Bill 927

                    Current Status

Introducing Body:               Senate
Bill Number:                    927
Ratification Number:            238
Act Number:                     161
Primary Sponsor:                Committee (11)
Type of Legislation:            GB
Subject:                        Commercial Code, investment
                                securities
Date Bill Passed both Bodies:   Jun 06, 1991
Computer Document Number:       CYY/18514.SD
Governor's Action:              S
Date of Governor's Action:      Jun 12, 1991
Introduced Date:                Apr 24, 1991
Date of Last Amendment:         Jun 05, 1991
Last History Body:              ------
Last History Date:              Jun 12, 1991
Last History Type:              Act No. 161
Scope of Legislation:           Statewide
Sponsor Committee:              Judiciary
Sponsor Committee Number:       11
Type of Legislation:            General Bill

 Bill  Body    Date          Action Description              CMN
 ----  ------  ------------  ------------------------------  ---
 927   ------  Jun 12, 1991  Act No. 161
 927   ------  Jun 12, 1991  Signed by Governor
 927   ------  Jun 06, 1991  Ratified R 238
 927   House   Jun 05, 1991  Concurred in Senate
                             amendment, enrolled for
                             ratification
 927   Senate  Jun 05, 1991  House amendments amended,
                             returned to House
 927   House   May 23, 1991  Read third time, returned
                             with amendment
 927   House   May 22, 1991  Amended, read second time
 927   House   May 09, 1991  Committee Report: Favorable     25
 927   House   Apr 30, 1991  Introduced, read first time,    25
                             referred to Committee
 927   Senate  Apr 26, 1991  Read third time, sent to House
 927   Senate  Apr 25, 1991  Unanimous consent for third
                             reading on Friday, April 26
 927   Senate  Apr 25, 1991  Read second time
 927   Senate  Apr 24, 1991  Introduced, read first time,
                             placed on Calendar without
                             reference

(A161, R238, S927)

AN ACT TO AMEND CHAPTER 8, TITLE 36, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO INVESTMENT SECURITIES UNDER THE UNIFORM COMMERCIAL CODE, SO AS TO FURTHER PROVIDE FOR THE ISSUANCE OF THESE SECURITIES, FOR THE RIGHTS, DUTIES, AND OBLIGATIONS OF THE HOLDERS AND ISSUES OF THESE SECURITIES, FOR THE PURCHASE, TRANSFER AND REGISTRATION OF THESE SECURITIES, AND FOR THE NEGOTIABILITY OF THESE SECURITIES AND OTHER RELATED PROVISIONS, AND TO AMEND SECTIONS 36-1-201, 36-5-114, 36-9-103, 36-9-105, 36-9-203, 36-9-302, 36-9-304, 36-9-305, 36-9-309, AND 36-9-312, RELATING TO OTHER PROVISIONS OF THE UNIFORM COMMERCIAL CODE, SO AS TO REVISE THESE PROVISIONS IN ORDER TO CONFORM THEM TO THE ABOVE PROVISIONS OF CHAPTER 8.

Be it enacted by the General Assembly of the State of South Carolina:

Uniform Commercial Code - Investment Securities Division

SECTION 1. Chapter 8, Title 36 of the 1976 Code is amended to read:

Section 36-8-101. Short title.

1. This chapter shall be known and may be cited as Uniform Commercial Code--Investment Securities.

2. If in any respect there is any inconsistency between this Article and the Uniform Act for Simplification of Fiduciary Security Transfers, Title 35, Chapter 7, the provisions of Title 35, Chapter 7 shall control.

Amended Official Comment

Purposes:

This Article sets forth certain rights and duties of the issuers of and the parties that deal with investment securities, both certificated and uncertificated. Unlike a corporation code, it does not set forth general rules defining property rights that accrue to holders of securities. And unlike a Blue Sky statute it does not set forth specific requirements for disclosing to the public the nature of the property interest that is the security. Rather it sets forth rules relative to the transfer of the rights that constitute securities and to the establishment of those rights against the issuer and other parties.

As is true with respect to all other Articles of the Code, parties may by agreement create rights and duties between themselves that vary from those set forth in this Article. Section 1-102(3). But prejudice to the rights of those not party to the agreement is limited by Code provisions (e.g., Sections 8-313 and 8-321) as well as by general legal principles that supplement the Code. See Section 1-103 and Comment 2 to Section 1-102.

This Article does not purport to determine whether a particular issue of securities should be represented by certificates, in whole or in part. That determination is left to the parties involved, subject to federal and state law.

South Carolina Reporter's Comments to the 1991 Amendment

The South Carolina version of the Uniform Act for Simplification of Fiduciary Security Transfers, Section 35-7-10 et seq., is intended to provide certainty to parties dealing with fiduciaries. Section 36-8-101(2) has been added to preserve this intended certainty where issuers of securities have dealings with fiduciaries.

Section 36-8-102. Definitions and index of definitions.

(1) In this chapter, unless the context otherwise requires:

(a) A `certificated security' is a share, participation, or other interest in property of or an enterprise of the issuer or an obligation of the issuer which is

(i) represented by an instrument issued in bearer or registered form;

(ii) of a type commonly dealt in on securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium for investment; and

(iii) either one of a class or series or by its terms divisible into a class or series of shares, participations, interests, or obligations.

(b) An `uncertificated security' is a share, participation, or other interest in property or an enterprise of the issuer or an obligation of the issuer which is

(i) not represented by an instrument and the transfer of which is registered upon books maintained for that purpose by or on behalf of the issuer;

(ii) of a type commonly dealt in on securities exchanges or markets; and

(iii) either one of a class or series or by its terms divisible into a class or series of shares, participations, interests, or obligations.

(c) A `security' is either a certificated or an uncertificated security. If a security is certificated, the terms `security' and `certificated security' may mean either the intangible interest, the instrument representing that interest, or both, as the context requires. A writing that is a certificated security is governed by this chapter and not by Chapter 7 of this title, even though it also meets the requirements of that chapter. This chapter does not apply to money. If a certificated security has been retained by or surrendered to the issuer or its transfer agent for reasons other than registration of transfer, other temporary purpose, payment, exchange, or acquisition by the issuer, that security must be treated as an uncertificated security for purposes of this chapter.

(d) A certificated security is in `registered form' if

(i) it specifies a person entitled to the security or to the rights it represents; and

(ii) its transfer may be registered upon books maintained for that purpose by or on behalf of the issuer or the security so states.

(e) A certificated security is in `bearer form' if it runs to bearer according to its terms and not by reason of any indorsement.

(2) A `subsequent purchaser' is a person who takes other than by original issue.

(3) A `clearing corporation' is a corporation registered as a `clearing agency' under the federal securities laws or a corporation:

(a) at least ninety percent of whose capital stock is held by or for one or more organizations, none of which, other than a national securities exchange or association, holds in excess of twenty percent of the capital stock of the corporation, and each of which is

(i) subject to supervision or regulation pursuant to the provisions of federal or state banking laws or state insurance laws,

(ii) a broker or dealer or investment company registered under the federal securities laws,

(iii) is a national securities exchange or association registered under the federal securities laws; and

(b) any remaining capital stock of which is held by individuals who have purchased it at or prior to the time of their taking office as directors of the corporation and who have purchased only so much of the capital stock as is necessary to permit them to qualify as directors.

(4) A `custodian bank' is a bank or trust company that is supervised and examined by state or federal authority having supervision over banks and is acting as custodian for a clearing corporation.

(5) Other definitions applying to this chapter or to specified parts thereof and the sections in which they appear are:

`Adverse claim.' Section 36-8-302.

`Bona fide purchaser.' Section 36-8-302.

`Broker.' Section 36-8-303.

`Debtor.' Section 36-9-105.

`Financial intermediary.' Section 36-8-313.

`Guarantee of the signature.' Section 36-8-402.

`Initial transaction statement.' Section 36-8-408.

`Instruction.' Section 36-8-308.

`Intermediary bank.' Section 36-4-105.

`Issuer.' Section 36-8-201.

`Overissue.' Section 36-8-104.

`Secured Party.' Section 36-9-105.

`Security Agreement.' Section 36-9-105.

(6) In addition, Chapter 1 contains general definitions and principles of construction and interpretation applicable throughout this chapter.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. This is Article 8's definitional Section. It is supplemented generally by the definitions in Article 1 and in particular matters is supplemented by definitions in other Articles. Subsection (5) enumerates several important supplementary definitions and their locations in the Code.

2. Subsection (1) defines `security,' the basic term of this section. Paragraphs (a) and (b) respectively define `certificated security' and `uncertificated security,' and paragraph (c) states that the term `security' comprises both. These definitions are functional rather than formal. At the core is the notion that a security is a share or participation in an enterprise or an obligation that is of a type commonly traded in organized markets for such interests or is commonly recognized as a medium for investment. The ambit of the definition will change as `securities' trading practices evolve to include or exclude new property interests. It is believed that the definition will cover anything which securities markets, including not only the organized exchanges but as well the `over-the-counter' markets, are likely to regard as suitable for trading. For example, transferable warrants evidencing rights to subscribe fore shares in a corporation will normally be `certificated securities' within the definition, since they (a) are issued in bearer or registered form, (b) are of a type commonly dealt in on securities markets, (c) constitute a class or series of instruments, and (d) evidence an obligation of the issuer, namely the obligation to honor the warrant upon its due exercise and issue shares accordingly.

Notice that the definition of uncertificated security does not include the phrase `or commonly recognized in any area in which it is issued or dealt in as a medium for investment.' Since there is no requirement of representation by an instrument, a great many interests that might be regarded as media for investment would be classified as securities under the umbrella of the omitted phrase. For example, interests such as bank checking and savings accounts are intended to be excluded from the definition because they are not commonly traded; but since those accounts are commonly recognized as media for investment, the omitted language might bring them within the scope of the definition.

Interests such as the stock of closely-held corporations, although they are not actually traded on securities exchanges, are intended to be included within the definitions of both certificated and uncertificated securities by the inclusion of interests `of a type' commonly traded in those markets. See paragraphs (1)(a)(ii) and (1)(b)(ii).

The second sentence of (1)(c) is intended to eliminate confusion arising from the fact that certificated securities are alternatively viewed as the actual pieces of paper and the interests they represent. The final sentence of (1)(c) is to recognize that an issuer that nominally issues certificated securities but does not normally send the certificates to the owners is functionally identical to the issuer of uncertificated securities and should be guided by the same rules.

3. The consequence of determining that an interest is a `security' is that this Article will provide the relative rights of issuers, owners, purchasers and creditors as to transfer of rights, notice of claims, registration of interests, etc. This definition has no bearing upon whether an interest is a `security' for purposes of federal securities laws. By the same token the definitions of `securities' for purposes of those laws has no bearing upon whether an interest is a security within the definition of this Article.

4. A certificated security is a negotiable instrument (Section 8-105) but is nonetheless governed by this Article rather than by Article 3. A critical distinction between certificated securities and other negotiable instruments is that one indorsing a security does not undertake the issuer's obligation or make any warranty that the issuer will honor the underlying obligation. One indorsing other negotiable instruments becomes secondarily liable on the underlying obligation.

5. The definition of `clearing corporation' in subsection (3) reflects the fact that a 1975 amendment to the Securities Exchange Act provides for registration of `clearing agencies' with the Securities and Exchange Commission.

South Carolina Reporter's Comment to the 1991 Amendment

`Security' -- The definition of security is intended to be flexible, to permit courts to construe the term in a manner commensurate with the purposes of the statute.

As was the case before amendment, the definition of security is not necessarily intended to coincide with the definition employed in securities regulation. Were the definitions to coincide, the definition of security would be far broader than required by Article 8 and, in addition, there could be gathered into Article 8 a vast amount of securities-regulation juris- prudence not necessarily related to the functions of Article 8.

The definition of security is intended to include shares of stock in closely-held corporations, but to exclude deposit obligations of any financial institution whose deposits are insured by a United States governmental entity. Concerning CDs see Article 9. Limited partnership interests are also meant to be excluded, except when represented by an instrument.

The definition of certificated security is intended to have exactly the same meaning as that intended for the pre-amendment definition of security. The changes in form and wording were not intended to change the substance of the definition except to introduce the distinguishing concept of the certificate.

The definition of uncertificated security is intended to be narrower in scope than the definition of certificated security. To this end, the phrase `or commonly recognized . . . as a medium for investment' has been omitted from the definition of uncertificated security. The purpose is to limit the application of the Article, in the case of uncertificated interests, to those cases in which the issuer intended to issue a traditional sort of security.

`Clearing corporation' -- These changes are not related to uncertificated securities. They are intended to facilitate the formation of the securities depository system.

Section 36-8-103. Issuer's lien.

A lien upon a security in favor of an issuer thereof is valid against a purchaser only if:

(a) the security is certificated and the right of the issuer to the lien is noted conspicuously thereon; or

(b) the security is uncertificated and a notation of the right of the issuer to the lien is contained in the initial transaction statement sent to the purchaser or, if his interest is transferred to him other than by registration of transfer, pledge, or release, the initial transaction statement sent to the registered owner or the registered pledgee.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 15, Uniform Stock Transfer Act.

Purposes:

1. The rule of Section 15 of the Uniform Stock Transfer Act is made applicable to all securities covered by the Article. An analogous rule as to restrictions on transfer imposed by the issuer appears at Section 8-204. Compare also Section 8-202. This section differs from those two sections in that the purchaser's knowledge of the issuer's claim is irrelevant.

`Noted' makes clear that the text of the lien provisions need not be set forth in full. However, this would not override a provision of an applicable corporation code requiring statement in haec verba.

2. The purchaser of an uncertificated security is charged with notice of all provisions in the initial transaction statement, whether or not it is sent to him personally. Similarly, one who takes a certificated security is charged with notice of all provisions noted on the certificate whether or not he actually receives the certificate. When a purchaser takes a security under circumstances in which no initial transaction statement is sent to him by the issuer and no certificated security is delivered to him, he must look to the person to whom a transfer or pledge of the uncertificated security has been registered or the person in possession of the certificated security for the appropriate notice or absence thereof. If the purchaser is not notified of a lien he may have a right of action for breach of transfer warranties. See Section 8-306. Compare Section 8-202 and its Comment 1.

South Carolina Reporter's Comment to the 1991 Amendment

As to certificated securities, no change is made in South Carolina law. As to uncertificated securities, transferees desiring certainty concerning issuer's liens must demand delivery of the original transaction statement.

Section 36-8-104. Effect of overissue; `overissue'.

(1) The provisions of this chapter which validate a security or compel its issue or reissue do not apply to the extent that validation, issue or reissue would result in overissue; but if:

(a) an identical security which does not constitute an overissue is reasonably available for purchase, the person entitled to issue or validation may compel the issuer to purchase the security for him and either to deliver a certificated security or to register the transfer of an uncertificated security to him, against surrender of any certificated security he holds; or

(b) a security is not so available for purchase, the person entitled to issue or validation may recover from the issuer the price he or the last purchaser for value paid for it with interest from the date of his demand.

(2) `Overissue' means the issue of securities in excess of the amount the issuer has corporate power to issue.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. Deeply embedded in corporation law is the conception that `corporate power' to issue securities stems from the statute, either general or special, under which the corporation is organized. Corporation codes universally require that the charter or articles of incorporation state, at least as to capital shares, maximum limits in terms of number of shares or total dollar capital. Historically, special incorporation statutes are similarly drawn and sometimes similarly limit the face amount of authorized debt securities. The theory is that issue of securities in excess of the authorized amounts is prohibited. See, for example, McWilliams v. Geddes & Moss Undertaking Co., 169 So. 894 (1936), La.; Crawford v. Twin City Oil Co., 216 Ala. 216, 113 So. 61 (1927); New York and New Haven R.R. Co. v. Schuyler, 34 N.Y. 30 (1865). This conception persists despite modern corporation codes under which, by action of directors and stockholders, additional shares can be authorized by charter amendment and thereafter issued. This section does not give a person entitled to validation, issue or reissue of a security, the right to compel amendment of the charter to authorize additional shares. Therefore, in a case where issue of an additional security would require charter amendment, the plaintiff is limited to the two alternate remedies set forth in paragraphs (a) and (b) of subsection (1).

2. Where an identical security is reasonably available for purchase, whether because traded on an organized market, or because one or more security owners may be willing to sell at a not unreasonable price, the issuer, although unable to issue additional shares, will be able to purchase them and may be compelled to follow that procedure. West v. Tintic Standard Mining Co., 71 Utah 158, 263 P. 490 (1928).

Paragraph (1)(a) gives the issuer the choice to transfer either a certificated or an uncertificated security. As a practical matter the issuer will have the choice only when the securities of the issue involved are partly certificated and partly uncertificated; and in those circumstances section 8-407 gives the owner (or registered pledgee) the right to choose the form of the security. Thus the issuer likely will transfer a security of the form requested by the person entitled to the security.

3. The right to recover damages from an issuer who has permitted an overissue for occur is well settled. New York and New Haven R. R. Co. v. Schuyler, 34 N.Y. 30 (1865). The measure of such damages, however, has been open to question, some courts basing them upon the value of stock at the time registration is refused; some upon the value at the time of trial; and some upon the highest value between the time of refusal and the time of trial. Allen v. South Boston Railroad, 150 Mass. 200, 22 N.E. 917, 5 L.R.A. 716, 15 Am. St. Rep. 185 (1889); Commercial Bank v. Kortright, 22 Wend. (N.Y.) 348 (1839). The purchase price of the security to the last purchaser who gave value for it is here adopted as being the fairest means of reducing the possibility of speculation by the purchaser. Interest may be recovered as the best available measure of compensation for delay.

4. This section modifies and controls the rules otherwise laid down in this Article as to the validation and issue of securities. The particular sections so modified are listed in the cross-references.

South Carolina Reporter's Comments to the 1991 Amendment

South Carolina law would be changed by this amendment to the extent that an issuer of a mixed issue of certificated and uncertificated securities, could use either to satisfy the holder in an overissue situation. As the Official Comment points out, the holder could thereupon, under Section 36-8-407, exchange one for the other, if dissatisfied. As a matter of corporate governance, of course, individual corporations could choose to issue only certificated or only uncertificated securities. In the case of a corporation choosing to authorize and issue only certificated securities, the amendment would make no change.

Section 36-8-105. Certificated securities negotiable; statements and instructions not negotiable; presumptions.

(1) Certificated securities governed by this chapter are negotiable instruments.

(2) Statements (Section 36-8-408), notices, or the like, sent by the issuer of uncertificated securities and instructions (Section 36-8-308) are neither negotiable instruments nor certificated securities.

(3) In any action on a security:

(a) unless specifically denied in the pleadings, each signature on a certificated security, in a necessary indorsement, on an initial transaction statement, or on an instruction, is admitted;

(b) if the effectiveness of a signature is put in issue, the burden of establishing it is on the party claiming under the signature, but the signature is presumed to be genuine or authorized;

(c) if signatures on a certificated security are admitted or established, production of the security entitles a holder to recover on it unless the defendant establishes a defense or a defect going to the validity of the security;

(d) if signatures on an initial transaction statement are admitted or established, the facts stated in the statement are presumed to be true as of the time of its issuance; and

(e) after it is shown that a defense or defect exists, the plaintiff has the burden of establishing that he or some person under whom he claims is a person against whom the defense or defect is ineffective (Section 36-8-202).

Amended Official Comment

Prior Uniform Statutory Provisions:

None.

Purposes:

1. Although certificated securities are negotiable instruments, this Article and not Article 3 provides the rights and duties relative to such instruments. See Sections 8-102(1)(c) and 3-103(1). But in subsection (3) of this section the particular rules stated in Section 3-307 for the negotiable instruments governed by Article 3 are adapted to certificated securities. Further those rules are adopted with respect to signatures on initial transaction statements, although subsection (2) makes clear that such statements are not negotiable instruments.

2. Paragraph (3)(d) makes clear that the effect of establishing the validity of signatures on an initial transaction statement is to create a presumption that the facts stated therein were true as of the time it was issued. The issuer is free to show that later events -- e.g., a subsequent transfer -- changed the stated facts.

3. `Any action on a security' includes any action or proceeding brought against the issuer to enforce a right or interest that is part of the security -- e.g., to collect principal or interest or a dividend, or to establish a right to vote or to receive a new security under an exchange offer or plan of reorganization.

South Carolina Reporter's Comments to the 1991 Amendment

The amendment makes no changes with respect to certificated securities. With respect to uncertificated securities, writings relating to the security are treated similarly to certificates for purposes of the section.

Section 36-8-106. Applicability.

The law (including the conflict of laws rules) of the jurisdiction of organization of the issuer governs the validity of a security, the effectiveness of registration by the issuer, and the rights and duties of the issuer with respect to:

(a) registration of transfer of a certificated security;

(b) registration of transfer, pledge, or release of an uncertificated security; and

(c) sending of statements of uncertificated securities.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. This section states a special rule for conflicts of laws relating to certain matters covered by this Article. Except as provided in this section, the generally applicable conflicts rules stated in Section 1-105 apply to Article 8.

2. Generally speaking, this section makes the law, including the conflict of laws rules, of the jurisdiction in which the issuer is organized applicable to determine the right and obligations of the issuer with respect to security. Further, the effectiveness of registration by the issuer is to be governed by the law of the jurisdiction in which the issuer is organized. Thus whenever an uncertificated security is transferred through registration on the issuer's records, Section 8-313(1)(b), this section provides the choice of law rule as to the effectiveness of the registration to effect the transfer. Similarly, the effectiveness of a registration on the issuer's records to create and perfect a security interest in uncertificated securities (see Section 8-321) is within the ambit of this section.

It is significant that this section makes applicable the conflict of laws rules as well as the substantive law of the jurisdiction in which the issuer is organized. Because of this provision many matters related to the registration of transfer--for example, the appointment of a guardian for an incompetent person and the existence of agency relations--may be governed by the substantive law of a jurisdiction other than that in which the issuer is organized.

Any transfer of securities that is not effected through registration on the issuer's records is subject to the law provided by general choice of law rules. Transfers (including pledges) of certificated securities are not effected by registration on the issuer's records, and thus are subject to general choice of law rules. Similarly, some transfers of uncertificated securities are not covered by this section. See Section 8-313(1)(d) and (f)-(j).

South Carolina Reporter's Comments to the 1991 Amendment

As to certificated securities, no change in South Carolina law is made by the amendment. Because transfers of uncertificated securities would normally be effected on the issuer's books, such transfers are brought within the laws of the issuer's jurisdiction of organization. Similarly, pledge and release of uncertificated securities, to the extent they are accomplished by registration on the issuer's books, are to be governed by the laws of the issuer's jurisdiction of organization.

Section 36-8-107. Securities transferable; action for price.

(1) Unless otherwise agreed and subject to any applicable law or regulation respecting short sales, a person obligated to transfer securities may transfer any certificated security of the specified issue in bearer form or registered in the name of the transferee, or indorsed to him or in blank, or he may transfer an equivalent uncertificated security to the transferee or a person designated by the transferee.

(2) If the buyer fails to pay the price as it comes due under a contract of sale, the seller may recover the price of:

(a) certificated securities accepted by the buyer;

(b) uncertificated securities that have been transferred to the buyer or a person designated by the buyer; and

(c) other securities if efforts at their resale would be unduly burdensome or if there is no readily available market for their resale.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. The rights and interests that constitute securities of the same issue are `fungible'. Section 1-201(17). This is true of both certificated and uncertificated securities. Subsection (1) states the generally accepted legal consequences of such fungibility. `Unless otherwise agreed,' the seller, bailee, broker or other `person obligated to transfer securities' need not transfer any specific instrument, but may select (e.g., from `a fungible bulk' (Section 8-13(2) any security of the proper issue, in bearer form or appropriately registered or indorsed or may transfer an uncertificated security of the same issue.

Rules of the organized markets limiting the forms in which securities are transferable in transactions on such markets are matters `otherwise agreed'. Cases such as Parsons v. Martin, 77 Mass. (11 Gray) 111 (1858) and Rumery v. Brooks, 205 App. Div. 283, 199 N.Y. Supp. 517 (1st Dept. 1923), holding a broker liable for conversion if he registers transfer of a customer's securities held in `cash account' out of the customer's name or tenders on demand for delivery a different though equivalent security, are rejected. However, this act does not enlarge the rights of a broker as to such securities so as to permit him without the customer's consent to pledge them for his own indebtedness, and he may properly do with securities held in a `margin account' to the extent he has acquired a lien for advances. The distinction is carefully preserved in statute (e.g., N.Y. Penal Law Section 956) and case law. In re Mills, 125 App. Div. 730, 113 N.Y. Supp. 314 (1st Dept. 1908).

