Articles 15(2) and 16.
With respect to unauthorised designating entries, the consequences of unauthorised dispositions provided in the non-Convention law are subject to the protection of innocent acquirers. Article 18(2).
The general idea of Article 15 is that dispositions of intermediated securities must be authorised by the person(s) affected by those dispositions. Article 15(1)(a)-(d) specify such dispositions, including dispositions in accordance with Articles 11, 12 and 13, and the persons by whom the intermediary must be authorised. The prerequisites of a valid authorisation are not regulated by the Convention. But the authorisation itself may be given by any kind of express or implied consent under the Convention, including instructions of the affected person.
Article 10(2)(c). The non-Convention law may additionally provide authorisation by operation of law and not by the affected person(s).
The consequences of unauthorised dispositions are deferred to non-Convention law. Dispositions under Article 15(1) are not necessarily associated with book-entries (e.g.
Articles 12(3)(a), 12(3)(c), 13). But insofar as unauthorised dispositions implicate a (removal of a) book-entry in a securities account, Article 15(2) replicates the general rule that the validity, reversibility and conditionality of book-entries in securities accounts are determined by the non-Convention law. Article 16.
The non-Convention law may permit that the account agreement or the uniform rules of a SSS also determine the consequences of unauthorised dispositions and whether book-entries are defective.
Articles 15(2), 16, 17(d).
The relevance of the non-Convention law is subject to the protection of the innocent acquirer. Articles 15(2), 16, 18. The reason why only unauthorised designating entries are mentioned in Article 15(2) and expressly made subject to Article 18(2) is that only such book-entries may directly result in defective entries. In the case of other unauthorised dispositions, later resulting in a defective (credit or designating) entry, however, an innocent person may, by a subsequent transaction, also acquire an interest in intermediated securities free of adverse claims.
2. Choices to be made by declaration
The Convention neither requires nor permits declarations in respect of the matters discussed in this section.
3. Matters to be addressed or clarified
a. Defining authorisation of dispositions and the consequences of unauthorised dispositions
While the Convention states that an intermediary may only dispose of intermediated securities with the authorisation of the person affected by the disposition, the authorisation required by Article 15 may also be contained in (general provisions of) the non-Convention law.
The law should clarify the consequences of dispositions that are not authorised by the person who is negatively affected by the disposition. Article 15(2). The non-Convention law may defer this decision to the general provisions of its law, to the account agreement or the uniform rules of a SSS.
The non-Convention law may also regard such unauthorised dispositions neither as void nor as liable to be reversed but, for instance, as a mere breach of contract between the intermediary and the person affected by the unauthorised disposition.
To some extent, the consequences of unauthorised dispositions may be dependent on the intermediated securities holding model chosen by the respective State. See generally Part I.B above. For example, in the co-ownership system of a European civil law State, unauthorised debits are void, though the subsequent acquisition by an innocent person may be protected, having the result that the account holder of the wrongly debited securities account would lose its proprietary interest. In the security entitlement system of a North American common law State, unauthorised debits are also void, and the relevant intermediary is obligated to re-credit the securities account which was wrongly debited, thereby re-establishing that account holder’s security entitlement.
b. Clarifying validity requirements and conditions of book-entries
In general, the law should clarify whether and in what circumstances book-entries are void, are liable to be reversed or are conditional. Article 16.
The law should also address the consequences of the reversibility of unauthorised or defective (credit or designating) book-entries. In particular, the law has to determine whether the reversal of book-entries has retroactive effect or ex nunc effect.
Likewise, decisions have to be made in case of conditional book-entries when the condition is not fulfilled. The non-Convention law may defer this decision to the general provisions of its law or to the account agreement or the uniform rules of a SSS.
Articles 15(2), 16 and see paragraphs 132-134 above (regarding the “no credit without debit” rule).
The law has to make clear that the consequences of unauthorised dispositions and defective (credit or designating) book-entries that are determined by the non-Convention law are subject to the overriding principle of the protection of an innocent acquirer. Article 18 and see also Articles 15(2), 16.