Some significant amendments to the Dutch Securities Giro Transfer Act (“SGTA”) took effect on 1 January 2011. The amendments will have an impact on issuers of securities, investors and financial institutions. Individual bearer instruments will have to be replaced by a global certificate or changed into registered instruments before 1 January 2013. Issuers of bearer shares may have to amend their articles.
The SGTA aims to offer holders of securities protection against the effects of a custodian’s bankruptcy. The SGTA treats securities holders as co-owners of a pool (gemeenschap) of securities of the same type. This SGTA securities pool is managed by the Dutch Central Securities Depository (“CSD”, currently: Euroclear Netherlands) and its participating institutions (banks and brokers). An SGTA securities pool does not form a part of the assets of the CSD or the participating institutions themselves. In any bankruptcy of a participant institution, those holding securities with that participating institution may recover their securities directly from the securities pool.
The SGTA only applies if:
Dutch (property) law applies – according to Dutch law of conflicts, Dutch property law only governs (claims with regard to) securities which have been credited to a securities account “held” in the Netherlands;
the CSD has determined that the relevant type of securities may form part of a pool of SGTA securities;
the relevant securities account is held with a participating institution; and
the investor’s securities are held by or for the participating institution or are held by the participating institution in a securities account with the CSD or another participating institution.
Where the SGTA does not apply, financial institutions which are subject to Dutch financial supervision must safeguard the rights of securities holders in another way. These institutions normally arrange for a separate custody entity, which is not otherwise commercially active, to hold (the claims to) the securities that have been deposited.
3. Consequences of the amendments for issuersSecurities issued may no longer exist in the form of traditional, individualised physical certificates and will have to be converted into a global instrument or registered securities. Physical K certificates and CF certificates must therefore be converted into a global, or into registered securities. This will in any case require a board resolution and possibly also an amendment of the articles. The globals may be deposited with the CSD or intermediaries (within the meaning of the SGTA). The registered securities may be entered in the issuer’s register in the name of the CSD or an intermediary. Issuing institutions will have until 1 January 2013 to put this conversion into place. After that, outstanding physical instruments in any form other than a global may no longer be transferred via the giro system. The only exception concerns foreign securities whose governing law does not allow a conversion as described above.
A second important change is that delivery of securities out of an SGTA pool is no longer possible, whereas previously this was the issuer’s prerogative. Delivery will continue to be possible only in the following instances:
if an issuing institution (also) wants to list its securities abroad, or if foreign law otherwise requires it to deposit its securities abroad; or
if an issuing institution decides – in connection with a delisting, for example – to transfer all issued securities of the same type to another entity, i.e. to another Dutch or foreign financial institution. A foreign institution will in that case have to be a participating institution of the central securities depository in the relevant country.
The amendments of the SGTA simplify settlement of securities issues. Previously, securities had to be deposited with a participating institution first and then be transferred on to the CSD for custody. Under the amended SGTA the system is as follows:
on issue, securities may be included directly in an SGTA securities pool managed by an intermediary; not only the intermediary but also the investors can become directly entitled to the newly issued securities; and
on issue, securities may be included directly in an SGTA securities pool managed by the CSD.
4. Consequences of the amendments for investorsFrom 1 July 2011, investors may no longer request delivery of securities out of an SGTA securities pool. Before the amendments, investors could always request delivery, unless the issuing institution had excluded this option. Also from 1 July 2011, delivery will no longer be possible when exercising a right of pledge on SGTA securities or liquidating an SGTA securities pool (for example, in the case of bankruptcy of the custodian). In such cases, the securities will no longer be capable of physical delivery to the investor (in the case of bearer securities) or registration in the investor’s name (in the case of registered securities). Instead, they will be transferred to a different securities account.
In addition, the scope of – and, accordingly, the protection offered by – the SGTA has been widened:
apart from the securities that the CSD has designated as part of an SGTA securities pool, all securities, money market instruments and participation rights in an investment institution (as referred to in section 1:1 Financial Markets Supervision Act, “FMSA”) may form part of an SGTA securities pool. This widened scope concerns in particular foreign securities, as the CSD has so far rarely designated foreign securities as securities that may form part of an SGTA securities pool. Securities may not form part of an SGTA securities pool if they are not transferable or have not been admitted to a regulated market or multilateral trading facility (as referred to in section 1:1 FMSA); and
not only securities held in custody by or for the CSD or a participating institution, but also securities held in custody by any investment company or bank (as referred to in section 1:1 FMSA) that may provide investment services or operate as a bank under the FMSA now form part of an SGTA securities pool. Such investment companies and banks are, jointly with participating institutions, referred to in the amended SGTA as “intermediaries”.
5. Consequences of the amendments for financial institutionsThe widening of the SGTA’s scope will also have an impact on financial institutions. Previously, where the SGTA did not apply, a financial institution had to arrange for a separate custody entity to hold (claims of clients on) securities. The use of a separate custody entity will no longer be required under the new regime where the securities are allowed to form part of an SGTA securities pool. The amended SGTA authorises custody entities to transfer such securities to an intermediary (within the meaning of the SGTA).
For example, if an intermediary (within the meaning of the SGTA) holds securities for its clients with a non-Dutch bank, the claims on those securities vis-à-vis the non-Dutch bank (which will usually be governed by non-Dutch law) will also become a part of the SGTA securities pool managed by that intermediary. The Dutch intermediary may hold the securities with the non-Dutch bank via an (omnibus) account in the intermediary’s own name. The SGTA creates the requisite separation between the intermediary’s shareholders capital and the claims of its clients on their securities.