2. Subsection (2) is designed to follow the dictum in Agar v. Orda, 265 N.Y. 248, 190 N.E. 479 (1934) in this context. Paragraph (c) is applicable where for example (i) the securities are those of a `closely-held' corporation not dealt in on any organized market; or (ii) because of the necessity for compliance with the registration requirements of the Securities Act of 1933 or other regulatory provisions or procedures prior to offering the particular securities on the market substantial delay and expense would be involved. The approval of these particular remedies does not constitute disapproval of other remedies that may exist under other rules of law. Section 1-103.

South Carolina Reporter's Comments to the 1991 Amendment

The amendment adds to existing law the concept of transfer of uncertifi- cated securities.

Section 36-8-108. Registration of pledge and release of uncertificated securities.

A security interest in an uncertificated security may be evidenced by the registration of pledge to the secured party or a person designated by him. There can be no more than one registered pledge of an uncertificated security at any time. The registered owner of an uncertificated security is the person in whose name the security is registered, even if the security is subject to a registered pledge. The rights of a registered pledgee of an uncertificated security under this chapter are terminated by the registration of release.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

This section introduces the concept of the registered pledge of uncertificated securities. The term "pledge" is used, notwithstanding the absence of physical delivery, because it reflects common terminology employed in connection with security interests in investment securities. Note that the same term has been used in Section 8-320 to describe the security interest created by book entry made by a securities depository. The rights of a registered pledgee, set forth in other sections (particularly Section 8-207), are intended to resemble, as closely as possible, the rights of the pledgee of a certificated security who retains possession of the pledged security without registration. Although the registration of pledge requires communication to the issuer, no details of the security agreement between the debtor and the secured party need be disclosed.

There is no provision for the registration of more than one pledge at a time. This limits the burden on issuers and insulates them from problems of conflicting priorities and the like. The registration of pledge is only one among several methods of crating security interests under Section 8-313(1), and other methods can be effectively employed to create security interests junior to that of the registered pledgee or even first security interests if, for some reason, the use of the registered pledge mechanism is inadvisable. See Section 8-321, which deals comprehensively with security interests and incorporates the transfer rules of Section 8-313(1) by reference.

The third sentence makes it clear that the registered owner, and not the registered pledgee is the person in whose name an uncertificated security is registered as, for example, to determine how an unsecured creditor may reach his debtor's interest under Section 8-317(2). The registration of release, in effect, nullifies the registration of pledge, and is functionally equivalent to the redelivery of a pledged certificated security to the pledgor.

South Carolina Reporter's Comment to the 1991 Amendment

Section 36-8-108 is a new concept in South Carolina law, making provision for pledges of uncertificated securities. Uncertificated securities may be pledged by transfer on the books of the issuer or, under this new section, by registration of the pledge on the issuer's books. The mechanics of registering a pledge of uncertificated securities are set out in part 3 of Article 8.

Section 36-8-201. `Issuer'.

(1) With respect to obligations on or defenses to a security, `issuer' includes a person who:

(a) places or authorizes the placing of his name on a certificated security (otherwise than as authenticating trustee, registrar, transfer agent, or the like) to evidence that it represents a share, participation, or other interest in his property or in an enterprise, or to evidence his duty to perform an obligation represented by the certificated security;

(b) creates shares, participations, or other interests in his property or in an enterprise or undertakes obligations, which shares, participations, interests, or obligations are uncertificated securities;

(c) directly or indirectly creates fractional interests in his rights or property, which fractional interests are represented by certificated securities; or

(d) becomes responsible for or in place of any other person described as an issuer in this section.

(2) With respect to obligations on or defenses to a security, a guarantor is an issuer to the extent of his guaranty, whether or not his obligation is noted on a certificated security or on statements of uncertificated securities sent pursuant to Section 36-8-408.

(3) With respect to registration of transfer, pledge, or release (Part 4 of this chapter), `issuer' means a person on whose behalf transfer books are maintained.

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 29, 60, 61, and 62, Uniform Negotiable Instruments law.

Purposes:

1. Part 2 of Article 8 describes the rights and duties of an "issuer" of a security. It is generally understood that an "issuer" is the one who creates the property interest that is a "security" and who thereby incurs obligations to purchasers of that interest. This section provides the criteria for determining whether a person has incurred the obligations--and gained the rights--given to an issuer in this Article. Numerous rights and obligations arise from sources other than Article 8. This section does not determine whether a person is an "issuer" for purposes of those sources of law.

2. Paragraph (1)(a) makes a person an "issuer" for purposes of this Article if he authorizes the placing of his name on a certificate intending that it should be a certificated security (Section 8-102(1)(a)). This paragraph bears a close relationship to Section 8-102(1)(a), which describes the property interests that may constitute a "certificated security." The latter section describes those interests in terms of rights against "the issuer," while this section defines issuer in terms of authorizing the placing of a name on a "certificated security." The effect is to add to the definition of "certificated security" the requirement that it bear the authorized name of the person creating the property interests. Thus, if a certificate bears the unauthorized name of the purported issuer is not an "issuer" within this Article; and the certificate is not a "certificated security." See Section 8-202(3) and its Comment 4. Section 8-205 describes the circumstances in which the purported issuer will be treated as if he were a true "issuer" despite the absence of his authorized signature.

3. Read in conjunction with the definition of "uncertificated security" in Section 8-102(1)(b), paragraph (1)(b) makes a person an "issuer" if he creates, and maintains books for the registration of ownership of, property interests that fit within the definition of an uncertificated security.

4. Subsection (2) distinguishes the obligations of a guarantor as issuer from those of the principal obligor. However, it does not exempt the guarantor from the impact of subsection (4) of Section 8-202. Whether or not the obligation of the guarantor is noted on the security or initial transaction statement (Section 8-408(4) is immaterial. Typically, guarantors are parent corporations, or stand in some similar relationship to the principal obligor. If that relationship existed at the time the security originally was issued, the guaranty probably would be noted on the security or initial transaction statement. However, if the relationship arose afterward -- e.g., through a purchase of stock or properties, or through merger or consolidation -- probably the notation would not be made. Nonetheless, the owner of the security is entitled to the benefit of the obligation of the guarantor.

5. Subsection (3) narrows the definition of "issuer" for purposes of Part 4 of this Article (registration of transfer). It is supplemented by Section 8-406.

South Carolina Reporter's Comments to the 1991 Amendment

The proposed revision broadens the definition to include those who create uncertificated securities. See Section 36-8-201 comment 3. The revision also adds the requirement that certificated securities must bear the authorized name of the creator of the property interest in order to qualify as an "issuer" for statutory purposes. On the other hand, a bona fide purchaser without notice of a defect would have rights against the issuer, regardless of the correctness of the name. See Section 36-8-201 (1)(a), comment 2. This requirement is not new in South Carolina law. See, e.g., Code Section 33-6-250 requiring an issuer's proper name to appear on share certificates.

Section 36-8-202. Issuer's responsibility and defenses; notice of defect or defense.

(1) Even against a purchaser for value and without notice, the terms of a security include:

(a) if the security is certificated, those stated on the security;

(b) if the security is uncertificated, those contained in the initial transaction statement sent to such purchaser or, if his interest is transferred to him other than by registration of transfer, pledge, or release, the initial transaction statement sent to the registered owner or registered pledgee; and

(c) those made part of the security by reference, on the certificated security or in the initial transaction statement, to another instrument, indenture, or document or to a constitution, statute, ordinance, rule, regulation, order or the like, to the extent that the terms referred to do not conflict with the terms stated on the certificated security or contained in the statement. A reference under this paragraph does not of itself charge a purchaser for value with notice of a defect going to the validity of the security, even though the certificated security or statement expressly states that a person accepting it admits notice.

(2) A certificated security in the hands of a purchaser for value or an uncertificated security as to which an initial transaction statement has been sent to a purchaser for value, other than a security issued by a government or governmental agency or unit, even though issued with a defect going to its validity, is valid with respect to the purchaser if he is without notice of the particular defect unless the defect involves a violation of constitutional provisions, in which case the security is valid with respect to a subsequent purchaser for value and without notice of the defect. This subsection applies to an issuer that is a government or governmental agency or unit only if either there has been substantial compliance with the legal requirements governing the issue or the issuer has received a substantial consideration for the issue as a whole or for the particular security and a stated purpose of the issue is one for which the issuer has power to borrow money or issue the security.

(3) Except as otherwise provided in the case of certain unauthorized signatures (Section 36-8-205), lack of genuineness of a certificated security or an initial transaction statement is a complete defense, even against a purchaser for value and without notice.

(4) All other defenses of the issuer of a certificated or uncertificated security, including nondelivery and conditional delivery of a certificated security, are ineffective against a purchaser for value who has taken without notice of the particular defense.

(5) Nothing in this section shall be construed to affect the right of a party to a `when, as and if issued' or a `when distributed' contract to cancel the contract in the event of a material change in the character of the security that is the subject of the contract or in the plan or arrangement pursuant to which the security is to be issued or distributed.

Amended Official Comment

Prior Uniform Statutory Provisions:

Sections 16, 23, 28, 56, 57, 60, 61, 62, Uniform Negotiable Instruments Law.

Purposes:

1. A purchaser must have some method of learning the terms of the security he is purchasing. The printing on the certificate or on the initial transaction statement ("ITS") is designed to notify the purchaser of those terms. If he purchases without examining the certificate or ITS, he does so at his peril, since he is charged with notice of terms stated thereon.

Some methods of transferring a security do not involve the actual delivery of a certificate or the sending of an ITS to the actual purchaser. See Section 8-313(1)(c)-(j). The situations in which these methods of transfer will be used can be divided into two categories--those in which an intermediary takes a transfer for his principal and those in which a bailee "holding" a security effects a transfer by receiving notice of, or sending acknowledgement of, the purchase. In either type of situation the purchaser will be charged with notice of all terms stated on the certificate if the security is certificated or, if the security is uncertificated, with notice of all terms stated in the ITS sent to the registered owner or registered pledgee. For example, suppose that Customer purchases an uncertificated security that is already registered in the name of his broker. Customer is content to allow the security to remain registered in Broker's name, so that Customer never receives an ITS. Customer is charged with notice of the terms stated on the ITS sent to Broker when Broker became the registered owner. Or suppose that Purchaser buys a certificated security and the transfer is effected not by delivering the certificate but by having Bailee, who holds the security, acknowledge that he holds for Purchaser. Purchaser is charged with notice of the terms written on the certificate.

It is apparent that in these situations a purchaser must rely upon the intermediary or bailee who "holds" the security for him.

2. Subsection (1)(c) states, in accordance with the prevailing case law, the right of the issuer (who prepares the text of the security or statement) to include terms incorporated by adequate reference to an extrinsic source, so long as the terms so incorporated do not conflict with the stated terms. Thus the standard practice of referring in a bond or debenture to the trust indenture under which it is issued without spelling out its necessarily complex and lengthy provisions is approved. Every stock certificate or ITS will refer in some manner to the charter or articles of incorporation of the issuer. At least where there is more than one class of stock authorized, applicable corporation codes specifically require a statement or summary as to preferences, voting powers and the like. References to constitutions, statutes, ordinances, rules, regulations or orders are not so common except in the obligations of governments or governmental agencies or units; but where appropriate they fit into the rule here stated.

Following the basic principles of the Negotiable Instruments Law the cases have generally held that an issuer is estopped from denying representations made in the text of a security. Delaware-New Jersey Ferry Co. v. Leeds, 21 Del. Ch. 279, 186 A. 913 (1936). Nor is a defect in form or the invalidity of a security normally available to the issuer as a defense. Bojnini v. Family Theatre Corporation, 327 Pa. 273, 194 a. 498 (1937); First National Bank of Fairbanks v. Alaska Airmotive, 119 F.2d 267 (C.C.A. Alaska 1941).

This general rule of estoppel is here adopted in favor of purchasers, with the exception noted above.

3. The last sentence of subsection (1) and all of subsection (2) embody the concept that it is the duty of the issuer, not of the purchaser, to make sure that the security complies with the law governing its issue. The last sentence of subsection (1) makes clear that the issuer cannot, by incorporating a reference to a statute or other document, charge the purchaser with notice of the security's invalidity. Subsection (2) gives to a purchaser for value without notice of the defect the right to enforce the security against the issuer despite the presence of a defect that otherwise would render the security invalid. This right accrues to a purchaser regardless of whether the security has been transferred to him through physical delivery of a certificate (Section 8-313(1)(a)), through registration of transfer or pledge of an uncertificated security (Section 8-313(1)(b)), or through some other method in which he receives no certificate or initial transaction statement. (Section 8-313(1)(c)-(j)). There are three circumstances in which a purchaser does not gain such rights: first, if the defect involves a violation of constitutional provisions, these rights accrue only to a subsequent purchaser (Section 8-102(2)). This Article leaves to the law of each particular state the rights of a purchaser on original issue of a security with a constitutional defect. No negative implication is intended by the explicit grant of rights to a subsequent purchaser.

Second, governmental issuers are distinguished in subsection (2) from other issuers as a matter of public policy, and additional safeguards are imposed before governmental issues are validated. Governmental issuers are estopped from asserting defenses only if there has been substantial compliance with the legal requirements governing the issue or if substantial consideration has been received and a stated purpose of the issue is one for which the issuer has power to borrow money or issue the security. The purpose of the substantial compliance requirement is to make certain that a mere technicality as, e.g., in the manner of publishing election notices, shall not be a ground for depriving an innocent purchaser of his rights in the security. The policy is here adopted of such cases as Tommie v. City of Gadsden, 229 Ala. 521, 158 So. 763 (1935), in which minor discrepancies in the form of the election ballot used were overlooked and the bonds were declared valid since there had been substantial compliance with the statute.

A long and well established line of Federal cases recognizes the principle of estoppel in favor of bona fide purchasers where municipalities issue bonds containing recitals of compliance with governing constitutional and statutory provisions, made by the municipal authorities entrusted with determining such compliance. Chaffee County v. Potter, 142 U.S. 355, 12 S. Ct. 216, 35 L. Ed. 1040 (1892); Oregon v. Jennings, 119 U.S. 74, 7 S. Ct. 124, 30 L. Ed. 323 (1886); Gunnison County Commissioners v. Rollins, 173 U.S. 255, 19 S. Ct. 390, 43 L. Ed. 689 (1898). This rule has been qualified, however, by requiring that the municipality have power to issue the security. Anthony v. County of Jasper, 101 U.S. 693, 25 L. Ed. 1005 (1879); Town of South Ottawa v. Perkins, 94 U.S. 260, 24 L. Ed. 154 (1876). This section follows the case law trend, simplifying the rule by setting up two conditions for an estoppel against a governmental issuer: (1) substantial consideration given, and (2) power in the issuer to borrow money or issue the security for the stated purpose. As a practical matter the problem of policing governmental issuers has been alleviated by the present practice of requiring legal opinions as to the validity of the issue. The bulk of the case law on this point is more than 50 years old and it may be assumed that the question now seldom arises.

Section 8-104 regarding over-issue, provides the third exception to the rule that an innocent purchase for value takes a valid security despite the presence of a defect that would otherwise give rise to invalidity. See that section and its comment for further explanation.

4. Subsection (3) is in effect a definitional provision. The person purported to have issued a certificated security is not an "issuer" and the certificate is not a "certificated security," unless that person actually took the actions that constitute issue. See Sections 8-102(1)(a) and 8-201(1). Similarly, a statement purportedly sent by an issuer is not an "initial transaction statement" if it was not actually sent by the issuer (Section 8-408(4), (1), (2) and (3)). Section 8-205 is a caveat to both of these general rules.

5. Subsection (4) gives the general rule that defenses of the issuer are ineffective against a purchaser for value without notice of the defense. Notice to the purchaser may come from sources other than a notation on a certificate or an initial transaction statement. Compare Section 8-103 with respect to an issuer's lien.

6. Subsection (5) is included to make clear that this section does not affect the presently recognized right of either party to a "when, as and if" or "when distributed" contract to cancel the contract on substantial change.

South Carolina Reporter's Comments to the 1991 Amendment

The proposed revision extends the general rule of estoppel in favor of purchasers to purchasers of uncertificated securities. Purchasers are charged with notice of terms printed on the certificate or included in the Initial Transaction Statement. Terms may also be incorporated by reference. When a security is transferred without delivery or the sending of an Initial Transaction Statement to the actual purchaser, the purchaser is charged with notice of all terms on the certificate, even if it is being held by a bailee. The purchaser is also charged with notice of terms listed in an Initial Transaction Statement sent to a registered pledgee or registered owner. See Section 36-8-202 comment 1. If the notice is defective, or if the security itself is defective or in some way illegal, the issuer is estopped from asserting the security's terms or invalidity. Lack of genuineness, however, is a complete defense.

With respect to certificated securities, South Carolina law would not be changed. With respect to uncertificated securities, the Initial Transaction Statement would be treated as the analogue of a certificate for purposes of the statute. Although delivery of the Initial Transaction Statement is not required to transfer ownership of the underlying security, its delivery is vital to the purchaser's understanding of his rights.

Section 36-8-203. Staleness as notice of defects or defenses.

(1) After an act or event creating a right to immediate performance of the principal obligation represented by a certificated security or that sets a date on or after which the security is to be presented or surrendered for redemption or exchange, a purchaser is charged with notice of any defect in its issue or defense of the issuer if:

(a) the act or event is one requiring the payment of money, the delivery of certificated securities, the registration of transfer of uncertificated securities, or any of these on presentation or surrender of the certificated security, the funds or securities are available on the date set for payment or exchange and he takes the security more than one year after the date; and

(b) the act or event is not covered by paragraph (a) and he takes the security more than two years after the date set for surrender or presentation or the date on which performance became due.

(2) A call that has been revoked is not within subsection (1).

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 52(2), 53, Uniform Negotiable Instruments Law.

Purposes:

1. The problem of matured or called securities is here dealt with in terms of the effect of such events in giving notice of the issuer's defenses and not in terms of "negotiability". The substance of this section applies only to certificated securities because such securities may be transferred to a purchaser by delivery after they have matured, been called or become redeemable or exchangeable. It is contemplated that uncertificated securities which have matured or been called will merely be canceled on the books of the issuer and the proceeds sent to the registered owner or registered pledgee, as the case may be. Uncertificated securities which have become redeemable or exchangeable, at the option of the owner, may be transferred to a purchaser, but the transfer is effectuated only by registration of transfer, thus necessitating communication with the issuer. If defects or defenses in such securities exist, the issuer will necessarily have the opportunity to bring them to the attention of the purchaser in the initial transaction statement sent to him.

2. The fact that a certificated security is in circulation long after it has been called for redemption or exchange must vie rise to the question in a purchaser's mind as to why it has not been surrendered. After the lapse of a reasonable period of time he can no longer claim that he had "no reason to know" of any defects or irregularities in its issue. Where funds are available for the redemption of the security it is normally turned in more promptly and a shorter time is set as the "reasonable period", subsection 91 (a), than is set where funds are not available.

It is true that defaulted certificated securities are frequently traded on financial markets in the same manner as unmatured and undefaulted instruments and a purchaser might not be placed upon notice of irregularity by the mere fact of default. An issuer, however, should at some point be placed in a position to determine definitely its liability on an invalid or improper issue, and for this purpose a security under this section becomes "stale" two years after the default. But notice that a different rule applies when the question is notice not of issuer's defenses but of claims of ownership. Section 8-305 and comment.

3. Nothing in this section is designed to extend the life of preferred stocks called for redemption as "shares of stock" beyond the redemption date. After such a call, the security represents only a right to the funds set aside for redemption.

South Carolina Reporter's Comments to the 1991 Amendment

This section limits an issuer's liability for invalid or improper issues by limiting the time period in which a purchaser can claim lack of notice that a security has matured or been called. After the period fixed by this section, a purchaser is charged with notice.

As the drafters of the proposed revision noted, this section normally applies only to certificated shares. The issuers of uncertificated securities may simply cancel the shares on their books and send the proceeds to the registered owner or pledgee. When new shares are issued, the issuer gives the registered owner or pledgee notice of the terms of the new shares by sending an Initial Transaction Statement for the new shares.

As to certificated securities, no change would be made in South Carolina law. Uncertificated securities by their nature require more frequent contact between issuer and holder, so that a holder is far less likely to buy a security which had matured or to be unaware of maturity or call.

Section 36-8-204. Effect of issuer's restrictions on transfer.

A restriction on transfer of a security imposed by the issuer, even if otherwise lawful, is ineffective against any person without actual knowledge of it unless:

(a) the security is certificated and the restriction is noted conspicuously thereon; or

(b) the security is uncertificated and a notation of the restriction is contained in the initial transaction statement sent to such person or, if his interest is transferred to him other than by the registration of transfer, pledge, or release, the initial transaction statement sent to the registered owner or the registered pledgee.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 15, Uniform Stock Transfer Act.

Purposes:

1. Use of the words "noted" and "notation" is intended to make clear that the restriction need not be set forth in full text. See Allen v. Biltmore Tissue Corporation, 2 N.Y.2d 5 34, 141 N.E.2d 812 (1957).

2. Securities traded on financial markets are generally assumed to be free of adverse claims (Section 8-302). That assumption should not be lightly negated. Therefore, a strict rule as to notice of a restriction on transfer is here imposed. The issuer can protect itself by noting the restriction on the D or initial transaction statement. Refusal by an issuer to register a transfer on the basis of an unnoted restriction constitutes a conversation and the issuer can be compelled to register the transfer under the policy of Part 4 of this Article. Hulse v. Consolidated Quicksilver Mining Corporation, 675 Idaho 768, 154 P.2d 149 (1944); Mancini v. Patrizi, 110 Cal. App. 42, 293 P. 828 (1930). Conversely, the issuer to whom a certificated security with proper notation of a restriction is presented thereby receives timely notification of an adverse claim and is under a duty to inquire (Section 8-403).

A purchaser with actual knowledge of an unnoted restriction certainly has notice of an adverse claim (Section 8-304 and Comment). In that situation this section adopts the reasoning of Baumohl v. Goldstein, 95 N.J. Eq. 597, 124 A. 118 (1924), and Tomoser v. Kamphausen, 307 N.Y. 797, 121 N.E.2d 622 (1954), rejecting the contrary holding of such cases as Costello v. Farrell, 234 Minn. 453, 48 N.W.2d 557 (1951).

3. A transferee who purchases securities in organized financial markets often may neither take physical delivery of a certificated security nor have an uncertificated security registered in his name. See Section 8-313(1)(c) through (j). Under those circumstances the transferee may have no occasion to examine the writing on the certificate or the initial transaction statement. Nonetheless the transferee is charged with notice of restrictions noted on the certificate or on the initial transaction statement sent to the registered owner or registered pledgee. See Section 8-202(1) and Comment 1 thereto.

4. Most jurisdictions recognize the right of issuers to impose restrictions giving either the issuer itself or other stockholders the option to purchase the security at an ascertained price before it is offered to third parties. Vanucci v. Peduni, 217 Cal. 138, 17 P.2d 706 (1932); People ex rel. Rudaitis v. Galskis, 233 Ill. App. 414 (1924); Bloomingdale v. Bloomingdale, 107 Misc. 646, 177 N.Y.S. 873 (1919). This is the type of restriction contemplated by the present section. Mere notation on the certificate or initial transaction statement cannot, of course, validate an otherwise unlawful restriction. The present section in no way alters the prevailing case law which recognizes free alienability as an inherent attribute of securities and holds invalid unreasonable restraints on alienation such as those requiring consents of directors without establishing criteria for the granting or withholding of such consents and those giving the directors an option of purchase at a price to be fixed in their sole discretion. Howe v. Roberts, 209 Ala. 80, 95 So. 344 (1923); People ex rel. Malcom v. Lake San Corporation, 251 Ill. App. 499 (1929); Morris v. Hussong Dyeing Machine Co., 81 N.J. Eq. 256, 86 A. 1026 (1913); New England Trust Co. v. Abbott, 162 Mass. 148, 378 N.E. 432, 27 L:.R.A. 271 (1894).

No interference is intended with the common practice of closing books for proper corporate purposes.

5. Cooperative associations and ventures, as well as private clubs are generally considered an exception to the rules against restrictions on transfer as unreasonable restraints on alienation and are permitted for example to require the consents of governing bodies such as a board of directors. Penthouse Properties, Inc. v. 1158 Fifth Avenue, Inc., 256 App. Div. 685, 11 N.Y.S.2d 417 (1939).

Historically restrictions on transfer were most commonly imposed by so-called "closely-held" issuers (including cooperatives and the like) in an attempt to restrict control if not total membership to a homogeneous security holder group. They have been increasingly resorted to by issuers with publicly held securities seeking to police enforcement of the registration requirements of the Securities Act of 1933 against persons purchasing their securities in a transaction exempt from those requirements (e.g., one "not involving any public offering" [Securities Act of 1933, Section 492]) or against persons in a "control" relationship to the issuer. [See Securities Act of 1933, Section 2(11) and Rule 405 of the Rules and Regulations of the Securities and Exchange Commission under that Act.] Particularly in the latter context in which notation of the restriction on all affected certificates or initial transaction statements may not be practical, the issuer enforces it by notifying the holders of such certificates and refusing requests to register transfer out of the name of the "controlling person" either for purposes of sale or for delivery after sale, relying on the stated exception as to a person "with actual knowledge" of the restriction.

6. This section deals only with restrictions imposed by the issuer and restrictions imposed by statute are not affected. See Quiner v. Marblehead Social Co., 10 Mass. 476 (18132); Madison Bank v. Price, 79 Kan. 289, 100 P. 280 (1909); Healey v. Steele Center Creamery Ass'n, 115 Minn. 451, 133 N.W. 69 (1911). Nor does it deal with private agreements between stockholders containing restrictive covenants as to the sale of the security as in In re Consolidated Factors Corporation, 46 F.2d 561 (S.D.N.Y. 1931).

7. An analogous provision concerning issuer's liens appears at Section 8-103.

South Carolina Reporter's Comments to the 1991 Amendment

The proposed revision extends the concept of constructive notice of restrictions on transfer to the purchasers of uncertificated securities. Purchasers of uncertificated securities are charged with constructive knowledge of all restrictions noted on the Initial Transaction Statement sent to the purchaser or to the registered pledgee or registered owner.

As to certificated securities, no change would be made in South Carolina law. As to uncertificated securities, the Initial Transaction Statement is treated as the analogue of the certificate for purposes of the statute.

Section 36-8-205. Effect of unauthorized signature on certificated security or initial transaction statement.

An unauthorized signature placed on a certificated security prior to or in the course of issue or placed on an initial transaction statement is ineffective, but the signature is effective in favor of a purchaser for value of the certificated security or a purchaser for value of an uncertificated security to whom the initial transaction statement has been sent, if the purchaser is without notice of the lack of authority and the signing has been done by:

(a) an authenticating trustee, registrar, transfer agent, or other person entrusted by the issuer with the signing of the security, of similar securities, or of initial transaction statements or the immediate preparation for signing of any of them; or

(b) an employee of the issuer, or of any of the foregoing, entrusted with responsible handling of the security or initial transaction statement.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 23, Uniform Negotiable Instruments Law.

Purposes:

1. In current practice the problem of forged or unauthorized signatures arises most frequently where an employee of the issuer, transfer agent or registrar has access to securities which he is required to prepare for issue by affixing the corporate seal or by adding a signature necessary for issue. This section is based upon the issuer's duty to avoid the negligent entrusting of securities to such persons. Issuers have long been held responsible for signatures placed upon securities by parties whom they have held out to the public as authorized to prepare such securities. See Fifth Avenue Bank of New York v. The Forty-Second Street & Grand Street Ferry Railroad Co., 137 N.Y. 231, 33 N.E. 378, 19 L.R.A. 331, 33 Am. St. Rep. 712 (1893); Jarvis v. Manhattan Beach Co., 148 N.Y. 652, 43 N.E. 68, 31 L.R.A. 776, 51 Am. St. Rep. 727 (1896). The "apparent authority" concept of some of the caselaw, however, is here extended and this section expressly rejects the technical distinction, made by courts reluctant to recognize forged signatures, between cases where the forger signs a signature he is authorized to sign under proper circumstances and those in which he signs a signature he is never authorized to sign. Citizens' & Southern National Bank v. Trust Co. of Georgia, 50 Ga. App. 681, 179 S.E. 278 (1935). Normally the purchaser is not in a position to determine which signature a forger, entrusted with the preparation of securities, has "apparent authority" to sign and which he has not. The issuer, on the other hand, can protect itself against such fraud by the careful selection and bonding of agents and employees, or by action over against transfer agents and registrars who in turn may bond their personnel.

2. It is contemplated that purchasers of uncertificated securities will rely on initial transaction statements (ITS's) sent to them, much as purchasers of certificated securities rely on certificates. The issuer's signature is thus required to ensure genuineness of the ITS. Section 8-408(4). In this regard the principal difference between certificates and ITS's is that only the one to whom the ITS is sent can safely rely on it, whereas a certificated security is a negotiable instrument and may be relied upon by transferees other than the original purchaser. The issuer's responsibility for unauthorized signatures otherwise is the same in both instances.

A transferee of an uncertificated security may be protected indirectly by this section despite the fact that he has not received the ITS. If his transferor received an ITS and was protected by this section, Section 8-301(1) gives those rights to the transferee.

3. The issuer cannot be held liable for the honesty of employees not entrusted, directly or indirectly, with the signing, preparation, or responsible handling of similar securities or similar ITS's and whose possible commission of forgery it has no reason to anticipate. The result in such cases as Hudson Trust Co. v. American Linseed Co., 232 N.Y. 350, 134 NJ.E. 178 (1922), and Dollar Savings Fund & Trust Co. v. Pittsburgh Plate Glass Co., 213 Pa. 307, 62 A. 916, 5 Ann. Cas. 248 (1906) is here adopted.

4. This section is not concerned with forged or unauthorized indorsements (Section 8-311), but only with unauthorized signatures of issuers, transfer agents, etc., placed upon certificated securities or initial transaction statements during the course of their issue. The protection here stated is available to all purchasers for value without notice and not merely to subsequent purchasers.

South Carolina Reporter's Comments to the 1991 Amendment

The revision extends to Initial Transaction Statements the current rule in favor of purchasers for value without notice of the lack of authority of the required signature on a certificate. If the original purchaser of an uncertificated security had knowledge that the signature on his or her Initial Transaction Statement was unauthorized, however, all subsequent purchasers are charged with the original purchaser's knowledge and may not invoke this section to avoid the complete bar of Section 8-202(3).

The amendment would not change South Carolina law relating to certificated securities. With respect to uncertificated securities, the amendment treats the Initial Transaction Statement as the analogue of the certificate.

Section 36-8-206. Completion or alteration of certificated security or initial transaction statement.

(1) If a certificated security contains the signatures necessary to its issue or transfer but is incomplete in any other respect:

(a) any person may complete it by filling in the blanks as authorized; and

(b) even though the blanks are incorrectly filled in, the security as completed is enforceable by a purchaser who took it for value and without notice of the incorrectness.

(2) A complete certificated security that has been improperly altered, even though fraudulently, remains enforceable, but only according to its original terms.

(3) If an initial transaction statement contains the signatures necessary to its validity, but is incomplete in any other respect:

(a) any person may complete it by filling in the blanks as authorized; and

(b) even though the blanks are incorrectly filled in, the statement as completed is effective in favor of the person to whom it is sent if he purchased the security referred to therein for value and without notice of the incorrectness.

(4) A complete initial transaction statement that has been improperly altered, even though fraudulently, is effective in favor of a purchaser to whom it has been sent, but only according to its original terms.

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 14, 15 and 124, Uniform Negotiable Instruments Law; Section 16, Uniform Stock Transfer Act.

Purposes:

1. The problem of forged or unauthorized signatures necessary for the issue or transfer of a security or for the authentication of an initial transaction statement is not involved here, and a person in possession of a blank certificate or of a writing that would be an initial transaction statement if it were properly signed is not, by this section, given authority to fill in blanks with such signatures.

2. Completion of blanks left in a transfer instruction is dealt with elsewhere (Section 8-308(5)). Blanks left upon authentication of an initial transaction statement or upon issue of a certificated security are the only ones dealt with here, and a purchaser for value without notice is protected. A purchaser is not in a good position to determine whether blanks were completed by the issuer or by some person not authorized to complete them. On the other hand the issuer can protect itself by not placing its signature on the writing until the blanks are completed or, if it does sign before all blanks are completed, by carefully selecting the agents and employees to whom it entrusts the writing after authentication. With respect to a certificated security or an initial transaction statement that is completed by the issuer but later is altered, the issuer has done everything it can to protect the purchaser and thus is not charged with the terms as altered. However, it is charged according to the original terms, since it is not thereby prejudiced.

If the completion or alteration is obviously irregular, the purchaser may be charged with notice. See Section 1-201(25).

3. Only the purchaser who physically takes the certificate or receives the initial transaction statement is directly protected. However, a transferee may receive protection indirectly through Section 8-301(1).

4. The protection granted a purchaser for value without notice under this section is modified to the extent that an overissue may result where an incorrect amount is inserted into a blank (Section 8-104).

South Carolina Reporter's Comment to the 1991 Amendment

The revision extends the current provision for an incomplete or altered certificate to an incomplete or altered Initial Transaction Statement. With respect to alteration, an original purchaser without notice may enforce the altered terms of the certificate or Initial Transaction Statement against the issuer. Subsequent purchasers, in every case, are bound by the original terms.

The amendment would not change South Carolina law relating to certificated securities, and, in the case of uncertificated securities, treats the Initial Transaction Statement as the analogue of the certificate.

Section 36-8-207. Rights and duties of issuer with respect to registered owners and registered pledgees.

(1) Prior to due presentment for registration of transfer of a certificated security in registered form, the issuer or indenture trustee may treat the registered owner as the person exclusively entitled to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner.

(2) Subject to the provisions of subsections (3), (4), and (6), the issuer or indenture trustee may treat the registered owner of an uncertificated security as the person exclusively entitled to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner.

(3) The registered owner of an uncertificated security that is subject to a registered pledge is not entitled to registration of transfer prior to the due presentment to the issuer of a release instruction. The exercise of conversion rights with respect to a convertible uncertificated security is a transfer within the meaning of this section.

(4) Upon due presentment of a transfer instruction from the registered pledgee of an uncertificated security, the issuer shall:

(a) register the transfer of the security to the new owner free of pledge, if the instruction specifies a new owner (who may be the registered pledgee) and does not specify a pledgee;

(b) register the transfer of the security to the new owner subject to the interest of the existing pledgee, if the instruction specifies a new owner and the existing pledgee; or

(c) register the release of the security from the existing pledge and register the pledge of the security to the other pledgee, if the instruction specifies the existing owner and another pledgee.

(5) Continuity of perfection of a security interest is not broken by registration of transfer under subsection (4)(b) or by registration of release and pledge under subsection (4)(c), if the security interest is assigned.

(6) If an uncertificated security is subject to a registered pledge:

(a) any uncertificated securities issued in exchange for or distributed with respect to the pledged security must be registered subject to the pledge;

(b) any certificated securities issued in exchange for or distributed with respect to the pledged security must be delivered to the registered pledgee; and

(c) any money paid in exchange for or in redemption of part or all of the security must be paid to the registered pledgee.

(7) Nothing in this chapter shall be construed to affect the liability of the registered owner of a security for calls, assessments, or the like.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 3, Uniform Stock Transfer Act.

Purposes:

1. Subsection (1) states the issuer's right to treat the registered owner of a certificated security as the person entitled to exercise all the rights of an owner. This right of the issuer is limited by the provisions of Part 4 of this article -- once there has been due presentation for registration of transfer, the issuer has a duty to register ownership in the name of the transferee. Section 8-401. Thus its right to treat the old registered owner as exclusively entitled to the rights of ownership must cease.

Subsection (2) states a parallel rule for uncertificated securities, with the important exception that the rights of the registered owner are curtailed when the uncertificated security is subject to a registered pledge. See Section 8-108. Thus, subsection (3) denies the registered owner the power to order transfer of an uncertificated security subject to a registered pledge until the pledge has been released by order of the pledgee. See Section 8-308(4) and (7)(b).

Subsection (4) establishes the right of the registered pledgee to control the transfer of an uncertificated security subject to his pledge. The three paragraphs of subsection (4) illustrate the mechanics for three common transactions: (a) the outright transfer of the security, free of the pledge; (b) the transfer of registered ownership, subject to the pledge; and (c) the transfer of the pledgee's interest without disturbing the registered ownership. These transactions are not intended to be exclusive. For example, the transfer of a pledged uncertificated security to a new owner subject to the interest of a new pledgee might be accomplished in several ways. There could be a release of his interest by the old pledgee followed by a transfer of registered ownership from the old owner to the new owner and a pledge from the new owner to the new pledgee. Or, if the respective pledgees wished to maintain complete control over the security, the old pledgee could order a transfer of his interest to the new pledgee under paragraph (c) and the new pledgee could then order the transfer of registered ownership from the old owner to the new owner under paragraph (b). Still other combinations are possible, depending on the positions of the parties.

Subsection (6) insures that stock dividends or splits issued with respect to a pledged uncertificated security and securities or money distributed or paid in exchange for a pledged uncertificated security will remain within the control of the registered pledgee. This result cannot be extended to pledges of certificated securities because the issuer will normally be unaware of the pledgee's rights unless the pledgee has caused a transfer to be registered.

The issuer may, under this section, make distributions of money and/or securities to the registered owners of certificated securities without requiring further proof of ownership, provided that such distributions are distributable to the owners of all securities of the same issue and the terms of the security do not require its surrender as a condition of payment or exchange. Any such distribution shall constitute a defense against a claim for the same distribution by a person in possession of the security.

2. The rule of such cases as Turnbull v. Longacre Bank, 249 N.Y. 159, 163 N.E. 135 (1928), which held the issuer liable for paying out dividends to the record holder after the transferee had given notice of the transfer and demanded that a new certificate be issued to him, is left unchanged. However, such cases as Morrison v. Gulf Oil Corporation, 189 Miss. 212, 196 So. 247 (1940), holding that Section 3 of the Uniform Stock Transfer Act did not change the common law as to the issuer's liability for dealing with the record holder after mere notice of a pledge, are expressly rejected. Mere notice is not enough under this section to impose upon the issuer the duty of dealing with the pledgee although it may constitute notice to the issuer of a claim of ownership under Part 4.

Subsections (1) and (2) are permissive and do not require that the issuer deal exclusively with the registered owner. It is free to require proof of ownership before paying out dividends or the like if it chooses to. Barbato v. Breeze Corporation, 128 N.J.L. 309, 26 A.2d 53 (1942).

3. This section does not operate to determine who is finally entitled to exercise voting and other rights or to receive payments and distributions. The parties are still free to incorporate their own arrangements as to these matters in seller-purchaser agreements which will be definitive as between them.

4. No change in existing state laws as to the liability of registered owners for calls and assessments is here intended; nor is anything in this section designed to estop a record holder from denying ownership when assessments are levied if he is otherwise entitled to do so under state law. See State ex rel. Squire v. Murfey, Blosson & Co., 131 Ohio St. 289, 2 N.E.2d 866 (1936); Willing v. Delaplaine, 23 F. Supp. 579 (1937).

5. No interference is intended with the common practice of closing the transfer books or taking a record date for dividend, voting and other purposes, as provided for in by-laws, characters and statutes.

South Carolina Reporter's Comments to the 1991 Amendment

The amendments are structured to provide secured parties with the same rights without regard to whether the pledged collateral is a certificated or uncertificated security. The revisions actually provide issuers and secured parties with more clearly defined rights when dealing with uncertificated securities. When a pledge of an uncertificated security is registered only the registered pledgee can order the registration of a transfer, unless a release of the pledge has been registered. The pledgee can exercise his or her right to transfer in 3 ways: outright transfer, transfer subject to the pledge, or transfer of the security interest to another secured party. These proposed provisions put a party with a security interest in an uncertificated security in roughly the same position as a secured party who has accepted a pledge of a certificated security and retains possession of the certificate.

The disparity between the registered pledgee of an uncertificated security and the pledgee of a certificated share arises when the issuer issues additional securities. The issuer delivers the certificate to the registered owner of a certificated security, but either delivers certificates to the registered pledgee of an uncertificated security (if the new securities are certificated) or registers the new securities subject to the pledge (if the new securities are uncertificated). This reaches a desirable result because the secured party's interest is not diminished by stock splits and similar events.

No change would be made in South Carolina law as to certificated securities. With respect to uncertificated securities, the Initial Transaction Statement does not work well as an analogue to the certificate. This requires creation of liens by registration and leads to the result that a pledged security simply cannot be transferred prior to release. This appears to give protection to pledgees at least as good as that ensured by possession of a certificate.

The uniform comments to the proposed revision emphasize that the parties' agreement may specify who is entitled to vote, receive dividends, and receive payments. The parties may make appropriate arrangements between themselves to implement the agreement. An issuer will not be affected by this type of agreement because it will be effective only between the parties.

Because both issuers and pledgees are given significant protection by the revisions proposed for uncertificated securities, the issuer can be fairly confident that it will not be subject to liability for wrongful dealings with the owner of an uncertificated security. The new revisions provide that the registered pledgee receives all dividend payments, certificated shares issued as a replacement for the uncertificated shares, and the like. An owner may not obtain a registration of transfer from the issuer unless the owner has first obtained a release from the registered pledgee.

Issuers may be subject to liability, however, when a pledgee does not obtain possession of a certificated share or register the pledge with the issuer. Although it would be impractical to implement the same type of system for certificated shares as that proposed for uncertificated shares, the Permanent Editorial Board has attempted to address the disparity by suggesting the following guidelines for interpreting Section 8-207:

(1) A distribution to the registered owner of a security is protected under Section 8-207(1) only if it is distributable to the owners of all securities of the same issue.

(2) If the terms of a security require its surrender as a condition of payment or exchange, a distribution to the registered owner in payment or exchange is not protected under Section 8-207(1) unless the security is surrendered.

(3) Distributions to all the registered owners of a security, the terms of which do not require the surrender thereof, are protected under Section 8-207(a), regardless of the regularity, amount, or nature of such distributions.

(4) A distribution to the registered owner that is protected under Section 8-207(a) constitutes a defense against a claim to such distribution by a person in possession of the security, even if such person is a bona fide purchaser.

Section 36-8-208. Effect of signature of authenticating trustee, registrar, or transfer agent.

(1) A person placing his signature upon a certificated security or an initial transaction statement as authenticating trustee, registrar, transfer agent, or the like, warrants to a purchaser for value of the certificated security or a purchaser for value of an uncertificated security to whom the initial transaction statement has been sent, if the purchaser is without notice of the particular defect, that:

(a) the certificated security or initial transaction statement is genuine;

(b) his own participation in the issue or registration of the transfer, pledge, or release of the security is within his capacity and within the scope of the authority received by him from the issuer; and

(c) he has reasonable grounds to believe the security is in the form and within the amount the issuer is authorized to issue.

(2) Unless otherwise agreed, a person by so placing his signature does not assume responsibility for the validity of the security in other respects.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. The warranties here stated express the current understanding and prevailing case law as to the effect of the signatures of authenticating trustees, transfer agents, and registrars. See Jarvis v. Manhattan Beach Co., 148 N.Y. 652, 43 N.E. 68, 31 L.Ra. 776, 51 Am. St. Rep. 727 (1896). Although it has generally been regarded as the particular obligation of the transfer agent to determine whether securities are in proper forms as provided by the by-laws and Articles of Incorporation, neither a registrar nor an authenticating trustee should properly place a signature upon a certificate or transaction statement without determining whether it is at least regular on its face. The obligations of these parties in this respect have therefore been made explicit in terms of due care. See Feldmeier v. Mortgage Securities, Inc., 34 Cal. app. 2d 201, 93 P.2d 593 (1939).

2. Those cases which hold that an authenticating trustee is not liable for any defect in the mortgage or property which secures the bond or for any fraudulent misrepresentations made by the issuer are not here affected since these matters do not involve the genuineness or proper form of the security. Ainsa v. Mercantile Trust Co., 174 Cal. 504, 163 P. 898 (1917); Tschetinian v. City Trust Co., 186 N.Y. 432, 79 N.E. 401 (1906); Davidge v. Guardian Trust Co. of New York, 203 N.Y. 331, 96 N.E. 751 (1911).

3. The charter or an applicable statute may affect the capacity of a bank or other corporation undertaking to act as an authenticating trustee, registrar or transfer agent. See, for example, the Federal Reserve Act (U.S.C.A., Title 12, Banks and Banking, Section 248) under which the Board of Governors of the Federal Reserve Bank is authorized to grant special permits to National Banks permitting them to act as trustees. Such corporations are therefore held to certify as to their legal capacity to act as well as to their authority.

4. Authenticating trustees, registrars and transfer agents have normally been held liable for an issue in excess of the authorized amount. Jarvis v. Manhattan Beach Co., supra; Mullen v. Eastern Trust & Banking Co., 108 Me. 498, 81 A. 948 (1911). In imposing upon these parties a duty of due care with respect to the amount they are authorized to help issue, this section does not necessarily validate the security, but merely holds persons responsible for the excess issue liable in damages for any loss suffered by the purchaser.

5. Aside from questions of genuineness and excess issued these parties are not held to certify as to the validity of the security unless they specifically undertake to do so. The case law which has recognized a unique responsibility on the transfer agent's part to testify as to the validity of any security which it countersigns is rejected.

6. This provision does not prevent a transfer agent or issuer from agreeing with a registrar of stock to protect the registrar in respect of the genuineness and proper form of a certificated security or initial transaction statement signed by the issuer or the transfer agent or both. Nor does it interfere with proper indemnity arrangements between the issuer and trustees, transfer agents, registrars and the like.

7. An unauthorized signature is a signature for purposes of this section if and only if it is made effective by Section 8-205.

South Carolina Reporter's Comments to the 1991 Amendment

The proposed revision extends the warranties of certain third party signatories to the addressee of an Initial Transaction Statement. This would make no change in South Carolina law relating to certificated securities, and, as to uncertificated securities, treats the Initial Transaction Statement as the analogue of the certificate for purposes of this statute.

Section 36-8-301. Rights acquired by purchaser.

(1) Upon transfer of a security to a purchaser (Section 36-8-313), the purchaser acquires the rights in the security which his transferor had or had actual authority to convey unless the purchaser's rights are limited by subsection (4) of Section 36-8-302.

(2) A transferee of a limited interest acquires rights only to the extent of the interest transferred. The creation or release of a security interest in a security is the transfer of a limited interest in that security.

Amended Official Comment

Prior Uniform Statute Provision:

Section 58, Uniform Negotiable Instruments Law.

Purposes:

1. The concept of transfer is defined only by example (Section 8-313), but it clearly involves the passing of rights in the security from one party to another. Subsection (1) states the "shelter" provision of the Negotiable Instruments Law--upon transfer of the security a purchaser acquires the rights his transferor had. There are at least three exceptions to this basic rule, two of which limit the purchaser's rights and one of which expands them. First, subsection (1) explicitly makes its rule subject to Section 8-302(4), which prevents certain transferees from being freed of the taint of earlier fraud or notice. The second exception, stated in subsection (2), is that there may be a transfer explicitly limited to an interest less than the transferor's entire interest. Finally Section 8-302 provides that a bona fide purchaser takes certain rights of his own account, regardless of the rights his transferor had.

2. Transfers by operation of law are not intended to be covered by this Article. For example, transfers from decedent to administrator, from ward to guardian, and from bankrupt to trustee in bankruptcy are governed by other law as to both the time they occur and the substance of the transfer. Subsequent delivery and registration on the issuer's record merely confirm what has already happened.

South Carolina Reporter's Comments to the 1991 Amendment

Section 36-8-301 states the "shelter principle", that a transferror can transfer no greater rights than those the transferror held in the security, subject to the provisions of Section 36-8-302 concerning bona fide purchasers. No change is made in current law with respect to certificated securities, and the same principles are applied to uncertificated securities.

The word "delivery" in the pre-amendment statute has been changed to "transfer", to accommodate methods for transferring uncertificated securities.

The new last sentence clarifies the existing law, that the creation or release of a security interest is a transfer, although of a limited interest, and comes within the statute's coverage.

Section 36-8-302. `Bona fide purchaser'; `adverse claim'; title acquired by bona fide purchaser.

(1) A `bona fide purchaser' is a purchaser for value in good faith and without notice of any adverse claim:

(a) who takes delivery of a certificated security in bearer form or in registered form, issued or indorsed to him or in blank;

(b) to whom the transfer, pledge, or release of an uncertificated security is registered on the books of the issuer; or

(c) to whom a security is transferred under the provisions of paragraph (c), (d)(i), or (g) of subsection (1) of Section 36-8-313.

(2) `Adverse claim' includes a claim that a transfer was or would be wrongful or that a particular adverse person is the owner of or has an interest in the security.

(3) A bona fide purchaser in addition to acquiring the rights of a purchaser (Section 36-8-301) also acquires his interest in the security free of any adverse claim.

(4) Notwithstanding subsection (1) of Section 36-8-301, the transferee of a particular certificated security who has been a party to any fraud or illegality affecting the security, or who as a prior holder of that certificated security had notice of an adverse claim, cannot improve his position by taking from a bona fide purchaser.

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 52, 57, 58 and 59, Uniform Negotiable Instruments Law; Section 7, Uniform Stock Transfer Act.

Purposes:

1. Any purchaser for value of a security without notice of a particular defect may take free of the issuer's defense based on that defect, but only a purchaser taking by a formally perfect transfer, for value and without notice of any adverse claim, may take free of adverse claims. The "bona fide purchaser" here dealt with is the person taking free of adverse claims. His rights against the issuer are determined by Part 2 of this Article and his rights to registration are determined by Part 4.

2. Not every form of transfer can confer upon the purchaser the status of bona fide purchaser. In particular, transfers effected through the acknowledgement of a bailee who is not a financial intermediary or through the acknowledgement of a financial intermediary who holds for the transferee a proportionate interest in a fungible bulk do not confer bona fide purchaser status. However, the transferee can acquire all the rights of a bona fide purchaser status. However, the transferee can acquire all the rights of a bona fide purchaser through the "shelter" provisions of Section 8-301(1) if the transferor had those rights.

3. Protection is extended to bona fide purchasers of all investment securities, whether such securities were considered negotiable or non-negotiable under the prior law. This is the result sought by many cases which have resolved doubts in favor of negotiability despite terms in bonds which militated against their negotiability under the provisions of the Negotiable Instruments Law. See Paxton v. Miller, 102 Ind. Ap. 511, 200 N.E. 87 (1936); Scott v. Platt, 171 Or. 379, 135 P.2d 769 (1943). Such cases as U.S. Gypsum v. Faroll, 296 Ill. App. 47, 15 N.E.2d 888 (1938), protecting bona fide purchasers of stock certificates under the provisions of the Stock Transfer Act are adopted and approved.

4. An adverse claim may be either legal or equitable, e.g., that the claimant is the beneficial owner of a security, though not the legal owner of it, or that it has been or is proposed to be transferred in breach of trust or a valid restriction on transfer (See Section 8-204 and Comment). Note that there may be claims of ownership that are not "adverse" -- e.g., the claim of a principal against his agent including that of a customer against his broker (Section 8-303). The agent's knowledge of his principal's claim thus cannot defeat the agent's right to be a bona fide purchaser under this section.

5. Subsection (4) provides an exception to the "shelter" provisions of Section 8-301(1), but applies only to a transferee of a certificated security transferee of a certificated security who as a prior holder of the particular security had notice of adverse claims or who has been a party to fraud or illegality affecting the particular security.

South Carolina Reporter's Comments to the 1991 Amendment

This section defines "bona fide purchaser" and "adverse claim", making no change in existing law as to certificated securities. It applies the definition of "adverse claim" to uncertificated securities, and, as to uncertificated securities, makes the time of registration the time for testing knowledge of adverse claims. For these purposes, transferees of uncertificated securities are charged with information contained in the initial transaction statement sent to them upon registration of transfer; see Section 36-8-303. For purposes of certainty they may wish to use such devices as escrow arrangements. Transferees of uncertificated securities may also request that their transferor request a written Statement from the issuer (see subsections (6) and (7) of Section 36-4-408) before completing the transaction. This discrepancy between transferees of certificated and uncertificated securities in obtaining Bona Fide Purchaser requirements has been described as being "of limited practical significance." PEBC Comments, 2 U.L.A. at 291 (Supp. 1989).

New subsection (1)(c) clarifies that certain transferees, who are defined by referenced provisions of 8-313, are "holders" and therefore can be bona fide purchasers under this section.

Section 36-8-303. `Broker'.

`Broker' means a person engaged for all or part of his time in the business of buying and selling securities, who in the transaction concerned acts for, buys a security from, or sells a security to a customer. Nothing in this chapter determines the capacity in which a person acts for purposes of any other statute or rule to which the person is subject.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

This section defines "broker" for purposes of this Article in terms of function in this particular transaction. The term is applicable to the person performing the function. The differentiation under the Securities Exchange Act of 1934 between "broker" and "dealer" is of no significance under this Article. This and similar distinctions are preserved for other purposes by the last sentence of the section.

South Carolina Reporter's Comments to the 1991 Amendment

Only minor grammatical changes have been proposed for this section.

Section 36-8-304. Notice to purchaser of adverse claims.

(1) A purchaser (including a broker for the seller or buyer, but excluding an intermediary bank) of a certificated security is charged with notice of adverse claims if:

(a) the security, whether in bearer or registered form, has been indorsed `for collection' or `for surrender' or for some other purpose not involving transfer; or

(b) the security is in bearer form and has on it an unambiguous statement that it is the property of a person other than the transferor. The mere writing of a name on a security is not such a statement.

(2) A purchaser (including a broker for the seller or buyer, but excluding an intermediary bank) to whom the transfer, pledge, or release of an uncertificated security is registered, is charged with notice of adverse claims as to which the issuer has a duty under subsection (4) of Section 36-8-403 at the time of registration and which are noted in the initial transaction statement sent to the purchaser or, if his interest is transferred to him other than by registration of transfer, pledge, or release, the initial transaction statement sent to the registered owner or the registered pledgee.

(3) The fact that the purchaser (including a broker for the seller or buyer) of a certificated or uncertificated security has notice that the security is held for a third person or is registered in the name of or indorsed by a fiduciary does not create a duty of inquiry into the rightfulness of the transfer or constitute constructive notice of adverse claims. If, however, the purchaser (excluding an intermediary bank) has knowledge that the proceeds are being used or that the transaction is for the individual benefit of the fiduciary or otherwise in breach of duty, the purchaser is charged with notice of adverse claims.

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 37, 56, Uniform Negotiable Instruments Law.

Purposes:

1. Section 8-302 defines "bona fide purchaser" in terms of three distinct elements, "value," "good faith", and lack of "notice of any adverse claim". This section deals only with notice and presents specific situations in which a purchaser is charged with notice of adverse claims as a matter of law. The listing is not exhaustive and does not exclude other situations in which the trier of the facts may determine that similar notice has been given. For example, receipt of notification that the particular security has been lost or stolen raises the question of notice "forgotten" in good faith. Kentucky Rock Asphalt v. Mazza's Admr., 264 Ky. 158, 94 S.W.2d 316 (1936); Graham v. White-Phillips Co., 296 U.S. 27, 56 S. Ct. 21, 80 L. Ed. 20, 102 A.L.R. 24 (1935) but cf., First National Bank of Odessa v. Fazzari, 10 N.Y.2d 394, 179 N.E.2d 493 (1961). Also suspicious characteristics of the transaction may give a purchaser (particularly a commercially sophisticated purchaser such as a broker) "reason to know." U.S. Fidelity & Guaranty Co. v. Goetz, 285 N.Y. 74, 32 N.E.2d 798 (1941); Morris v. Muir, 111 Misc. 739, 180 N.Y.S. 913 (1920).

2. Subsection (1)(a) refers to situations in which a certificated security indorsed "for collection" or "for surrender" is being offered for transfer and follows in effect Section 37 of the Negotiable Instruments Law, which provides that subsequent indorsees acquire only the title of the first indorsee under a restrictive indorsement.

3. A purchaser of an uncertificated security is charged with notice of adverse claims noted in the initial transaction statement. If the security is transferred to him other than by registration on the issuer's records, he is charged with notice of claims noted in the statement sent to the registered owner (or to the registered pledgee if his rights were transferred by notice to or acknowledgement from a registered pledgee).

Situations may arise in which the lissauer receives notice of an adverse claim after registration of transfer, pledge or release but before the initial transaction statement is prepared and sent. The issuer ought not to note those claims on the statement. See Section 8-408(1)(d), (2)(d) and (3)(d). If the issuer should mistakenly note such a claim, subsection (2) does not charge the purchaser with notice.

4. In subsection (3) some situations involving purchaser from one described or identifiable as a fiduciary are explicitly provided for, again imposing an objective standard, while leaving the door open to other circumstances which may constitute notice of adverse claims. Mere notice of the existence of the fiduciary relation is not enough in itself to prevent bona fide purchase, and the purchaser is free to take the security on the assumption that the fiduciary is acting properly. The fact that the security may be transferred to the individual account of the fiduciary or that the proceeds of the transaction are paid into that account in cash would not be sufficient to charge the purchaser with notice of potential breach of fiduciary obligation but as in State Bank of Binghamton v. Bache, 162 Misc. 128, 293 N.Y.S. 667 (1937) knowledge that the proceeds are being applied to the personal indebtedness of the fiduciary will charge the purchase with such notice.

5. The notice here involved is to purchasers. A broker acting as such (Section 8-303) is treated in this section as a purchaser though he may not be a purchaser under the definitions of that term (Section 1-201(33)). On the other hand, a bank, stockbroker or other intermediary who, in the particular transaction acts purely in that capacity, is not a purchaser. Cf. subsections (3) and (4) of Section 8-306 and Comments 3 and 4 to that Section. Subsection (3) follows the policy of Section 4 of the Uniform Fiduciaries Act and of Section 3-304(2) with respect to commercial paper. Compare Section 7(a) of the Uniform Act for Simplification of Fiduciary Security Transfers.

The fact that the broker is expressly mentioned in this section carries no negative implication in other sections in which merely the word "purchaser" is used.

An issuer is not a purchaser. Its duty of inquiry is set forth in Part 4.

South Carolina Reporter's Comments to the 1991 Amendment

The proposed section makes no change in the current law with respect to certificated securities. A new subsection has been added to provide an analogous method of notice of adverse claims for uncertificated securities. The purchaser of an uncertificated security is charged with notice of an adverse claim if the claim appears or is referred to in the Initial Transaction Statement (see Section 36-8-403(4)). The rules of subsection (3), which states that a purchaser's knowledge that the seller holds for a third party does not constitute notice of an adverse claim, has been extended to apply equally to certificated and uncertificated securities.

Section 36-8-305. Staleness as notice of adverse claims.

An act or event that creates a right to immediate performance of the principal obligation represented by a certificated security or sets a date on or after which the certificated security is to be presented or surrendered for redemption or exchange does not itself constitute any notice of adverse claims except in the case of a transfer:

(a) after one year from any date set for presentment or surrender for redemption or exchange; or

(b) after six months from any date set for payment of money against presentation or surrender of the security if funds are available for payment on that date.

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 52(2), 53, Uniform Negotiable Instruments Law.

Purposes:

1. The fact of "staleness" is viewed as notice of certain defects after the lapse of stated periods, but the maturity of the security does not operate automatically to affect holders' rights. The periods of time here stated are shorter than those appearing in the provisions of this Article on staleness as notice of defects or defenses (Section 8-203) since a purchaser who takes a security after funds or other securities are available for its redemption has more reason to suspect claims of ownership than issuer's defenses. An owner will normally turn in his security rather than transfer it at such a time.

Of itself, a default never constitutes notice of a possible adverse claim. To provide otherwise would not tend to drive defaulted securities home and would serve only to disrupt current financial markets where many defaulted securities are actively traded.

2. The owner is provided with a means of protecting himself while his security is being sent in for redemption or exchange. He may endorse it "for collection" or "for surrender," and this constitutes notice of his claims (Section 8-304). The present section does not come into operation unless the time period here stated has elapsed.

3. Unpaid or overdue coupons attached to a bond do not bring it within the operation of this section, although under some circumstances they may give the purchaser "reason to know" of claims of ownership. Georgia Granite R. Co. v. Miller, 144 Ga. 665, 87 S.E. 897 (1916).

4. This section has been made expressly applicable to certificated securities only, since the transfer of an uncertificated security normally will involve communication with the issuer and a consequent opportunity for the issuer to give the transferee effective notice of adverse claims.

South Carolina Reporter's Comments to the 1991 Amendment

This section applies only to certificated securities and makes no change in the current law. Because transfer of uncertificated securities requires communication with the issuer or registrar, the transferee will receive notice of any claims from the issuer or registrar. A collateral system of notice is therefore not necessary for uncertificated securities.

Section 36-8-306. Warranties on presentment and transfer of certificated securities; warranties of originators of instructions.

(1) A person who presents a certificated security for registration of transfer or for payment or exchange warrants to the issuer that he is entitled to the registration, payment or exchange. However, a purchaser for value without notice of adverse claims who receives a new, reissued, or reregistered certificated security on registration of transfer or receives an initial transaction statement confirming the registration of transfer of an equivalent uncertificated security to him warrants only that he has no knowledge of any unauthorized signature (Section 36-8-311) in a necessary indorsement.

(2) A person by transferring a certificated security to a purchaser for value warrants only that:

(a) his transfer is effective and rightful;

(b) the security is genuine and has not been materially altered; and

(c) he knows of no fact which might impair the validity of the security.

(3) If a certificated security is delivered by an intermediary known to be entrusted with delivery of the security on behalf of another or with collection of a draft or other claim against delivery, the intermediary by delivery warrants only his own good faith and authority, even though he has purchased or made advances against the claim to be collected against the delivery.

(4) A pledgee or other holder for security who redelivers a certificated security received, or after payment and on order of the debtor delivers that security to a third person, makes only the warranties of an intermediary under subsection (3).

(5) A person who originates an instruction warrants to the issuer that:

(a) he is an appropriate person to originate the instruction; and

(b) at the time the instruction is presented to the issuer he will be entitled to the registration of transfer, pledge, or release.

(6) A person who originates an instruction warrants to any person specially guaranteeing his signature (subsection (3) of Section 36-8-312) that:

(a) he is an appropriate person to originate the instruction; and

(b) at the time the instruction is presented to the issuer

(i) he will be entitled to the registration of transfer, pledge, or release; and

(ii) the transfer, pledge, or release requested in the instruction will be registered by the issuer free from all liens, security interests, restrictions, and claims other than those specified in the instruction.

(7) A person who originates an instruction warrants to a purchaser for value and to any person guaranteeing the instruction (subsection (6) of Section 36-8-312) that:

(a) he is an appropriate person to originate the instruction; and

(b) the uncertificated security referred to therein is valid; and

(c) at the time the instruction is presented to the issuer

(i) he will be entitled to the registration of transfer, pledge, or release; and

(ii) the transfer, pledge, or release requested in the instruction will be registered by the issuer free from all liens, security interests, restrictions, and claims other than those specified in the instruction; and

(iii) the requested transfer, pledge, or release is rightful.

(8) If a secured party is the registered pledgee or the registered owner of an uncertificated security, a person who originates an instruction of release or transfer to the debtor or, after payment and on order of the debtor, a transfer instruction to a third person, warrants to the debtor or the third person only that he is an appropriate person to originate the instruction and, at the time the instruction is presented to the issuer, the transferor will be entitled to the registration of release or transfer. If a transfer instruction to a third person who is a purchaser for value is originated on order of the debtor, the debtor makes to the purchaser the warranties of paragraphs (b), (c)(ii) and (c)(iii) of subsection (7).

(9) A person who transfers an uncertificated security to a purchaser for value and does not originate an instruction in connection with the transfer warrants only that:

(a) his transfer is effective and rightful; and

(b) the uncertificated security is valid.

(10) A broker gives to his customer and to the issuer and a purchaser the applicable warranties provided in this section and has the rights and privileges of a purchaser under this section. The warranties of and in favor of the broker, acting as an agent, are in addition to applicable warranties given by and in favor of his customer.

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 65, 66, 67, 69, Uniform Negotiable Instruments Law; Sections 11, 12, Uniform Stock Transfer Act.

Purposes:

1. The warranties with respect to certificated securities have been recognized by the prevailing case law as well as by the prior Acts cited. See Boston Tow Boat Co. v. Medford Nat. Bank, 232 Mass. 38, 121 N.E. 491 (1919); Burtch v. Child, Hulswit & Co., 207 Mich. 205, 174 N.W. 170 (1919).

Usual estoppel principles apply with respect to transfers of both certificated and uncertificated securities whenever the purchaser has knowledge of the defect, and these warranties will not be effective in such a case. In addition, under Section 1-102(3) these provisions apply only "unless otherwise agreed" and the parties are free to enter into any express agreement they desire where both are aware of possible defects.

2. The second sentence of subsection (1) limits the warranties made by a bona fide purchaser whose presentation of a certificated security is defective in some way but who nonetheless is given a reissued certificated security or an initial transaction statement confirming the transfer of an uncertificated security to him. The effect is to deny the issuer a remedy against such a person unless at the time of presentment the person had knowledge of an unauthorized signature in a necessary indorsement. The issuer can protect itself by refusing to make the transfer or, if it registers the transfer before it discovers the defect, by pursuing its remedy against a signature guarantor.

3. Subsections (3) and (4) are designed to eliminate all substantive warranties in the case of deliveries of certificated securities by intermediaries and pledgees. Such parties deal primarily with the draft or other claim and, having no access to direct knowledge about the security, they cannot be held to warrant its genuineness or validity. Subsection (8) similarly limits the warranties given by a secured party (or its agent) originating an instruction at the behest of the debtor.

4. The so-called "stock-broker" normally functions as a broker (see definition of "Broker", Section 8-303) and on a few occasions another institution such as a bank may function as a broker--e.g., for a standard broker's commission or similar compensation. In those situations the warranties, rights and privileges of the broker are spelled out in subsection (10). Nevertheless either the so-called "stock-broker" or the bank can qualify for the protection given by subsections (3) and (4) to an "intermediary" where in the particular transaction it does not function as a broker -- e.g., when it transfers securities on a customer's instructions, either without charge or for a nominal handling charge.

5. Subsection (5) establishes the rights of the issuer against one who originates an instruction (Section 8-308(4)) that is fraudulent or otherwise improper. The issuer's loss -- which necessitates the remedy -- arises only if the issuer registers the requested transfer, pledge or release and is subjected to liability for improper registration. See Section 8-404(3).

6. Subsection (6) sets forth the warranties made by the instruction originator to a person specially guaranteeing his signature. These warranties mirror those made by the special signature guarantor.

7. Subsection (7) sets forth the warranties made to a purchaser for value by one who originates an instruction. These warranties are quite similar to those made by one transferring a certificated security, subsection (2), the principal difference being the absolute warranty of validity. If upon receipt of the instruction the issuer should dispute the validity of the security, it seems proper to place the burden of proving validity upon the transferor. Because the guarantor of an instruction makes an absolute warranty of rightfulness, Section 8-312(6), he is given the benefit of a similar warranty from the originator in subsection (7).

South Carolina Reporter's Comments to the 1991 Amendment

No change in the law relating to certificated securities is made by the amendments to this section. With respect to uncertificated securities and in their context of transfer, pledge and release, the amendments create a system of warranties as closely analogous as possible to that relating to certificated securities.

Uncertificated securities can be transferred and pledged, and pledges released, only by instruction (Section 36-8-308(4)) to the issuer submitted by an appropriate person (Section 36-8-308(7)). Accordingly, in subsections (5)(a) and (b) the amendment creates new warranties, running to the issuer from the person originating the instruction, that such person is an appropriate person to originate the instruction and is entitled to the action sought by the transfer. This permits issuers to rely on instructions while placing the burden on the originator.

Those guaranteeing signatures on instructions will not have certificates to inspect. Accordingly, the signing party is required, by new subsections (6)(a) and (b), to warrant to the guaranteeing party that the signing party is an appropriate person to execute the instruction and entitled to the action requested in the instruction. New subsection (6)(c) requires the signing party to warrant to the guaranteeing party that the security will be registered free from claims not specified in the instruction. The warranties running to guarantors are designed to protect guarantors in light of their own warranties created by Section 36-8-312(3).

Warranties to purchasers and guarantors are found in subsection (7). The person originating an instruction warrants to purchasers and guarantors the appropriateness and entitlement found in subsections (5) and (6); that all claims are specified in the instruction; and that the action requested in the instruction is rightful and that the security is valid. The warranty of validity of certificated securities is limited by the knowledge of the warranting party. With respect to uncertificated securities, there is no such limit on the transferror's warranty. Should the issuer dispute the validity of a security upon receipt of an instruction, the transferror would bear the burden of proving validity. This is appropriate in light of the transferror's superior access to information concerning the status of an uncertificated security, as opposed to a certificated one. Further, it is anticipated that transferees, by means of escrow accounts or similar devices, will not part with their money until after receiving an initial transfer statement from the issuer.

Because the guarantor of an instruction warrants its rightfulness under Section 36-8-312, guarantors are given the benefit of the warranties of subsection (7).

New subsection (8) limits the warranties of the originators of instructions relating to uncertificated securities when the originator is acting for a pledgee of the security, who is either the registered owner or registered pledgee. When such an instruction is for release of a pledge, for transfer to the debtor or transfer after payment to a third person on the debtor's order, the originator's warranties are limited in ways substantially similar to those in which the warranties of the pledgee of a certificated security are limited under subsection (4).

New subsection (9) addresses the transfer of an uncertificated security by a transferror who does not originate an instruction in connection with such transfer, such as (without limitation) a transferror who is neither the registered owner nor the registered pledgee. Such a transferror's warranties are limited as described in subsection (9).

Under both systems of warranties, a purchaser for value without notice makes only limited warranties on presentation and is shielded from liability against a former owner or pledgee. When secured parties deliver certificated securities or originate transfer instructions, they also make only limited warranties.

Section 36-8-307. Effect of delivery without indorsement; right to compel indorsement.

If a certificated security in registered form has been delivered to a purchaser without a necessary indorsement he may become a bona fide purchaser only as of the time the indorsement is supplied; but against the transferor, the transfer is complete upon delivery and the purchaser has a specifically enforceable right to have any necessary indorsement supplied.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 49, Uniform Negotiable Instruments Law; Section 9, Uniform Stock Transfer Act.

Purposes:

1. As between the parties the transfer of a certificated security is made complete upon delivery, but the transferee cannot become a bona fide purchaser of the security until indorsement is made. The indorsement does not operate retroactively, and notice may intervene between delivery and indorsement so as to prevent the transferee from becoming a bona fide purchaser. This Article rejects such cases as Bethea v. Floyd, 177 S.C. 521, 181 S.E. 721 (1935), certiorari denied, 296 U.S. 622, 56 S. Ct. 143, 80 L. Ed. 442, holding that the indorsement of a note delivered prior to maturity but indorsed thereafter took effect as of the date of delivery to permit the purchaser to become a holder in due course. Although a purchaser taking without a necessary indorsement may be subject to claims of ownership, any issuer's defense of which he had no notice at the time of delivery will be cut off, since the provisions of this Article protect all purchasers for value without notice (Section 8-202).

2. The transferee's right to compel an indorsement where a certificated security has been delivered with intent to transfer is recognized in the case law and the Article of this Act on Documents of Title. See Coats v. Guaranty Bank & Trust Co., 170 La. 871, 129 So. 513 (1930), and Section 7-506 of this Act.

3. A proper indorsement is one of the requisites of transfer which a purchaser of a certificated security has a right to obtain (Section 8-316). A purchaser may not only compel an indorsement under that section but may also recover for any reasonable expense incurred by the transferor's failure to respond to the demand for an indorsement.

South Carolina Reporter's Comments to the 1991 Amendment

This section makes no change to a transferee's right to compel indorsement or to the indorsement requirement for Bona Fide Purchaser status. Language has been inserted to reflect that the section applies only to certificated securities.

Section 36-8-308. Indorsements; instructions.

(1) An indorsement of a certificated security in registered form is made when an appropriate person signs on it or on a separate document an assignment or transfer of the security or a power to assign or transfer it or his signature is written without more upon the back of the security.

(2) An indorsement may be in blank or special. An indorsement in blank includes an indorsement to bearer. A special indorsement specifies to whom the security is to be transferred, or who has power to transfer it. A holder may convert a blank indorsement into a special indorsement.

(3) An indorsement purporting to be only part of a certificated security representing units intended by the issuer to be separately transferable is effective to the extent of the indorsement.

(4) An `instruction' is an order to the issuer of an uncertificated security requesting that the transfer, pledge, or release from pledge of the uncertificated security specified therein be registered.

(5) An instruction originated by an appropriate person is:

(a) a writing signed by an appropriate person; or

(b) a communication to the issuer in any form agreed upon in a writing signed by the issuer and an appropriate person.

If an instruction has been originated by an appropriate person but is incomplete in any other respect, any person may complete it as authorized and the issuer may rely on it as completed even though it has been completed incorrectly.

(6) `An appropriate person' in subsection (1) means the person specified by the certificated security or by special indorsement to be entitled to the security.

(7) `An appropriate person' in subsection (5) means:

(a) for an instruction to transfer or pledge an uncertificated security which is then not subject to a registered pledge, the registered owner; or

(b) for an instruction to transfer or release an uncertificated security which is then subject to a registered pledge, the registered pledgee.

(8) In addition to the persons designated in subsections (6) and (7), `an appropriate person' in subsections (1) and (5) includes:

(a) if the person so designated is described as a fiduciary but is no longer serving in the described capacity, either that person or his successor;

(b) if the persons designated are described as more than one person as fiduciaries and one or more are no longer serving in the described capacity, the remaining fiduciary or fiduciaries, whether or not a successor has been appointed or qualified;

(c) if the person so designated is an individual and is without capacity to act by virtue of death, incompetence, infancy, or otherwise, his executor, administrator, guardian, or like fiduciary;

(d) if the persons designated are described as more than one person as tenants by the entirety or with right of survivorship and by reason of death all cannot sign, the survivor or survivors;

(e) a person having power to sign under applicable law or controlling instrument; and

(f) to the extent that the person designated or any of the foregoing persons may act through an agent, his authorized agent.

(9) Unless otherwise agreed, the indorser of a certificated security by his indorsement or the originator of an instruction by his origination assumes no obligation that the security will be honored by the issuer but only the obligations provided in Section 36-8-306.

(10) Whether the person signing is appropriate is determined as of the date of signing and an indorsement made by or an instruction originated by him does not become unauthorized for the purposes of this chapter by virtue of any subsequent change of circumstances.

(11) Failure of a fiduciary to comply with a controlling instrument or with the law of the state having jurisdiction of the fiduciary relationship, including any law requiring the fiduciary to obtain court approval of the transfer, pledge, or release, does not render his indorsement or an instruction originated by him unauthorized for the purposes of this chapter.

Amended Official Comment

Prior Uniform Statutory Provision:

Sections 31 through 37, 64 through 69, Uniform Negotiable Instruments Law; Section 20, Uniform Stock Transfer Act.

Purposes:

1. The simplified method of indorsing certificated securities set forth in the Uniform Stock Transfer Act is continued in subsections (1) and (2). Although more than one special indorsement on a given certificated security is here made possible, the desire for dividends or interest, as the case may be, should operate to bring the security home for registration of transfer within a reasonable period of time. The usual form of assignment which appears in the back of a stock certificate or in a separate "power" may be filled up either in the form of an assignment, a power of attorney to transfer, or both. If it is not filled up at all but merely signed, the indorsement is in blank; if filled up either as an assignment or as a power of attorney to transfer, the indorsement is special.

2. Subsection (3) recognizes, in contradistinction to the rule under the Uniform Negotiable Instruments Law, the validity of a "partial" indorsement of a certificated security -- e.g., as to fifty shares of the one hundred represented by a single certificate. The rights of a transferee under a partial indorsement to the status of a bona fide purchaser are left to the case law.

3. Subsections (4) and (5) together indicate that an instruction is an order from an "appropriate person" (subsection (7)) to the issuer demanding registration of some form of transfer of an uncertificated security. Functionally, presentation of an instruction is quite similar to the presentation of an indorsed certificate of re-registration. The instruction may be in the form of a writing signed by an appropriate person or in any other form agreed upon in writing by the issuer and an appropriate person. Allowing nonwritten forms of instructions will permit the development and employment of means of transmitting instructions electronically.

When a person originates an instruction in which he leaves a blank and the blank later is completed, subsection (5) gives the issuer the same rights it would have had against the originating person had that person completed the blank himself. This is true regardless of whether the person completing the instruction had authority to complete it. Compare Section 8-206 and its Comment, dealing with blanks left upon issue.

4. Subsections (6) and (7) give basic rules for determining who is an appropriate person to indorse a certificated security or to originate a transfer instruction for an uncertificated security. Subsection (8) defines the various situations in which persons other than those designated in subsections (6) and (7) will also be "appropriate persons." The provisions are not mutually exclusive; for example, the same certificated security may be effectively indorsed either by the registered owner under subsection (6) or by his agent under (8)(f). Paragraph (8)(a) is made explicitly alternative to make it clear that there is no conflict with paragraph (3)(a) of Section 8-403, permitting the issuer to rely on the continued power of a fiduciary to act where he is the registered owner and the issuer has not received written notice to the contrary. Similar protection is given to other persons dealing with the security. See also the comment to Section 8-404.

Paragraphs (e) and (f) in particular are comprehensive. For example, where a "small estate statute" permits a widow to transfer a decedent's securities without administration proceedings, she would be "a person having power to sign under applicable law." Similarly, in the usual partnership case, the signature of a partner would be that of "a person having power to sign under ... [a] ... controlling instrument."

Indorsement or origination by "an appropriate person" is included in the scope of the guarantee of signature (Section 8-312). It is prerequisite to the issuer's duty to register a transfer (Section 8-401) and to his exoneration from liability for improper registration (Section 8-404).

5. Subsection (9) makes clear that the indorser of a certificated security and the originator of an instruction do not warrant that the issuer will honor the underlying obligation. In view of the nature of investment securities and the circumstances under which they are normally transferred, a transferor cannot be held to warrant as to the issuer's actions. As a transferor he, of course, remains liable for breach of the warranties set forth in this Article (Section 8-306).

6. Subsection (10) of this section makes the indorsement or instruction speak as of the date of signing. Section 8-312 on guaranty of signature and Section 8-402 on assurance that indorsements and instructions are effective apply the same reasoning. Thus, the signatures on a security indorsed by A during his lifetime or on behalf of X corporation by Y as president during his incumbency do not become "unauthorized" (Section 8-311) because A dies or Y is replaced as president by Z. Authority to deliver a certificated security and thus to complete the transfer is not covered by this section. Subsection (11) supplements Section 8-403(3)(b) by making it clear that certain matters go to rightfulness of the transfer rather than to the validity of the indorsement or instruction. An example is the failure of a duly appointed guardian to obtain a required court approval of the transfer. Such a guardian is an "appropriate person" under paragraph (8)(c) of this section, and his indorsement may be effective even though, e.g., a required court order is not obtained.

South Carolina Reporter's Comments to the 1991 Amendment

This section is closely related to Section 36-8-306, which creates systems for transfers of certificated and uncertificated securities. The amendment to Section 36-8-308 is designed to permit, as far as possible, reliance on the same documentation and evidence relating to registration under both systems.

Essential to the system of transfer of certificated securities are the concepts of "indorsement" and "appropriate person". Section 36-8-308 makes no change in the concept of "indorsement", and no change in the concept of "appropriate person" as it applies to certificated securities.

Essential to the system of transfer of uncertificated securities are the concepts of "instruction" and "appropriate person". An "instruction" is the order for action which substitutes, in the case of an uncertificated security, for the absence of an instrument. Subsection (4) defines "instruction", and provides that instructions may be used to order registrations of transfer, pledge and release of pledge. Subsection (5) permits the parties to agree in a signed writing that instructions may be given in any manner. Subsection (5) also provides that blanks left in an instruction originated by an appropriate person may be completed by any person to the effect authorized by the issuer.

Subsection (7) defines "appropriate person" as applied to uncertificated securities. As to uncertificated securities not subject to a registered pledge, the appropriate person is the registered owner, who may originate an instruction either to transfer or to pledge. When the uncertificated security is subject to a registered pledge, only the registered pledgee may originate an instruction to register either a transfer or a release. (There can be only one registered pledgee. See Section 36-8-108.)

In addition to the persons designated in subsections (1) and (5) as "appropriate" to initiate instructions, subsection (8) carries over from prior law a list of alternative "appropriate persons", unchanged except as necessary to make them applicable to both certificated and uncertificated securities.

Subsections (9), (10) and (11) are changed only as necessary to add the concept of uncertificated securities, with the exception of the final phrase of subsection (9). This phrase was added to make clear that a transferror of a certificated security and the originator of an instruction relating to an uncertificated security do not, unless otherwise agreed, warrant that the issuer will honor their orders to register the transaction, nor do they become sureties, in effect, of the issuer's duties beyond the duty to register, such as the duty to pay interest and principal.

Section 36-8-309. Effect of indorsement without delivery.

An indorsement of a certificated security, whether special or in blank, does not constitute a transfer until delivery of the certificated security on which it appears or, if the indorsement is on a separate document, until delivery of both the document and the certificated security.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 30, Uniform Negotiable Instruments Law; Sections 1, 10, Uniform Stock Transfer Act.

Purposes:

1. There must be a voluntary parting with control in order to effect a valid transfer of a certificated security as between the parties. Levey v. Nason, 279 Mass. 268, 181 N.E. 193 (1932), and National Surety Co. v. Indemnity Insurance Co. of North America, 237 App. Div. 485, 261 N.Y.S. 605 (1933).

2. The provision in Section 10 of the Uniform Stock Transfer Act that an attempted transfer without delivery amounts to a promise to transfer is here omitted. Even under the prior Act the effect of such a promise was left to the applicable law of contracts, and this Article by making no reference to such situations intends to achieve a similar result.

With respect to delivery there is no counterpart to Section 8-307 on right to compel indorsement, such as is envisaged in Johnson v. Johnson, 300 Mass. 24, 13 N.E.2d 788 (1938), where the transferee under a written assignment was given the right to compel a transfer of the certificate.

South Carolina Reporter's Comments to the 1991 Amendment

This section makes no change to the current law, which provides that indorsement alone does not constitute transfer. Language has been inserted to reflect that the section applies only to certificated securities.

Section 36-8-310. Indorsement of certificated security in bearer form.

An indorsement of a certificated security in bearer form may give notice of adverse claims (Section 36-8-304) but does not otherwise affect any right to registration the holder possesses.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 40, Uniform Negotiable Instruments Law.

Purposes:

1. The concept of indorsement applies only to registered certificated securities, and a purported indorsement of bearer paper is normally of no effect.

An indorsement "for collection," "for surrender" or the like, charges a purchaser with notice of adverse claims (Section 8-304(1)(a)) but does not operate beyond this to interfere with any right the holder may otherwise possess to have the security registered in his name.

2. The provisions of Section 40 of the Negotiable Instruments Law as to the liability of special indorsers of bearer instruments have no applicability here since this Article negates the liability of indorsers as such upon the issuer's obligation (Section 8-308(9)).

South Carolina Reporter's Comments to the 1991 Amendment

This section makes no change to the effect of an indorsement in bearer form placed on a certificated security. Language has been inserted to reflect that the section applies only to certificated securities.

Section 36-8-311. Effect of unauthorized indorsement or instruction.

Unless the owner or pledgee has ratified an unauthorized indorsement or instruction or is otherwise precluded from asserting its ineffectiveness:

(a) he may assert its ineffectiveness against the issuer or any purchaser, other than a purchaser for value and without notice of adverse claims, who has in good faith received a new, reissued, or reregistered certificated security on registration of transfer or received an initial transaction statement confirming the registration of transfer, pledge, or release of an equivalent uncertificated security to him; and

(b) an issuer who registers the transfer of a certificated security upon the unauthorized indorsement or who registers the transfer, pledge, or release of an uncertificated security upon the unauthorized instruction is subject to liability for improper registration (Section 36-8-404).

Amended Official Comment

Prior Uniform Statutory Provision:

Section 23, Uniform Negotiable Instruments Law.

Purposes:

1. Most present day security purchases are made through brokers. The purchaser who normally receives and sees only a certificated security registered in his own name or an initial transaction statement addressed to him cannot realistically be held to have notice of or to have relied upon a forged or unauthorized indorsement on the original security transferred or upon the unauthorized instruction. A good faith purchaser who has received an initial transaction statement or a new, reissued or re-registered certificate is therefore protected. Compare Telegraph Co. v. Davenport, 97 U.S. 369, 24 L. Ed. 1047 (1878). That line of cases which has refused to apply this rule where the new security is still in the hands of the party to whom it was issued is expressly rejected. See Weniger v. Success Mining Co., 227 F. 548 (C.C.A. Utah 1915); Hambleton v. Central Ohio R.R. Co., 44 Md. 551 (1876).

2. The original owner of a security which has been transferred on the basis of a forged indorsement or instruction is protected by the issuer's liability for wrongful registration of transfer (Section 8-404). The issuer's duty to issue a similar security to the owner unless an overissue would result is made explicit in Part 4 of this Article, as is his obligation to purchase available securities on the open market for transfer to the owner where overissue is involved (see Section 8-104). Compare Prince v. Childs Co., 23 F.2d 605 (1928); West v. Tintic Standard Mining Co., 71 Utah 158, 263 P. 490, 56 A.L.R. 1190 (1928). The issuer's recourse is against the forger and the guarantor of the latter's signature, if any. But since the issuer has a right to require a guarantee of signature, a bona fide purchaser presenting the certificated security or instruction to the issuer should not be held liable on any implied warranty of title theory unless he knew of the forgery (Section 8-306).

3. A bond which has been registered as to principal and subsequently is returned to bearer form is, at that point, a "new security" within the meaning of this Section.

South Carolina Reporter's Comments to the 1991 Amendment

The proposed section makes no change to the effect of an unauthorized indorsement of a certificated security. The proposal extends the rule to unauthorized instructions ordering registration of pledge or transfer of an uncertificated security. The bona fide purchaser who receives an initial transaction statement receives the same protection as does the recipient of a certificated security from the issuer. The proposed revision also extends issuers' liability for improper registration to issuers who register a transfer, pledge, or release after receiving unauthorized instructions.

Section 36-8-312. Effect of guaranteeing signature, indorsement, or instruction.

(1) Any person guaranteeing a signature of an indorser of a certificated security warrants that at the time of signing:

(a) the signature was genuine;

(b) the signer was an appropriate person to indorse (Section 36-8-308); and

(c) the signer had legal capacity to sign.

(2) Any person guaranteeing a signature of the originator of an instruction warrants that at the time of signing:

(a) the signature was genuine;

(b) the signer was an appropriate person to originate the instruction (Section 36-8-308) if the person specified in the instruction as the registered owner or registered pledgee of the uncertificated security was, in fact, the registered owner or registered pledgee of the security, as to which fact the signature guarantor makes no warranty;

(c) the signer had legal capacity to sign; and

(d) the taxpayer identification number, if any, appearing on the instruction as that of the registered owner or registered pledgee was the taxpayer identification number of the signer or of the owner or pledgee for whom the signer was acting.

(3) Any person specially guaranteeing the signature of the originator of an instruction makes not only the warranties of a signature guarantor (subsection (2)) but also warrants that at the time the instruction is presented to the issuer:

(a) the person specified in the instruction as the registered owner or registered pledgee of the uncertificated security will be the registered owner or registered pledgee; and

(b) the transfer, pledge, or release of the uncertificated security requested in the instruction will be registered by the issuer free from all liens, security interests, restrictions, and claims other than those specified in the instruction.

(4) The guarantor under subsections (1) and (2) or the special guarantor under subsection (3) does not otherwise warrant the rightfulness of the particular transfer, pledge, or release.

(5) Any person guaranteeing an indorsement of a certificated security makes not only the warranties of a signature guarantor under subsection (1) but also warrants the rightfulness of the particular transfer in all respects.

(6) Any person guaranteeing an instruction requesting the transfer, pledge, or release of an uncertificated security makes not only the warranties of a special signature guarantor under subsection (3) but also warrants the rightfulness of the particular transfer, pledge, or release in all respects.

(7) No issuer may require a special guarantee of signature (subsection (3)), a guarantee of indorsement (subsection (5)) or a guarantee of instruction (subsection (6)) as a condition to registration of transfer, pledge, or release.

(8) The foregoing warranties are made to any person taking or dealing with the security in reliance on the guarantee and the guarantor is liable to the person for any loss resulting from breach of the warranties.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. In subsection (1) the commonly accepted liability of the guarantor of the signature of the indorser of a certificated security, which includes a warranty of the authority of the signer to sign for the holder as well as the capacity of the signer to sign, is made express so that issuers and their agents may have a clear understanding of the extent to which they may rely upon such guarantees.

2. Consistent with the coordinate provisions of Section 8-308, 8-401 and 8-404, this Section provides that a signature guarantor warrants as to facts "at the time of signing."

3. Subsection (2) sets forth the warranties that can reasonably be expected from the guarantor of the signature of the originator of an instruction, who, though familiar with the signer, does not have before him any evidence that the purported owner or pledgee is, in fact, the owner or pledgee of the subject uncertificated security. This is in contrast to the position of the person guaranteeing a signature on a certificate who can see a certificate in the signer's possession in the name of or indorsed to the signer or in blank. Thus, the warranty of appropriateness in clause (b) is expressly conditioned on the actual registration's conforming to that represented by the originator. If the signer purports to be the owner or pledgee, the guarantor under clause (b), warrants only his identity. If, however, the signer is acting in a representative capacity, the guarantor warrants both his identity and his authority to act for the purported owner or pledgee. The additional warranty of clause (d) as to the taxpayer identification number is intended to prevent error or fraud resulting from identical or similar names. The warranties of subsection (2) are intended to provide satisfactory assurance to the issuer who needs no warranty as to the facts of registration because he can ascertain those facts from his own records.

4. Subsection (3) sets forth a "special guarantee of signature" under which the guarantor additionally warrants both registered ownership or pledge and freedom from undisclosed defects of record. The guarantor of the signature of an indorser of a certificated security effectively makes these warranties to a purchaser for value on the evidence of a clean certificate issued in the name of the indorser, indorsed to the indorser or indorsed in blank. By specially guaranteeing under subsection (3), the guarantor warrants that the instruction will, when presented to the issuer, result in the requested registration free from defects not specified. It is contemplated that the special guarantee of signature will be used principally in brokerage transactions where the broker will be specially guaranteeing the signature on an instruction originated by his own customer. The broker's risk will be no greater than that of a broker who executes the sale of a security for his customer without the absolute assurance that his customer will deliver a clean certificate at settlement.

5. Subsection (4) makes clear that the warranties of a person guaranteeing a signature are limited to those specified in this section and do not include a general warranty of rightfulness. On the other hand subsections (5) and (6) make clear that a person guaranteeing an indorsement or an instruction does warrant that the transfer is rightful in all respects.

6. Subsection (7) makes clear what can be inferred from the combination of Sections 8-401 and 8-402, that the issuer may not require as a condition to transfer a guarantee of the indorsement or instruction nor may it require a special signature guarantee. But the voluntary furnishing of such a guarantee and its acceptance by the issuer may save the time and expense of an inquiry into possible adverse claims (cf. Section 8-403).

7. Subsection (8) is expressly designed to encourage issuers and their agents to rely upon signature guarantees and to avoid needless waste of time and duplication of effort in ascertaining the facts so guaranteed.

South Carolina Reporter's Comments to the 1991 Amendment

To this section, which delineates the warranties made by a signature guarantor or guarantor of an indorsement, the 1991 amendments added warranties made by a signature guarantor of an instruction, a special guarantor of the signature of an originator of an instruction and a guarantor of an instruction.

The amendments to subsection (1) do not make any changes in South Carolina law with respect to the warranties made by a person who guarantees the signature of an indorser of a certificated security. The former language disclaiming any warranty of rightfulness by a signature guarantor has been retained in subsection (4).

Subsection (2) establishes an analogous system of warranties made by a person who guarantees the signature of an originator of an instruction relating to an uncertificated security. Because the signature guarantor of an instruction does not have a certificate that specifies the registered owner or pledgee of the uncertificated security, there are some differences between the warranties made by the signature guarantor of an indorsement and the signature guarantor of an instruction. The signature guarantor conditions his warranty of appropriateness (subsection (2)(b)) on registration conforming to representations made by the originator. Without this condition, the signature guarantor would be required to warrant facts of which he has no evidence. If the signer purports to be the registered pledgee or owner, the signature guarantor warrants only the signer's identity. If the signer is a representative of the purported owner or pledgee, the signature guarantor warrants the signer's identity and his authority to act for the purported owner or pledgee. The additional warranty of subsection (2)(d), which warrants that the taxpayer identification number that appears on the instruction is that of the registered owner or pledgee, or his representative, is designed to prevent fraud or error which results from similar or identical names.

Subsection (3) describes the warranties made by a person who specially guarantees the signature of an originator of an instruction. This concept is new and does not apply to certificated securities. The guarantor warrants that, upon receipt of the instruction, the issuer will register the transfer, pledge, or release free from all defects not specified in the instruction. An issuer may not require a special guarantee as a condition of registration (subsection (7)). The special guarantee is contemplated for use in brokerage transactions. A broker who specially guarantees an instruction originated by his customer will be in a position analogous to that of a broker who executes the sale of a certificated security without absolute assurance that his customer will deliver a clean certificate.

Subsection (4) makes clear that a signature guarantor or a special guarantor does not warrant the rightfulness of the transfer or registration.

Subsection (6), which is new, provides for a guarantee of instruction analogous to the guarantee of indorsement of subsection (5). Such a guarantee, in addition to warranting the signature on an instruction, warrants the rightfulness of the transfer, pledge, or release in all respects.

Subsection (7) collects and extends the former rules that an issuer may not require any guarantees other than a signature guarantee of an indorsement or instruction. An issuer may not require a special guarantee (subsection (3)).

Section 36-8-313. When transfer to the purchaser occurs; a financial intermediary as bona fide purchaser; `financial intermediary'.

(1) Transfer of a security or a limited interest (including a security interest) therein to a purchaser occurs only:

(a) at the time he or a person designated by him acquires possession of a certificated security;

(b) at the time the transfer, pledge, or release of an uncertificated security is registered to him or a person designated by him;

(c) at the time his financial intermediary acquires possession of a certificated security specially indorsed to or issued in the name of the purchaser;

(d) at the time a financial intermediary, not a clearing corporation, sends him confirmation of the purchase and also by book entry or otherwise identifies as belonging to the purchaser:

(i) a specific certificated security in the financial intermediary's possession;

(ii) a quantity of securities that constitute or are part of a fungible bulk of certificated securities in the financial intermediary's possession or of uncertificated securities registered in the name of the financial intermediary;

(iii) a quantity of securities that constitute or are part of a fungible bulk of securities shown on the account of the financial intermediary on the books of another financial intermediary;

(e) with respect to an identified certificated security to be delivered while still in the possession of a third person, not a financial intermediary, at the time that person acknowledges that he holds for the purchaser;

(f) with respect to a specific uncertificated security the pledge or transfer of which has been registered to a third person, not a financial intermediary, at the time that person acknowledges that he holds for the purchaser;

(g) at the time appropriate entries to the account of the purchaser or a person designated by him on the books of a clearing corporation are made under Section 36-8-320; or

(h) with respect to the transfer of a security interest where the debtor has signed a security agreement containing a description of the security, at the time a written notification, which, in the case of the creation of the security interest, is signed by the debtor (which may be a copy of the security agreement) or which, in the case of the release or assignment of the security interest created pursuant to this paragraph, is signed by the secured party, is received by:

(i) a financial intermediary on whose books the interest of the transferor in the security appears;

(ii) a third person, not a financial intermediary, in possession of the security, if it is certificated;

(iii) a third person, not a financial intermediary, who is the registered owner of the security, if it is uncertificated and not subject to a registered pledge; or

(iv) a third person, not a financial intermediary, who is the registered pledgee of the security, if it is uncertificated and subject to a registered pledge;

(i) with respect to the transfer of a security interest where the transferor has signed a security agreement containing a description of the security, at the time new value is given by the secured party; or

(j) with respect to the transfer of a security interest where the secured party is a financial intermediary and the security has already been transferred to the financial intermediary under paragraphs (a), (b), (c), (d), or (g), at the time the transferor has signed a security agreement containing a description of the security and value is given by the secured party.

(2) The purchaser is the owner of a security held for him by a financial intermediary, but cannot be a bona fide purchaser of a security so held except in the circumstances specified in subparagraphs (c), (d)(i), and (g) of subsection (1). If a security so held is part of a fungible bulk, as in the circumstances specified in subparagraphs (d)(ii) and (d)(iii) of subsection (1), the purchaser is the owner of a proportionate property interest in the fungible bulk.

(3) Notice of an adverse claim received by the financial intermediary or by the purchaser after the financial intermediary takes delivery of a certificated security as a holder for value or after the transfer, pledge, or release of an uncertificated security has been registered free of the claim to a financial intermediary who has given value is not effective either as to the financial intermediary or as to the purchaser. However, as between the financial intermediary and the purchaser, the purchaser may demand transfer of an equivalent security as to which no notice of an adverse claim has been received.

(4) A `financial intermediary' is a bank, broker, clearing corporation, or other person (or the nominee of any of them) which in the ordinary course of its business maintains security accounts for its customers and is acting in that capacity. A financial intermediary may have a security interest in securities held in account for its customer.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 191, Uniform Negotiable Instruments Law; Section 22, Uniform Stock Transfer Act.

Purposes:

1. Subsection (1) lists the various methods by which legal rights in a security may be transferred from one person to another. Subsection (1) is expressly made applicable to limited interests, including security interests, as well as to entire interests. Compare Section 8-301(2). The word "only" in the first sentence is intended to provide that the methods of transfer listed are exclusive and that compliance with one of them is essential to a valid transfer. Transfers by operation of law are excepted because they are not transfers to a "purchaser".

2. This section is intended to bring the law of securities transfers into line with modern security trading practices and to allow for future development of those practices. It is recognized that most transfers are not effected through physical delivery of a certificate from seller to buyer, but rather through adjustments in balances of the parties' accounts with various intermediaries. Whether each intermediary has physical possession of a certificate to match every security it "holds" in its customer accounts is of no importance. So long as the intermediary exercises ultimate control, the securities may equally well take the form of an account with a securities depository, with another intermediary or with a transfer agent.

Thus a "financial intermediary," which as defined in subsection (4) must be a person that as part of its ordinary business "maintains security accounts" for its customers, must control the disposition of securities pursuant to its customers' orders but may exercise its control in any of a number of forms -- e.g., maintaining possession of certificated securities, being registered owner or registered pledgee of uncertificated securities, or having its own account with another financial intermediary. The important factor is that the intermediary must "hold" securities in an account of the customer. Notice that one who is a professional agent for holding securities accounts is not a financial intermediary with respect to any particular transaction in which it is not holding securities in an account for its customer. For example, a bank may as part of its business hold securities in accounts for its customers and therefore hold a financial intermediary with respect to those accounts; but if it takes a pledge of securities not held in account for the borrower to secure a loan, it is not a financial intermediary with respect to the securities pledged, since it holds the securities for its own account rather than for a customer. On the other hand, a broker is a financial intermediary with respect to a margin account, since even though it has a personal interest in the securities, it holds securities in an account for a customer.

3. Paragraphs (a) and (b) of subsection (1) describe the most basic forms of transfer for certificated and uncertificated securities respectively. Paragraph (d) is the basic provision for transfers effected through entries in the records of a financial intermediary. For a valid transfer to be effected there must be both an entry made in the records and a confirmation sent to the purchaser. Confirmation is required to ensure that evidence exists to prove that the securities are held by the intermediary in a customer account rather than for its own account. This provision is important principally with regard to potential insolvency of an intermediary. So long as the financial intermediary holds the securities in an account, the form in which it "holds" the securities makes no difference to the effectuation of a transfer. The form does, however, make a difference as to whether the purchaser can become a bona fide purchaser. See subsection (2) and Section 8-302(1)(c).

Paragraphs (e) and (f) of the subsection (1) provide for transfers of certificated and uncertificated securities held by a "third person" who is not a financial intermediary ... Acknowledgement by that person that he holds for the purchaser is the only condition to the transfer. Requiring acknowledgement forces the transferee to have the arrangement made explicit.

Paragraph (g) sets forth the requirements for a transfer of a security held by a clearing corporation. The transfer occurs when the appropriate entries are made. No confirmation is required, since the fact that a clear corporation holds no securities for its own account eliminates the possibility that customers' securities might be intermingled with securities owned by the clearing corporation.

Paragraphs (h), (i), and (j) relate only to transfers of security interests. Paragraph (h) is analogous to Section 9-305, which provides the rule for perfecting a security interest in property in the possession of a bailee. Paragraph (h) makes explicit that if the transferor's interest is in an account with a financial intermediary, that intermediary is the proper person to receive notice of the transfer regardless of whether it has physical possession or registration in its own name or whether it has securities in an account with another intermediary. The notification to the "bailee" must be written and must be signed by the debtor or by the secured party, according to whether the security interest is being created or released. The transfer is also conditioned upon the existence of a written security agreement signed by the debtor and adequately identifying the security. This requirement is included in paragraph (h) because Section 8-321, which sets forth the requirements for creation and perfection of security interests, gives no formality requirements other than the existence of a valid transfer.

Paragraph (i) is similar to Section 9-304(4). Read in conjunction with Section 8-321, it provides for "automatic" perfection for 21 days after new value is given with respect to a security interest as to which the debtor has signed a security agreement.

Paragraph (j) also deals only with the creation of security interests. In conjunction with Section 8-321, it provides that a financial intermediary that already controls disposition of a security may take a perfected security interest by giving value and having the debtor sign a security agreement.

4. Subsection (2) sets forth the principle that a purchaser is the owner of any security "held for him" -- i.e., controlled pursuant to his instructions -- by a financial intermediary. For example, a purchaser owns the securities in his custody account with a bank or his margin account with a broker. However, unless specific securities are separately identified as belonging to the purchaser, he cannot become a bona fide purchaser. A bona fide purchaser takes particular securities free of all claims and defenses. If bona fide purchaser status were given to those whose securities are held as part of a fungible bulk, there would be a possibility of inconsistent claims between two or more bona fide purchasers, since if the bulk should prove to be smaller than was expected, the claim of one or both must be compromised. An exception is made with respect to securities held by clearing corporations, since the fact that those entities hold only for customer accounts makes the chance of inconsistent claims small. Securities held by intermediaries pursuant to paragraphs (c) and (d)(i) of subsection (1) are identifiable as belonging to a particular customer, and the customer therefore can be a bona fide purchaser. Those customers that are not bona fide purchasers own a proportionate property interest in the bulk of securities of that nature held by the intermediary. Thus the group of customers together own the entire bulk, and in the event of insolvency of the intermediary they would as a group be secured to the extent the bulk covered their ownership claims. If the bulk were insufficient to provide each customer his full claim, each would share ratably.

5. Subsection (3) provides protection to both financial intermediary and customer whenever notice of an adverse claim is received after the intermediary takes delivery of a certificated security as a holder for value or after the transfer, pledge or release of an uncertificated security has been registered free of the claim to a financial intermediary. It also states the principle that as between the intermediary and its customer, the latter is entitled to a "clean" security, i.e., one as to which no notice of adverse claim has been received. Isham v. Post, 141 N.Y. 100, 35 N.E. 1084, 23 A.L.R. 90 (1894), which permitted a broker acting as agent to deliver to his customer a security as to which a claim of forgery was made after its receipt by the broker, is rejected. An intermediary is in the business of handling securities. It is better equipped to clear up any questions of genuineness or adverse claim. And even though it acts in whole or in part as agent for its customer, it is not permitted to pass such problems on to its customer. However, if the problem arises because of the customer's own act or omission to act, he is estopped to rely on it as a basis for rejecting the security. Section 1-103.

South Carolina Reporter's Comments to the 1991 Amendment

This is one of three sections -- the others being 36-8-317 and 36-8-321 -- which has been substantively amended beyond the introduction of the concept of uncertificated securities. Prior law has been changed by the substitution of the term "financial intermediary" for "broker". "Financial intermediary" is defined in subsection (4) to include any entity which maintains security accounts for its customers. Institutions, such as commercial banks, which serve customers in multiple ways would be financial intermediaries in respect of their customer accounts but not otherwise; not, for example, in respect of securities held as pledgee.

Prior law has also been changed by the broadening of the application of this section to include transfers of all interests in securities, including such limited interests as security interests. The word "only" in subsection (1) is intended to indicate that this section represents the only means of a valid transfer of any interest in a security, including security interests. Compliance with one of the methods of transfer described in this section is essential to a valid transfer. Transfers by operation of law are excepted, because they are not transfers to a "purchaser". Finally, subparagraphs (d)(ii) and (d)(iii) introduce the concept of transfers of parts of "fungible bulks" of securities and thereby make clear a proposition implied in former law. Prior law relating to certificated securities is otherwise unchanged by the 1991 amendments, and is to be found in subsections (a), (c), (d)(i), (e) and (g). Substitution of the concept of financial intermediary broadens the application of subsections (c) and (d)(i), and financial intermediaries have been deleted from the operation of subsection (e). The basic rule for timing of transfers of uncertificated securities is found in subsection (b), which provides that transfer occurs upon registration.

New subsection (f) is, for uncertificated securities, the analogue of subsection (e), providing that when a security is held by a third person, transfer to the transferee occurs upon acknowledgment by the third person that he holds for the transferee.

Subsection (d) applies to all financial intermediaries except clearing corporations. It requires, for a valid transfer, that there be both a book entry and a confirmation to the customer. The requirement of a confirmation is to provide protection, in the form of objective, physical evidence, of the transfer. This protection is thought to be useful in case of the insolvency of either the customer or the financial intermediary, to distinguish customer's securities from those of the financial intermediary held for their own account or as pledgee. By contrast, subparagraph (g), which applies only to clearing corporations, requires only a book entry, on the supposition that clearing corporations normally hold only customers' securities. A similar distinction was made between subsections (c) and (e) of prior law.

Under prior law, under subsection (2) a broker's customer could not be a "holder" unless the broker were holding a specific certificated security for the customer's account. Customers with interests in fungible bulks of securities could not, under that rule, be bona fide purchasers. New subsection (2) specifies the kinds of transfers in which a purchaser, whose securities are held by a financial intermediary, can become a bona fide purchaser. See also Section 36-8-302(1)(c).

Subsection (3) has been broadened to apply to all financial intermediaries protection for the customer against adverse claims noticed to a financial intermediary after the financial intermediary has achieved bona-fide-purchaser status. Similarly, it gives customers the right to demand a clean security from any financial intermediary who has received no notice of adverse claims.

Security interests. Under prior law, this section did not expressly apply to security interests and, in any event, was not made exclusive. Section 36-9-203(1) did permit the creation of an enforceable security interest upon (i) the giving of value, (ii) the creation of rights of the secured party in the collateral and (iii) either possession of the security by the secured party or the execution by the debtor of a written security agreement. Chapter 9 of this title also permitted an enforceable (but, normally, unperfected) security interest in securities by a written and signed security agreement.

New Section 36-8-321 now requires a transfer under Section 36-8-313(1) to create an enforceable security interest. This means that an enforceable security interest in securities can no longer be made by a written agreement alone. Section 36-8-321 now provides that a security interest transferred under Section 36-8-313 "pursuant to agreement by a transferror who has rights in the security to a transferee who has given value is a perfected security interest", except that interests transferred pursuant to subsection (1)(i) become unperfected after 21 days unless the requirements of some other provision of subsection (1) are satisfied first.

Subsection (1)(h) permits security interests in either certificated or uncertificated securities to be perfected by notice to a bailee, pursuant to a written agreement. A similar provision was made by Section 36-9-305 of prior law. Securities are now excluded from the coverage of Section 36-9-305.

Subsection (1)(h) requires receipt of the notice, which must be signed by the transferror to minimize the possibility of fraud, and describes who must receive the notice. Unlike subsections (1)(d), (e) or (f), no confirmation or acknowledgement is required to be made by the controlling party. The transfer is effective upon receipt of notice by the party required by the subsection to be notified.

Subsection (1)(i) is also new. It deals with automatic 21-day perfection, similar to that previously dealt with by Section 36-9-304(4). Subsection (1)(i) provides, in essence, that a "transfer" occurs when new value is given pursuant to written agreement, creating a security interest which, under Section 36-8-321(2), is automatically perfected for 21 days. Securities are now excluded from the coverage of Section 36-9-304(4).

Subsection (1)(j) applies to financial intermediaries who obtain security interests in securities held in customers' accounts. Examples would be a broker's margin account, or the pledging of securities held for a customer by a lending bank. Subsection (1)(j) requires a written agreement as protection for the customer.

Section 36-8-314. Duty to transfer, when completed.

(1) Unless otherwise agreed, if a sale of a security is made on an exchange or otherwise through brokers:

(a) the selling customer fulfills his duty to transfer at the time he: (i) places a certificated security in the possession of the selling broker or a person designated by the broker;

(ii) causes an uncertificated security to be registered in the name of the selling broker or a person designated by the broker;

(iii) if requested causes an acknowledgment to be made to the selling broker that a certificated or uncertificated security is held for the broker;

(iv) he places in the possession of the selling broker or of a person designated by the broker a transfer instruction for an uncertificated security, provided that the issuer does not refuse to register the requested transfer if the instruction is presented to the issuer for registration within thirty days thereafter; and

(b) the selling broker, including a correspondent broker acting for a selling customer, fulfills his duty to transfer at the time he:

(i) places a certificated security in the possession of the buying broker or a person designated by the buying broker;

(ii) causes an uncertificated security to be registered in the name of the buying broker or a person designated by the buying broker;

(iii) places in the possession of the buying broker or of a person designated by the buying broker a transfer instruction for an uncertificated security, provided that the issuer does not refuse to register the requested transfer if the instruction is presented to the issuer for registration within thirty days thereafter; or

(iv) effects clearance of the sale in accordance with the rules of the exchange on which the transaction took place.

(2) Except as provided in this section or unless otherwise agreed, a transferor's duty to transfer a security under a contract of purchase is not fulfilled until he:

(a) places a certificated security in form to be negotiated by the purchaser in the possession of the purchaser or of a person designated by him or at the purchaser's request causes an acknowledgment to be made to the purchaser that such a certificated security is held for him; or

(b) causes an uncertificated security to be registered in the name of the purchaser or a person designated by the purchaser; or

(c) if the purchaser requests, causes an acknowledgment to be made to the purchaser that a certificated or uncertificated security is held for the purchaser.

(3) Unless made on an exchange, a sale to a broker purchasing for his own account is within subsection (2) and not within subsection (1).

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. This section, together with the section on warranties to the purchaser (Section 8-306) and the section on transfer to the purchaser (Section 8-313), states the rights and duties of the parties involved in the transfer of a security from the original transferor to the ultimate purchaser. Particular emphasis has been placed upon transactions on organized exchanges or through brokers or dealers since they account for the great bulk of security sales. Normally the sale of a security on such an exchange or through brokers involves at least three intermediate transactions, and perhaps more, depending upon the number of correspondent brokers concerned. Rarely is the same security transferred through the entire transaction, and the duty of each intermediate party in the chain of transfer must therefore be stated. The increased use of clearing houses is also recognized - in subparagraph (1)(b)(iv) a selling broker is specifically permitted to make delivery by clearing the sale through such a clearing agency.

2. Subparagraphs (1)(a)(i), (1)(a)(ii), (1)(b)(i) and (1)(b)(ii) set forth the basic methods of fulfilling the duty to transfer in exchange transactions. The selling customer can fulfill his duty by physically delivering a certificated security to the selling broker or by effecting the transfer of an uncertificated security to him on the records of the issuer. Similarly the selling broker can satisfy its duty to transfer to the buying broker by delivering a certificate or causing registration of an uncertificated security. Further, with respect to exchange transactions subparagraphs (a)(iv) and (b)(iii) of subsection (1) provide that the duty to transfer can be condition- ally satisfied by the delivery of an instruction. Such delivery does not constitute complete performance if the instruction is timely presented for registration and the issuer refuses to comply with its request. The burden of timely presentment is placed on the recipient of the instruction and it is not intended that instructions so given will circulate in the manner in which certificated securities now commonly circulate by indorsement. It is contemplated that this method of performance will be commonly employed in transactions settled through brokers, within many cases, the selling broker specifically guaranteeing the signature of the originator of the instruction pursuant to Section 8-312(3).

3. Under subsection (2), absent agreement, one transferring a security to a purchaser in a transaction a security to a purchaser in a transaction not consummated on an exchange or through brokers must either make physical delivery of a certificated security or cause the registration of transfer of an uncertificated security. Further, at the request of the purchaser he can satisfy his duty by causing acknowledgement to be given to the purchaser by a third person who controls the security (Section 8-313(1)(d) and (e)). He cannot, for example, just put a certificated security in transit and impose the risk of loss upon the recipient; nor can he fulfill his duty by delivering to the purchaser a transfer instruction.

4. Subsection (3) covers the situation in which one in business as a broker is, in the particular transaction, his own customer. When he buys or sells for a customer other than himself, whether as agent or as principal, he is a "broker" under this Article (Section 8-303) and the transaction is within subsection (1) of this section.

South Carolina Reporter's Comments to the 1991 Amendment

Former law, applying only to certificated securities, provided four ways in which to satisfy a duty to deliver the security upon sale: By delivery of the certificate either to the buyer's broker or to one designated by such broker, by causing a third-party holder to make an acknowledgment to the purchaser that the security is held for him or by effecting clearance according to exchange rules. These methods of transfer are preserved in subparagraphs (1)(a)(i), (1)(b)(i), (2)(a), 1(a)(iii), 2(c) and (1)(b)(iv). As to these provisions, no substantive change has been made in this section.

Parallel methods of satisfying a duty to deliver an uncertificated security are provided in subsections (1)(a)(ii), (1)(b)(ii) and 2(b). These subsections permit the transferor to satisfy his duty by causing the registration of transfer of an uncertificated security to the purchaser or the purchaser's designee. Subsections (1)(a)(iii), 2(c) and (1)(b)(iv) have been extended to apply to uncertificated as well as to certificated securities.

Subsections (1)(a)(iv) and (1)(b)(iii), which apply to brokerage transactions only, permit a seller conditionally to satisfy his duty of delivery by delivery of an instruction to the buying broker. Delivery of the instruction for registration, even if timely, does not constitute complete performance if the issuer refuses to execute the instruction. For this reason, it is anticipated that in many cases the selling broker will specially guarantee the signature of the originator of the instruction as provided in section 36-8-312(3). It is not intended that such instructions circulate by indorsement, as if they were certificates.

Section 36-8-315. Action against transferee based upon wrongful transfer.

(1) Any person against whom the transfer of a security is wrongful for any reason, including his incapacity, as against anyone except a bona fide purchaser, may:

(a) reclaim possession of the certificated security wrongfully transferred;

(b) obtain possession of any new certificated security representing all or part of the same rights;

(c) compel the origination of an instruction to transfer to him or a person designated by him an uncertificated security constituting all or part of the same rights; or

(d) have damages.

(2) If the transfer is wrongful because of an unauthorized indorsement of a certificated security, the owner may also reclaim or obtain possession of the security or a new certificated security, even from a bona fide purchaser, if the ineffectiveness of the purported indorsement can be asserted against him under the provisions of this chapter on unauthorized indorsements (Section 36-8-311).

(3) The right to obtain or reclaim possession of a certificated security or to compel the origination of a transfer instruction may be specifically enforced and the transfer of a certificated or uncertificated security enjoined and a certificated security impounded pending the litigation.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 7. Uniform Stock Transfer Act.

Purposes:

1. This section grants to all owners of securities - certificated or uncertificated - a remedy for wrongful transfer. The general rule permitting an owner to reclaim possession of a certificated security wrongfully transferred is continued in paragraph (1)(a). Also, the owner of either a certificated or uncertificated security that has been wrongfully transferred may obtain a certificated security representing the same rights or may compel the origination of an effective transfer instruction for an uncertificated security comprising the same rights. Finally, the owner may have damages.

An exception is made, as in the prior law, in favor of bona fide purchasers. However, where the transfer is based upon a forged or unauthorized indorsement the exception operates in favor only of a good faith purchaser who is protected by Section 8-311. See that section and the comments thereto.

2. This section is not intended to exclude any rights an owner may have to damages for conversion under the case law. But see Section 8-318, which protects innocent brokers and other agents and bailees from liability for conversion.

South Carolina Reporter's Comments to the 1991 Amendment

The 1991 amendments made no change in former law relating to certificated securities. The scope of this section was broadened to include uncertificated securities, with forced registration of transfer serving as the analogue to re-delivery of certificates.

Section 36-8-316. Purchaser's right to requisites for registration of transfer, pledge, or release on books.

Unless otherwise agreed, the transferor of a certificated security or the transferor, pledgor, or pledgee of an uncertificated security on due demand must supply his purchaser with any proof of his authority to transfer, pledge, or release or with any other requisite necessary to obtain registration of the transfer, pledge, or release of the security but if the transfer, pledge, or release is not for value, a transferor, pledgor, or pledgee need not do so unless the purchaser furnishes the necessary expenses. Failure within a reasonable time to comply with a demand made gives the purchaser the right to reject or rescind the transfer, pledge, or release.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. The registration of the transfer of a security is a matter of vital importance to a purchaser and he is here provided with the means of obtaining such formal requirements for registration as signature guarantees, proof of authority, transfer tax stamps and the like. The transferor is the one in a position to supply most conveniently whatever documentation may be requisite for registration of transfer, and his duty to do so upon demand within a reasonable time is here stated affirmatively. But if the transfer is not for value the transferee should pay expenses. For these purposes a release from pledge by a secured party to a debtor is a transfer for value.

2. If the transferor's duty is not performed the transferee may reject or rescind the contract to transfer, pledge or release. He is not bound to do so - he may prefer his action for damages for breach of contract. If an essential item is peculiarly within the province of the transferor so that he is the only one who can obtain it, the purchaser may specifically enforce his right. Compare Section 8-307.

South Carolina Reporter's Comments to the 1991 Amendment

The 1991 amendments made no change in former law relating to certificated securities. The scope of this section was broadened to take into account transfers of registration, including registrations of pledge and release, of uncertificated securities.

Section 36-8-317. Creditors' Rights.

(1) Subject to the exceptions in subsections (3) and (4), no attachment or levy upon a certificated security or any share or other interest represented thereby which is outstanding is valid until the security is actually seized by the officer making the attachment or levy, but a certificated security which has been surrendered to the issuer may be reached by a creditor by legal process at the issuer's chief executive office in the United States.

(2) An uncertificated security registered in the name of the debtor may not be reached by a creditor except by legal process at the issuer's chief executive office in the United States.

(3) The interest of a debtor in a certificated security that is in the possession of a secured party not a financial intermediary or in an uncertificated security registered in the name of a secured party not a financial intermediary (or in the name of a nominee of the secured party) may be reached by a creditor by legal process upon the secured party.

(4) The interest of a debtor in a certificated security that is in the possession of or registered in the name of a financial intermediary or in an uncertificated security registered in the name of a financial intermediary may be reached by a creditor by legal process upon the financial intermediary on whose books the interests of the debtor appears.

(5) Unless otherwise provided by law, a creditor's lien upon the interest of a debtor in a security obtained pursuant to subsection (3) or (4) is not a restraint on the transfer of the security, free of the lien, to a third party for new value; but in the event of a transfer, the lien applies to the proceeds of the transfer in the hands of the secured party or financial intermediary, subject to any claims which have priority.

(6) A creditor whose debtor is the owner of a security is entitled to aid from courts of appropriate jurisdiction, by injunction or otherwise, in reaching the security or in satisfying the claim by means allowed at law or in equity in regard to property that cannot readily be reached by ordinary legal process.

Amended Official Comment

Prior Uniform Statutory Provisions:

Section 13, 14, Uniform Transfer Act.

Purposes:

1. In dealing with certificated securities the instrument itself is the vital thing, and therefore a valid levy cannot be made unless all possibility of the security's wrongfully finding its way into a transferee's hands has been removed. This can be accomplished only when the security is in the possession of a public officer, the issuer, or an independent third party. A debtor who has been enjoined can still transfer the security in contempt of court. See Overlock v. Jerone-Portland Copper Mining Co., 29 Ariz. 560, 243 P. 400 (1926). Therefore, although injunctive relief is provided in subsection (6) so that creditors may use this method to gain control of the security, the security itself must be reached to constitute a proper levy whenever the debtor has possession. The method used in Hodes v. Hodes, 176 Or. 102, 155 P.2d 564 (1945), where the Oregon court enjoined the transfer of a security in a safe deposit box in the state of Washington, directing a copy of the writ to be served upon the issuer, although not operative as an effective levy, is a method of reaching the security approved by the section.

2. Whenever the security is not in the form of a negotiable instrument in the debtor's possession, an effective levy can be made by serving process upon the person controlling transfer. Thus subsection (2) provides that when the security is uncertificated and registered in the debtor's name - or, what in effect is the same situation, whenever a certificated security is in the issuer's possession (Section 8-102(1)(c) - levy can be made only by serving process upon the issuer. The most logical place to serve the issuer would be the place where the transfer records are maintained, but that location might be difficult to identify, especially when the separate elements of a computer network might be situated in different places. The chief executive office is selected as the appropriate place by analogy to Section 9-103(3)(d). See Comment 5(c) to that section.

This section indicates only how attachment is to be made, not when it is legally justified. For that reason there is no conflict between this section and Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977).

3. An attachment filed at the issuer's office against certificate securities is ineffective unless the security itself has been surrendered to the issuer. The case law holdings that priority in time of transfer or attachment governed the validity of the levy are rejected under this Article as under the Stock Transfer Act. See for example, National Bank of the Pacific v. Western Pac. R. Co., 157 Cal. 573, 108 P. 676, 27 L.R.A., N.S., 987, 21 Ann. Cas. 1391 (1910).

4. Subsection (3) provides that when a security, either certificated or uncertificated, is controlled by a secured party, an effective lien can be established by service on the secured party. This section does not attempt to provide for rights as between the creditor and the secured party, as, for example, whether or when the secured party must liquidate the security.

Subsection (4) recognizes that securities are frequently held in account for customers by banks or brokers and that such securities may be registered not only in the name of the debtor but, more commonly, in street or other nominee name. Additionally, in such cases, the securities may have been commingled, repledged or deposited so that no particular security could be identified as that of the debtor. The subsection provides that the debtor's account can be reached by process upon the entity upon whose books the interest of the debtor appears. This appears to be the most effective way of preventing the transfer of the debtor's interest and thus protecting the creditor. It is only that entity that is aware of the debtor's interest, irrespective of where the securities are located or in what name they happen to be registered.

Subsection (5) expressly provides that securities in which the debtor's interest is reached pursuant to subsection (3) or (4) may be transferred for new value, free of the creditor's lien, but also provides that when and if they are transferred, the lien will be transferred to the proceeds. Nothing in subsection (5) is intended to validate any transfer that would otherwise constitute a fraudulent conveyance. Furthermore, subsection (5) is expressly subject to the procedural laws of the states, and no attempt has been made to prescribe the consequences of obtaining such a lien or the procedures for its enforcement.

5. Particular terms to describe creditor's process have been avoided in this section. This section is not intended to have any effect on the availability of garnishment or similar third-party process as a pre-judgment or post-judgment remedy. Cf. Sniadach v. Family Finance Corp., 395 U.S. 337, 23 L.Ed.2 349, 89 S.Ct. 1820 (1969); Fuentes v. Shevin, 407 U.S. 67, 32 L.Ed.2d 556, 92 S.Ct. 1983 (1972); Mitchell v. W.T. Grant Co., 416 U.S. 600, 40 L.Ed.2d 406 94 S.Ct. 1895 (1974). Such matters are a proper concern of the procedural rules of the states, subject, of course, to constitu- tional limitations.

6. This section deals with the problems of attaching or levying creditors. It does not apply in cases where a governmental agency, for reasons of public safety or the like, seeks to confiscate securities. See, for example, the situation in Silesian American Corp. v. Clark, 332 U.S. 469, 68 S.Ct. 179, 92 L.Ed. 81 (1947), upon which this section has no bearing.

South Carolina Reporter's Comments to the 1991 Amendment

This section has been amended as to certificated securities, as well as to include uncertificated securities, as a part of the movement of rules concerning security interests in securities from Chapter 9 of this title to Chapter 8.

Subsection (1) preserves the fundamental rule of former law, that a certificated security cannot be attached or levied upon until actually seized, whether in possession of the debtor in the case of outstanding securities, or, if the security has been surrendered to the issuer, by legal process directed at the issuer. Words have been added to make clear that such legal process must be directed to the issuer's "chief executive office in the United States." Subsection (1) has no application where a person other than the debtor or, through surrender, the issuer, has control of the security.

Subsection (2) embodies a rule for uncertificated securities analogous to that of subsection (1), permitting attachment or levy of an uncertificated security under control of the debtor to be accomplished only through legal process at the issuer's chief executive office in the United States.

Subsection (3) provides a method of creating an effective line upon securities in the hands of secured parties other than financial intermediaries: By service on the secured party in possession, in the case of certificated securities, or upon the secured party in whose name the security is registered, in the case of uncertificated securities. This section does not address relative rights between the creditor and the secured party.

Subsection (4) applies where the security is held by a financial intermediary by possession or registration. Holdings in street name are included. Subsection (4) provides that an effective lien may be created by process upon the entity on whose books the debtor's account appears.

Subsection (5) provides that a lien under this section will not impede transfer of the security for new value, but that the lien will attach to the proceeds. The security would pass free of the lien.

As under former law, procedures for obtaining liens, and the consequences of so doing, are not addressed in this Chapter, but are left to the general law of South Carolina.

Section 36-8-318. No conversion by good faith conduct.

An agent or bailee who in good faith (including observance of reasonable commercial standards if he is in the business of buying, selling, or otherwise dealing with securities) has received certificated securities and sold, pledged, or delivered them or has sold or caused the transfer or pledge of uncertificated securities over which he had control according to the instructions of his principal, is not liable for conversion or for participation in breach of fiduciary duty although the principal had no right so to deal with the securities.

Amended Official Comment

South Carolina Reporter's Comments to the 1991 Amendment

No change has been made in prior South Carolina law relating to certificated securities. This section has been broadened to apply to uncertificated securities.

Prior Uniform Statutory Provision:

None.

Purposes:

This section negates the liability of agents, including brokers, and of bailees for innocent conversion or participation in breach of fiduciary duty. Gruntal v. National Surety Co., 254 N.Y. 4658, 173 N.E. 682 (1930) is followed. Compare Section 7(a) of the Uniform Act for Simplification of Fiduciary Security Transfers.

Notice that the concept of good faith includes the objective element of observing reasonable commercial standards when the agent or bailee is in the business of dealing with securities.

Section 36-8-319. Statute of frauds.

A contract for the sale of securities is not enforceable by way of action or defense unless:

(a) there is some writing signed by the party against whom enforcement is sought or by his authorized agent or broker, sufficient to indicate that a contract has been made for sale of a stated quantity of described securities at a defined or stated price;

(b) delivery of a certificated security or transfer instruction has been accepted, or transfer of an uncertificated security has been registered and the transferee has failed to send written objection to the issuer within ten days after receipt of the initial transaction statement confirming the registration, or payment has been made but the contract is enforceable under this provision only to the extent of the delivery, registration, or payment;

(c) within a reasonable time a writing in confirmation of the sale or purchase and sufficient against the sender under paragraph (a) has been received by the party against whom enforcement is sought and he has failed to send written objection to its contents within ten days after its receipt; or

(d) the party against whom enforcement is sought admits in his pleading, testimony, or otherwise in court that a contract was made for sale of a stated quantity of described securities at a defined or stated price.

Amended Official Comment

Prior Uniform Statutory Provision:

Section 4, Uniform Sales Act (which was based on Section 17 of the statute of 29 Charles II).

Purposes:

1. This Section is intended to conform the statute of frauds provisions with regard to securities to the policy of the like provisions in Article 2 (Section 2-201). The chief difference is that this Section requires that quantity and price be specified.

2. What will be sufficient specification will vary with the circumstances. Where the transaction is on an exchange or an over-the-counter market where daily quotations of the security are available "100 shares X. Corp. comm. at market" should suffice. If there is no readily available standard to interest "at market" there is no "defined or stated price."

3. Paragraph (b) sets forth several actions which, if taken by a transferee, constitute manifestation of intent to purchase. The person receiving an initial transaction statement is given a period of 10 days to subject, since there is no overt manifestation of intent. While acceptance of delivery of a certificate or instruction is seen as an overt manifestation so that there is no grace period, in practice there will often be a question as to what constitutes acceptance by an organization. Failure to object to delivery within a reasonable period will be a factor to consider. Making payment is a more definite indication of intent.

4. Paragraph (c) is particularly important in the relationship of broker (Section 8-303) and customer. Normally a great volume of such business is done over the telephone. Orders are executed almost immediately and confirmed on the same or the next business day, usually on standard forms which as to the broker more than met the minimal requirements of paragraph (a). It is reasonable to require the customer to raise his objection, if any, within ten days after the confirmation has been received (Section 1-201).

South Carolina Reporter's Comments to the 1991 Amendment

No change has been made in this section so far as it relates to certificated securities. Coverage of the section has been broadened to include uncertificated securities. The part-performance exception of subsection (b) has been modified to include registration of transfer of an uncertificated security as an analogue to delivery of a certificate. Subsection (b) does not give the transferor an opportunity to object in writing, because, in order for transfer to have been accomplished, a writing must have originated with the transferor, putting transferors within subsection (a).

Section 36-8-320. Transfer or pledge within a central depository system.

(1) In addition to other methods, a transfer, pledge, or release of a security or any interest therein may be effected by the making of appropriate entries on the books of a clearing corporation reducing the account of the transferor, pledgor, or pledgee and increasing the account of the transferee, pledgee, or pledgor by the amount of the obligation or the number of shares or rights transferred, pledged, or released, if the security is shown on the account of a transferor, pledgor, or pledgee on the books of the clearing corporation; is subject to the control of the clearing corporation; and

(a) if certificated

(i) is in the custody of a clearing corporation, another clearing corporation, a custodian bank, or a nominee of any of them; and

(ii) is in bearer form or indorsed in blank by an appropriate person or registered in the name of the clearing corporation, or a nominee of any of them; or

(b) if uncertificated, is registered in the name of the clearing corporation, another clearing corporation, a custodian bank, or a nominee of any of them.

(2) Under this section entries may be with respect to like securities or interests therein as a part of a fungible bulk and may refer merely to a quantity of a particular security without reference to the name of the registered owner, certificate or bond number, or the like, and, in appropriate cases, may be on a net basis taking into account other transfers, pledges, or releases of the same security.

(3) A transfer under this section is effective (Section 36-8-313) and the purchaser acquires the rights of the transferor (Section 36-8-301). A pledge or release under this section is the transfer of a limited interest. If a pledge or the creation of a security interest is intended, the security interest is perfected at the time when both value is given by the pledgee and the appropriate entries are made (Section 36-8-321). A transferee or pledgee under this section may be a bona fide purchaser (Section 36-8-302).

(4) A transfer or pledge under this section is not a registration of transfer under Part 4 of this chapter.

(5) That entries made on the books of the clearing corporation as provided in subsection (1) are not appropriate does not affect the validity or effect of the entries or the liabilities or obligations of the clearing corporation to any person adversely affected thereby.

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. Consistent with the underlying purposes and policies of this Act "to permit the continued expansion of commercial practices through custom, usage and agreement of the parties" -- subsection (2)(b) of Section 1-102 -- this Section expressly authorizes a newly developing and commercially useful method of transferring or pledging securities on the organized securities markets, particularly among brokers and banks but not necessarily so limited. A clearing corporation is a special kind of financial intermediary. It holds securities on deposit from brokers, banks and other financial institutions, and clears trades among its depositors by making entries on its records. This section sets forth rules for determining when such entries are effective to constitute a transfer (Section 8-313(1)(g)).

The basic requirements, outlined in subsection (1), are that the security ultimately be subject to the control of the clearing corporation making the entries and that the security be in a form that would allow the clearing corporation (or a person acting subject to its orders) to have a new security registered in the name of, and transferred to, a purchaser. The latter requirement is specified in some detail. A certificated security must be in the custody of either the clearing corporation making the entries, another clearing corporation, a custodian bank or nominee; and it must either be in bearer form, registered in the name of the clearing corporation (or of one of the clearing corporations if there are more than one involved), or else indorsed so that the clearing corporation (or one of them) could obtain registration of transfer from the issuer. (The phrase "registered in the name of the clearing corporation" in subparagraph (1)(a)(ii) should be interpreted liberally so as to include restrictive indorsements and also to include registration or indorsement to either of the clearing corporations.) An uncertificated security must be registered in the name of a clearing corporation, a custodian bank or a nominee.

The requirement that the security be subject to the control of the clearing corporation means that if a certificated security is in the custody of, or an uncertificated security is registered in the name of, another clearing corporation or a custodian bank, the clearing corporation on whose records the entries in question are made must have the right to give orders to that person as to how and when to dispose of the security. That right may be an indirect one -- for example, a security is subject to the control of Clearing Corporation A if the security is certificated and has been deposited in A's account with Clearing Corporation B, which in turn has deposited the security in its account with C, which may be either another clearing corporation or a custodian bank. Clearing Corporation A can give orders to B which in turn can give orders to C.

2. Subsection (2) makes clear that securities of the same issue may be treated as fungible interests, and that entries may be merely debits and credits to the accounts of the participants.

3. Subsection (4) makes clear that transfer, pledge or release under this Section does not affect the registration of ownership or pledge on the issuer's records.

Subsection (5) states the entries made pursuant to this Section are effective to transfer the subject securities regardless of the fact that the entries were not appropriate. A person wronged by an inappropriate transfer may pursue his remedies against the transferee and against the clearing corporation. The nature of the rights between the clearing corporation and the participants is left to private contract and case law. See Section 8-315 as to actions against the transferee.

South Carolina Reporter's Comments to the 1991 Amendment

No change has been made in former law relating to certificated securities, but parts of this section have been rewritten for purposes of clarification. Subsection (1) has been rewritten to clarify that it applies to securities which one clearing corporation controls though its account in another clearing corporation. Subsection (3) has been rewritten to address certain consequences directly, rather than by analogy.

The section has been broadened to contemplate uncerificated securities. This will permit several simplifications in the operations of securities depositories: (i) Customers will be able to add to their accounts without delivery of certificates. (ii) Depositories will be able to maintain holdings of securities in uncertificated form, reducing the burden of custody. (iii) Depositories, now able to transfer securities to customers in uncertificated form, will be able to reduce physical inventories.

Section 36-8-321. Enforceability, attachment, perfection, and termination of security interests.

(1) A security interest in a security is enforceable and can attach only if it is transferred to the secured party or a person designated by him pursuant to a provision of Section 36-8-313(1).

(2) A security interest so transferred pursuant to agreement by a transferor who has rights in the security to a transferee who has given value is a perfected security interest, but a security interest that has been transferred solely under subparagraph (i) of Section 36-8-313(1) becomes unperfected after twenty-one days unless, within that time, the requirements for transfer under any other provision of Section 36-8-313(1) are satisfied.

(3) A security interest in a security is subject to the provisions of Chapter 9 of this title, but:

(a) no filing is required to perfect the security interest; and

(b) no written security agreement signed by the debtor is necessary to make the security interest enforceable, except as provided in paragraph (h), (i), or (j) of Section 36-8-313(1). The secured party has the rights and duties provided under Section 36-9-207, to the extent they are applicable, whether or not the security is certificated, and, if certificated, whether or not it is in his possession.

(4) Unless otherwise agreed, a security interest in a security is terminated by transfer to the debtor or a person designated by him pursuant to a provision of Section 36-8-313(1). If a security is thus transferred, the security interest, if not terminated, becomes unperfected unless the security is certificated and is delivered to the debtor for the purpose of ultimate sale or exchange or presentation, collection, renewal, or registration of transfer. In that case, the security interest becomes unperfected after twenty-one days unless, within that time, the security (or securities for which it has been exchanged) is transferred to the secured party or a person designated by him pursuant to a provision of Section 36-8-313(1).

Amended Official Comment

Prior Uniform Statutory Provision:

None.

Purposes:

1. This section is intended to govern the creation, perfection and termination of security interests in all securities, certificated and uncertificated. Subsection (1) requires an effective transfer under Section 8-313(1) as formal evidence of the security interest. The requirement that there be formal evidence of the creation of a security interest in collateral other than securities can be satisfied by having the debtor sign a security agreement or by having the secured party take possession of the collateral. Section 9-203. Transfers pursuant to paragraphs (a)-(g) of Section 8-313(1) all involve either delivery to the secured party or else some other specific event that is the functional equivalent of delivery. Transfers pursuant to paragraphs (h)-(j) do not involve any event that serves that function, but they require a security agreement signed by the debtor.

2. Subsection (2) provides that when value has been given and the debtor has rights in the collateral, an appropriate transfer will result not only in an enforceable security interest but also in one that is perfected. Under this section, an unperfected security interest in a security cannot be created. A security interest created by transfer under Section 8-313(1)(i), however, may become unperfected if, within 21 days, the requirements of another method of effective transfer are not satisfied.

3. Subsection (3) expressly makes a security interest in securities subject to the provisions of Article 9 except those provisions dealing with the creation and perfection of security interests. Those matters are governed by these sections. In addition, the provisions of Section 9-207, which govern the rights and duties of the pledgee of a certificated security, are extended, to the extent they are applicable, to all secured parties, whether or not the possession of a certificated security is involved. Thus, in the absence of agreement to the contrary, the secured party, who might be the registered owner of an uncertificated security, would have the duty to remit dividends he received to the debtor or to apply them in reduction of the obligation under Section 9-207(2)(c).

4. Subsection (4) provides that a security interest is terminated by retransfer to the debtor unless the parties otherwise agree. Even when the parties agree that the security interest is to continue, it will become unperfected unless there is delivery of a certificated security for the limited purposes described in the second sentence. Compare Section 9-304(5) and (6).

South Carolina Reporter's Comments to the 1991 Amendment

This section is entirely new. Together with new Sections 36-8-313 and 36-8-317, it serves to move the main provisions governing creation and perfection of security interests in securities from Chapter 9 of this title to Chapter 8. This section governs the creation, perfection and termination of security interests in certificated and uncertificated securities.

Subsection (1) provides that an enforceable security interest cannot be created without an effective transfer under Section 36-8-313(1). Section 36-9-203(1), which permits an enforceable security interest to be created without possession if the debtor has signed a security agreement, has been made expressly subject to this section.

Subsection (2) establishes the elements of perfection of a security interest in securities. Perfection occurs upon an appropriate transfer, where the debtor has rights in the securities and value has been given. In effect, an unperfected security interest cannot be created in a security. Perfection under Section 36-8-313(1)(i) will lapse after 21 days, however, unless some other method of transfer under Section 36-8-313 has been accomplished first. This result is the same as under Section 36-9-304(4); securities are now expressly excluded from the operation of that section.

Subsection (3) provides that creation and perfection of security interests in securities are to be governed by Article 8, and all other matters relating to security interests in securities remain subject to Chapter 9. In addition, Section 36-9-207, which establishes the rights and duties of the pledgee of a certificated security, is expanded to apply to all secured parties.

Pursuant to subsection (4), a security interest is terminated upon its transfer to the debtor, unless the parties have agreed otherwise, and, even so, the security interest will cease to be perfected unless there is a delivery of a certificated security to the debtor for the purposes described in the second sentence of subsection (4). Such provisional perfection is limited in time to 21 days unless the security is redelivered to the secured party; see also Section 36-9-304(5).

Section 36-8-401. Duty of issuer to register transfer, pledge, or release.

(1) If a certificated security in registered form is presented to the issuer with a request to register transfer or an instruction is presented to the issuer with a request to register transfer, pledge, or release, the issuer shall register the transfer, pledge, or release as requested if:

(a) the security is indorsed or the instruction was originated by the appropriate person or persons (Section 36-8-308);

(b) reasonable assurance is given that those indorsements or instructions are genuine and effective (Section 36-8-402);

(c) the issuer has no duty as to adverse claims or has discharged the duty (Section 36-8-403);

(d) any applicable law relating to the collection of taxes has been complied with; and

(e) the transfer, pledge, or release is in fact rightful or is to a bona fide purchaser.

(2) If an issuer is under a duty to register a transfer, pledge, or release of a security, the issuer is also liable to the person presenting a certificated security or an instruction for registration or his principal for loss resulting from any unreasonable delay in registration or from failure or refusal to register the transfer, pledge, or release.

Prior Uniform Statutory Provision:

None.

Purposes:

1. Section 8-201(3) defines "issuer" as used in this Part 4 as the person on whose behalf transfer books are maintained. Transfer agents, registrars or the like have rights and duties under this Part within the scope of their respective functions, similar to those of the issuer (Section 8-406).

2. There is a substantial and heterogeneous body of case law as to the issuer's duty to register a transfer and as to his ability for improper registration, e.g., on an unauthorized signature (Section 8-311), or where the indorsement is not that of an appropriate person (Section 8-308), and generally under circumstances where the issuer is deemed to have had notice of an adverse claim (Section 8-302) and thus of the possible wrongfulness of the transfer.

In general this section and those which follow it continue the well-settled rules found in the case law as to duty to register and as to liability for improper registration on an unauthorized signature, or where the indorsement is not that of an appropriate person. They also extend the application of those rules to uncertificated securities.

In all other areas, the issuer's potential liability for wrongful registration of transfer has been substantially reduced. The rules found in the case law are drastically modified in furtherance of a considered policy to speed up the registration process by narrowing the field in which the issuer historically has first sought to assure itself that it cannot be held to be on notice of an adverse claim, and, failing that assurance, has imposed rigorous requirements of proof that there is no possible impropriety.

3. This section states the basic duty of the issuer to register transfers. It states that a duty exists, but only if certain preconditions exist. If any of the preconditions do not exist, there is no duty to register transfer. If the indorsement on a security is a forgery, there is no duty. If the instruction to transfer an uncertificated security is not originated by an appropriate person, there is no duty. If there has not been compliance with applicable tax laws, there is no duty. If the security is properly indorsed but nevertheless the transfer is in fact wrongful, there is no duty unless the transfer is to a bona fide purchaser (and the other preconditions exist). Cf. Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952), certiorari denied 73 S.Ct. 89, 344 U.S. 856, 97 L.Ed. 664.

This section does not constitute a mandate that all preconditions must be met before the issuer registers a transfer. If it so desires, the issuer can waive the reasonable assurances specified in paragraph (b). If it has confidence in the responsibility of the persons requesting transfer, it can ignore questions of compliance with tax laws. If it has no duty to inquire into or otherwise recognize adverse claims, it can and it should register transfer without inquiry as to the rightfulness of a transfer.

Sections 8-402 and 8-403 are the sections dealing with the specific rules as to assurances and duty to inquire.

4. By subsection (2) the person entitled to registration may not only compel it but may hold the issuer liable in damages for unreasonable delay.

5. See Section 8-404 as to the issuer's liability for wrongful registration of transfer.

South Carolina Reporter's Comment to the 1991 Amendment

The proposed revision makes no change to an issuer's duty under South Carolina law to register the transfer of a certificated security. New language has been inserted to create parallel duties for an issuer who receives an instruction to register the transfer, pledge, or release of an uncertificated security, if the instruction meets the requirements of paragraphs (a), (b), (c), (d), and (e) of subsection (1). Subsection (2) extends an issuer's liability for loss caused by delay or failure to register the transfer of a certificated security to situations in which the issuer has unreasonably delayed to register the transfer, pledge, or release of an uncertificated security.

Section 36-8-402. Assurance that indorsements and instructions are effective.

(1) The issuer may require the following assurance that each necessary indorsement of a certificated security or each instruction (Section 36-8-308) is genuine and effective:

(a) in all cases, a guarantee of the signature (subsection (1) or (2) of Section 36-8-312) of the person indorsing a certificated security or originating an instruction including, in the case of an instruction, a warranty of the taxpayer identification number or, in the absence thereof, other reasonable assurance of identity;

(b) if the indorsement is made or the instruction is originated by an agent, appropriate assurance of authority to sign;

(c) if the indorsement is made or the instruction is originated by a fiduciary, appropriate evidence of appointment or incumbency;

(d) if there is more than one fiduciary, reasonable assurance that all who are required to sign have done so; and

(e) if the indorsement is made or the instruction is originated by a person not covered by any of the foregoing, assurance appropriate to the case corresponding as nearly as may be to the foregoing.

(2) A `guarantee of the signature' in subsection (1) means a guarantee signed by or on behalf of a person reasonably believed by the issuer to be responsible. The issuer may adopt standards with respect to responsibility if they are not manifestly unreasonable.

(3) `Appropriate evidence of appointment of incumbency' in subsection (1) means:

(a) in the case of a fiduciary appointed or qualified by a court, a certificate issued by or under the direction or supervision of that court or an officer thereof and dated within sixty days before the date of presentation for transfer, pledge, or release; or

(b) in any other case, a copy of a document showing the appointment or a certificate issued by or on behalf of a person reasonably believed by the issuer to be responsible or, in the absence of that document or certificate, other evidence reasonably deemed by the issuer to be appropriate. The issuer may adopt standards with respect to the evidence they are not manifestly unreasonable. The issuer is not charged with notice of the contents of any document obtained pursuant to this paragraph (b) except to the extent that the contents relate directly to the appointment or incumbency.

(4) The issuer may elect to require reasonable assurance beyond that specified in this section but if it does so and, for a purpose other than that specified in subsection (3)(b), both requires and obtains a copy of a will, trust, indenture, articles of copartnership, bylaws, or other controlling instrument, it is charged with notice of all matters contained therein affecting the transfer, pledge, or release.

Prior Uniform Statutory Provision:

None.

Purposes:

1. As is noted in the Comment to Section 8-401, the issuer is absolutely liable for wrongful registration of transfer when the signature of the indorser if unauthorized or is not that of an appropriate person or when an instruction is not originated by an appropriate person. The issuer is entitled to require such assurance as is reasonable under the circumstances that all necessary indorsements are effective, and thus to minimize its risk. This section establishes the requirements the issuer may make in terms of documentation which, except in the rarest of instances, should be easily furnished. If a demand for further assurance is reasonable under the circumstances, subsection (4) applies.

2. Under subsection (1)(a) the issuer may require in all cases a guarantee of signature (Section 8-312). When an instruction is presented the issuer always may require either a warranty of taxpayer identification number or some other reasonable assurance as to the identity of the originator. Subsection (2) allows the issuer to require that the person making these guarantees be one reasonably believed to be responsible, and the issuer may adopt standards of responsibility which are not manifestly unreasonable. In this aspect this section approves the practice of the organized securities markets.

3. This section, by paragraphs (b) through (e) of subsection (1), permits the issuer to seek confirmation of the effectiveness of the indorsement or instruction. The permitted methods act as a double check on matters which are within the warranties of the guarantor of signature. See Section 8-312. In addition, to some extent they act also as a check on the right to transfer (i.e., to deliver the indorsed certificated security or to transmit an instruction). Thus, an agent may be required to submit his power of attorney, a corporation to submit a certified resolution evidencing the authority of its signing officer to sign, an executor or administrator to submit the usual "short-form certificate", etc. But failure of a fiduciary to obtain court approval of the transferor to comply with other requirements does not make his signature unauthorized. Section 8-308(11). Hence court orders and other controlling instruments are omitted from subsection (1).

Subsection (1)(c) authorizes the issuer to require "appropriate evidence" of appointment or incumbency, and subsection (3) indicates what evidence will be "appropriate". In the case of a fiduciary appointed or qualified by a court that evidence will be a court certificate dated within sixty days before the date of presentation. Where the fiduciary is not appointed or qualified by a court, as in the case of a successor trustee, subsection (3)(b) applies. Compare Section of the Uniform Act for Simplification of Fiduciary Security Transfers. If the security is registered in the name of the fiduciary, the issuer may under Section 8-403(3)(a) assume without inquiry that the fiduciary status continues until written notice to the contrary is received. Hence no evidence of appointment or incumbency is needed unless such a notice has been received. Compare Section 2 of the Uniform Act for Simplification of Fiduciary Security Transfers.

Where subsection (3)(b) applies, the issuer may require a copy of a trust instrument or other document showing the appointment, or it may require the certificate of a responsible person. In the absence of such a document or certificate, it may require other appropriate evidence. If a document is obtained solely as "appropriate evidence of appointment or incumbency" under subsection (3)(b), the issuer is not charged with notice of its contents except to the extent that the contents relate directly to the appointment or incumbency. But if the document is obtained for any other purpose, the issuer may be charged under subsection (4). See Point 6 below.

4. There are many other types of situations where, under the case law, the issuer would be deemed to have notice of possible adverse claims, and therefore would register transfer at its peril. Typical are: knowledge that the registered owner is dead, the fact that he is described or identifiable as a fiduciary, etc. Perhaps the most ubiquitous is where a will, trust indenture or other controlling instrument is on file with the issuer or transfer agent for some other purpose (e.g., in the banking as distinct from the corporate agency department of a trust company), but, unless specifically asked for, would not come to the attention of the officers responsible for the registration of security transfers. Here, under the cases, there is an area of liability based upon notice of possible adverse claims affecting the right to deliver the security, an area to which the warranties of the guarantor of signature specifically do not extend. See Section 8-312(4). Also, it is the area in which in the past issuers and their agents, fearing possible lawsuits based upon unauthorized transfers by fiduciaries and the like, have made it a practice to demand complete and convincing evidence that the transfer is proper in all of its aspects. Section 8-403 and 8-404 strictly circumscribe the issuer's liability in such cases, and this section therefore makes no provisions for assurances to cover them.

5. Circumstances may indicate that a necessary signature was unauthorized or was not that of an appropriate person. Such circumstances would be ignored at risk of absolute liability, and to minimize that risk that issuer may properly exercise the option given by subsection (4) to require assurance beyond that specified in subsection (1). On the other hand, the facts at hand may reflect only on the rightfulness of the transfer. Such facts do not operate, as they did under prior law, automatically to create a duty of inquiry, unless there is timely notification of the existence of an adverse claim. See Section 8-403(1) and (4). If there is a duty of inquiry under Section 8-403, the issuer may follow the procedure provided in Section 8-403(2) or (5), or it may discharge the duty of inquiry as to certificated security "by any reasonable means". The same is true if the issuer's overriding duty to conduct its functions in good faith (Section 1-203) comes into play - e.g., where the certificates security is indorsed or the instruction is originated by a person known to the employee handling the transaction for the issuer to be wanted by the police.

6. Specifically to implement the policy of this Act to discourage issuers from requiring excessive documentation, subsection (4) provides that if the issuer elects to require additional documentation for any purpose other than to obtain "appropriate evidence of appointment or incumbency" under subsection (3)(b) and both requires and obtains a copy of a will, trust, indenture, article of co-partnership, by-laws or other controlling instrument, it is charged with notice of all matters contained therein affecting the transfer. It follows that an instrument voluntarily submitted, without having been "required" by the issuer, may be returned without examination.

But if the issuer has no duty to inquire and demands more than reasonable assurance that the instruction or the certificated security may refuse the demand and sue for improper refusal to register Section 8-401.

South Carolina Reporter's Comment to the 1991 Amendment

This section makes no change to South Carolina law with respect to the issuer's ability to demand assurances of the effectiveness of the indorsement of an uncertificated security. New language is added to permit issuers to require similar assurances that an instruction is effective. In addition, a new provision is added to subsection (1)(a) permitting issuers to require reasonable proof of identity of persons originating instructions. This new provision relates only to instructions and therefor only to uncertificated securities.

Section 36-8-403. Issuer's Duty as to Adverse Claims.

(1) An issuer to whom a certificated security is presented for registra- tion shall inquire into adverse claims if:

(a) a written notification of an adverse claim is received at a time and in a manner affording the issuer a reasonable opportunity to act on it prior to the issuance of a new, reissued, or reregistered certificated security and the notification identifies the claimant, the registered owner, and the issue of which the security is a part, and provides an address for communications directed to the claimant; or

(b) the issuer is charged with notice of an adverse claim from a controlling instrument it has elected to require under subsection (4) of Section 36-8-402.

(2) The issuer may discharge any duty of inquiry by any reasonable means, including notifying an adverse claimant by registered or certified mail at the address furnished by him or, if there be no such address, at his residence or regular place of business that the certificated security has been presented for registration of transfer by a named person, and that the transfer will be registered unless within thirty days from the date of mailing the notification, either:

(a) an appropriate restraining order, injunction, or other process issues from a court of competent jurisdiction; or

(b) there is filed with the issuer an indemnity bond sufficient in the issuer's judgment to protect the issuer and any transfer agent, registrar, or other agent of the issuer involved, from any loss it or they may suffer by complying with the adverse claim.

(3) Unless an issuer is charged with notice of an adverse claim from a controlling instrument which it has elected to require under subsection (4) of Section 36-8-402 or receives notification of an adverse claim under subsection (1) of this section, if a certificated security presented for registration is indorsed by the appropriate person or persons the issuer is under no duty to inquire into adverse claims. In particular:

(a) an issuer registering a certificated security in the name of a person who is a fiduciary or who is described as a fiduciary is not bound to inquire into the existence, extent, or correct description of the fiduciary relationship; and thereafter the issuer may assume without inquiry that the newly registered owner continues to be the fiduciary until the issuer receives written notice that the fiduciary is no longer acting as such with respect to the particular security;

(b) an issuer registering transfer on an indorsement by a fiduciary is not bound to inquire whether the transfer is made in compliance with a controlling instrument or with the law of the state having jurisdiction of the fiduciary relationship, including any law requiring the fiduciary to obtain court approval of the transfer; and

(c) the issuer is not charged with notice of the contents of any court record or file or other recorded or unrecorded document even though the document is in its possession and even though the transfer is made on the indorsement of a fiduciary to the fiduciary himself or to his nominee.

(4) An issuer is under no duty as to adverse claims with respect to an uncertificated security except:

(a) claims embodied in a restraining order, injunction, or other legal process served upon the issuer if the process was served at a time and in a manner affording the issuer a reasonable opportunity to act on it in accordance with the requirements of subsection (5);

(b) claims of which the issuer has received a written notification from the registered owner or the registered pledgee if the notification was received at a time and in a manner affording the issuer a reasonable opportunity to act on it in accordance with the requirements of subsection (5);

(c) claims (including restrictions on transfer not imposed by the issuer) to which the registration of transfer to the present registered owner was subject and were so noted in the initial transaction statement sent to him; and

(d) claims as to which an issuer is charged with notice from a controlling instrument which it has elected to require under subsection (4) of Section 36-8-402.

(5) If the issuer of an uncertificated security is under a duty as to an adverse claim, he discharges that duty by:

(a) including a notation of the claim in any statements sent with respect to the security under subsections (3), (6), and (7) of Section 36-8-408; and

(b) refusing to register the transfer or pledge of the security unless the nature of the claim does not preclude transfer or pledge subject thereto.

(6) If the transfer or pledge of the security is registered subject to an adverse claim, a notation of the claim must be included in the initial transaction statement and all subsequent statements sent to the transferee and pledgee under Section 36-8-408.

(7) Notwithstanding subsections (4) and (5), if an uncertificated security was subject to a registered pledge at the time the issuer first came under a duty as to a particular adverse claim, the issuer has no duty as to that claim if transfer of the security is requested by the registered pledgee or an appropriate person acting for the registered pledgee unless:

(a) the claim was embodied in legal process which expressly provides otherwise;

(b) the claim was asserted in a written notification from the registered pledgee;

(c) the claim was one as to which the issuer was charged with notice from a controlling instrument it required under subsection (4) of Section 36-8-402 in connection with the pledgee's request for transfer; or

(d) the transfer requested is to the registered owner.

Prior Uniform Statutory Provision:

Section 3, Uniform Fiduciaries Act.

Purposes:

1. In consonance with the general policy of this Part 4 (See the Comments to Sections 8-401 and 8-402), and subject always to the overriding duty of good faith in the performance of its functions (Section 1-203) this section limits the issuer's duty as to adverse claims to the specific situations stated in subsections (1) as to certificated securities and (4) as to uncertificated securities.

Paragraph (a) of subsection (1) is the ordinary "stop transfer" notice commonly resorted to by the owner of a lost or stolen certificated security or in a situation where breach of trust, disregard of a valid restriction on transfer, or other improper action is feared to have occurred or to be about to occur.

Notification under paragraph (a) of subsection (1) must be "written" (Section 1-201(46)) and must be "received" (Section 1-201(26)) "at a time and in a manner which affords the issuer a reasonable opportunity to act on it prior to the issuance of a new, reissued, or re-registered security". Cf. Section 1-201(27). Its contents must be such as to make reasonably clear who makes the claim and with respect to what security and where communications may be addressed to him. Compare Section 5(a) of the Uniform Act for Simplification of Fiduciary Security Transfers.

A notification once so received is easily keyed to the appropriate records. Therefore, no defense of "forgotten notice", possibly relevant on the issue of bona fide purchase as to bearer form securities, is available under this section.

As to paragraph (b) see the Comments to Section 8-402.

2. With respect to certificated securities subsection (2) does not limit the issuer to any specific method of discharging a duty of inquiry. It may use "any reasonable means" including the procedure spelled out in the subsection. That procedure, based on a New York statute respecting adverse claims to bank deposits and on commercial practice, should be effective in the large majority of cases to protect the rights of all interested parties and relieve the issuer of further responsibility. No delay during the thirty-day period will be "reasonable" under Section 8-401(2).

3. Subsection (3) is the converse of subsection (1) and spells out some specific situations in which under prior law a duty to inquire existed or may have existed. Compare Sections 2 and 3 of the Uniform Act for Simplification of Fiduciary Security Transfers. As to the effect of subsection (3)(a) on the effectiveness of an indorsement, see the Comment to Section 8-404.

4. Transfer of uncertificated securities does not take place until registration so that any mandated delay seriously impairs an owner's ability to sell or pledge his security. Since a prudent purchaser may not pay unless he receives a clean initial transaction statement, the effect of a rule giving the issuer a duty to inquire any time it received any written notice of an adverse claim, however frivolous, would be disastrous. Because of this important difference between certificated and uncertificated securities, there are separate provisions as to duty to inquire. Subsections (4), (5), (6), and (7) apply only to uncertificated securities and are intended to accommodate the interests of owners, purchasers, issuers, and adverse claimants.

Subsection (4) states that an issuer has no duty as to adverse claims except in four described situations. Mere written notifications result in a duty only when they come from existing owners and pledgees and are analogous to stop payment orders on checks. There is a duty as to claims to which the security was subject when it was purchased by the present owner, a situation with which the owner is already familiar. There is a duty as to claims arising from the issuer's request for documentation under Section 8-402.

The significant difference of subsection (4) from subsection (1) is that claims asserted by third parties, in order to impose a duty on the issuer, must be supported by legal process. This will constitute assurance that the claim is not merely frivolous and that its assertion is more than harassment. In most cases the owner will have been notified and have had the opportunity to be heard. While claims thus asserted may ultimately be adjudged invalid, the owner will not be tied up by a bare written communication from the claimant. On the other hand, while a more substantial burden is imposed on the claimant, there is a channel through which he can assert his claim before the rights of a bona fide purchaser intervene.

If the claimant sues the owner in a court that has no jurisdiction over the issuer and an injunction is issued against the owner forbidding him to transfer the security, the issuer has a duty under paragraph (4)(a) if it receives an authenticated copy of the order. Even though in that situation the order is not directed to the issuer it is "legal process served upon the issuer" for purposes of paragraph (4)(a). There is sufficient guarantee that the complaint is not frivolous. Further, the issuer might breach its duty to act in good faith if it registered a transfer in spite of such clear evidence of impropriety.

5. Once it is established that the claim imposes a duty on the issuer, notations of the claim must be contained in all statements sent with respect to the security, and registration of transfer or pledge must be refused unless the nature of the claim is consistent with transfer or pledge subject to the claim. When transfer or pledge is registered subject to the claim, subsection (6) requires that the claim be noted in all statements sent to the transferee or pledgee.

Subsection (7) deals with the situation in which an uncertificated security is already subject to as registered pledge when the issuer first learns of an adverse claim as to which it has a duty. In that event, the registered pledgee who became such without notice of the claim may be a bona fide purchaser with the right to transfer the security free of the claim. That right cannot be curtailed by the claim of a third party (including the registered owner) unless legal process embodying the claim expressly deals with the pledgee's interest. There is obviously no curtailment of the pledgee's right when the claim is asserted by the pledgee himself. It should be curtailed if the pledgee's right to obtain registration of transfer is called into question by a controlling instrument which the issuer elects to require before acting on the pledgee's request. Since the transfer to the registered owner is the equivalent of a release of the pledge, such a transfer does not terminate the issuer's duty as to the claim.

South Carolina Reporter's Comment to the 1991 Amendment

The 1991 amendments made no changes to South Carolina law relating to issuers' duties to inquire as to adverse claims relating to certificated securities. Prior law is preserved in subsections (1) through (3), with wording changes made to indicate that these subsections relate only to certificated securities, and for clarity. No change was made in the substance of subsections (1) through (3).

New subsections (4) through (7) establish issuers' duties to inquire as to adverse claims relating to uncertificated securities. These duties are quite different than those relating to certificated securities, chiefly because, at the time that an issuer is asked to register a certificated security, effective transfer has already taken place by delivery of the certificate, so that the parties' relative rights are already established, and notice of an infirmity usually results only in delay of registration; in the case of an uncertificated security, however, transfer cannot take place until the issuer registers the transfer, and the issuer's delay in making such registration can seriously impair the rights of the transferror and transferee. Accordingly, the issuer's duties of inquiry relating to uncertificated securities are more explicit and strict. Thus, while an issuer asked to register the transfer of a certificated security may be put on notice, raising a duty of inquiry, by a simple writing, one asked to register the transfer of an uncertificated security is under no duty of inquiry except in the four circumstances described in subsections (4). Most significantly, notices of adverse claims of third parties must be supported by legal process. The triggers of subsections (1)(a) (written notice) and (b) (controlling documents), relating to certificated securities, are echoed in subsections (4)(b) and (d), respectively, except that subsection (4)(b) is limited to written notices originating with the registered owner or pledgee.

The safe harbors for discharge of the duty of inquiry are also more particularized with respect to uncertificated securities. While a simple notice to an adverse claimant will do for certificated securities, the issuer of an uncertificated security must note the claim on any statements it issues relating to the security in question, and must refuse to register the transfer if the claim is of a nature precluding transfer (subsections (5) and (6)). The latter action, in particular, could expose an issuer to liability (see Section 36-8-404), and fully justifies the narrow circumstances under which an issuer of uncertificated securities is put on notice of inquiry.

Under subsection (7), registered pledgees who become such before the issuer receives notice of adverse claims are given special rights to reflect the possibility of their status as bona fide purchasers with a right to transfer free of such claims. Such a pledgee's right to transfer cannot be affected by any third-party claim except one embodied in legal process dealing directly with the pledgee's interest (subsection (7)(a)) or one reflected in a controlling instrument (subsection (7)(c)). Such a pledgee's right does not, however, survive his own admission of a claim (subsection (7)(b)). If such a pledgee seeks to transfer his interest back to the registered owner, the pledgee needs no further protection (subsection (7)(d)).

Section 36-8-404. Liability and nonliability for registration.

(1) Except as otherwise provided in any law relating to the collection of taxes, the issuer is not liable to the owner, pledgee, or any other person suffering loss as a result of the registration of a transfer, pledge, or release of a security if:

(a) there were on or with a certificated security the necessary indorsements or the issuer had received an instruction originated by an appropriate person (Section 36-8-308); and

(b) the issuer had no duty as to adverse claims or has discharged the duty (Section 36-8-403).

(2) If an issuer has registered a transfer of a certificated security to a person not entitled to it, the issuer on demand shall deliver a like security to the true owner unless:

(a) the registration was pursuant to subsection (1);

(b) the owner is precluded from asserting any claim for registering the transfer under subsection (1); or

(c) the delivery would result in overissue, in which case the issuer's liability is governed by Section 36-8-104.

(3) If an issuer has improperly registered a transfer, pledge, or release of an uncertificated security, the issuer on demand from the injured party shall restore the records as to the injured party to the condition that would have obtained if the improper registration had not been made unless:

(a) the registration was pursuant to subsection (1); or

(b) the registration would result in overissue, in which case the issuer's liability is governed by Section 36-8-104.

Prior Uniform Statutory Provisions:

None.

Purposes:

1. This section states the basic exonerative policy of this Article where there is no duty to inquire into adverse claims and the certificated security is appropriately indorsed or the issuer receives an instruction from an appropriate person.

Note that under subsection (1)(a) exoneration depends on whether or not the necessary indorsements were in fact on or with the security. The issuer cannot, for example, defend a suit based on its having registered a transfer on a forged indorsement on the ground that it received the assurances listed in Section 8-402 and was under no duty to go further. It has that option under Section 8-402(4).

Note, however, that this Act excludes from the category of "unauthorized indorsement" (Section 8-311) certain situations that might have been included in that category under prior law - e.g., where there has been a change of circumstances subsequent to the signature (subsection (10) of Section 8-308), and where the signature is that of a fiduciary who has failed to obtain court approval of the transfer (subsection (11) of Section 8-308). Similarly, when an issuer acts on the assumption permitted by section (3)(a) of Section 8-403, that a fiduciary registered owner continues to act as such, the "necessary indorsement" under subsection (1)(a) of this section is that of the registered owner under Section 8-308(8)(a), even though a successor has in fact been appointed. In these and other cases, where the question is one affecting only the rightfulness of the transfer, the issuer need only establish that it had no duty under Section 8-403 to inquire into adverse claims or that it has discharged any such duty.

2. The registered owner's right to receive a new security where the issuer has wrongfully registered a transfer is established, but the cases have also recognized his right to elect between an equitable action to compel issue of a new security and an action for damages. Cf. Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N.W. 754 (1914). Such election of remedies is no longer available. The true owner of a certificated security is now required to take a new security except where an overissue would result and a similar security is not reasonably available for purchase. See Section 8-104. The true owner of an uncertificated security is entitled and required to take restoration of the records to their proper state, with a similar exception for overissue.

Nothing in subsections (2) and (3) is intended to deny the owner the right to choose the form of his security whenever the issuer maintains securities of the same issue in both certificated and uncertificated form (Section 8-407).

South Carolina Reporter's Comment to the 1991 Amendment

The 1991 amendments made no change to South Carolina law relating to certificated securities. Similar limits on liability of issuers were introduced for uncertificated securities, with receipt of an instruction originated by an appropriate person serving as the analogue to receipt of a certificated security bearing proper indorsements.

New subsection (3) establishes the remedies for improper registration, pledge or release relating to uncertificated securities, with exceptions parallel to those relating to certificated securities found in subsection (2).

Section 36-8-405. Lost, destroyed, and stolen certificated securities.

(1) If a certificated security has been lost, apparently destroyed, or wrongfully taken and the owner fails to notify the issuer of that fact within a reasonable time after he has notice of it and the issuer registers a transfer of the security before receiving notification, the owner is precluded from asserting against the issuer any claim for registering the transfer under Section 36-8-404 or any claim to a new security under this section.

(2) If the owner of a certificated security claims that the security has been lost, destroyed, or wrongfully taken, the issuer shall issue a new certificated security or, at the option of the issuer, an equivalent uncertificated security in place of the original security if the owner:

(a) so requests before the issuer has notice that the security has been acquired by a bona fide purchaser;

(b) files with the issuer a sufficient indemnity bond; and

(c) satisfies any other reasonable requirements imposed by the issuer.

(3) If, after the issue of the new certificated or uncertificated security, a bona fide purchaser of the original certificated security presents it for registration of transfer, the issuer must register the transfer unless registration would result in overissue, in which event the issuer's liability is governed by Section 36-8-104. In addition to any rights on the indemnity bond, the issuer may recover the new certificated security from the person to whom it was issued or any person taking under him except a bona fide purchaser or may cancel the uncertificated security unless a bona fide purchaser or any person taking under a bona fide purchaser is then the registered owner or registered pledgee thereof.

Prior Uniform Statutory Provision:

Section 17, Uniform Stock Transfer Act.

Purposes:

1. By failing to notify the issuer within a reasonable time after he knows or has reason to know of the loss or theft of his certificated security, the owner is estopped from asserting the ineffectiveness of a forged or unauthorized indorsement and the wrongfulness of the registration of the transfer. Compare Section 8-311. If the lost security was indorsed by the owner, then the registration of the transfer was not wrongful under Section 8-404 unless notice had been given to the issuer.

2. The long standing corporate practice of voluntarily issuing new certificated securities to replace lost, destroyed or stolen ones is now incorporated into law. Where reasonable requirements are satisfied and a sufficient indemnity bond supplied, a court order is no longer necessary but of course, the court may compel a recalcitrant issuer to take action.

Subsection (2) gives the issuer the alternative of issuing an uncertificated security rather than a new certificated security. This alternative will exist only when the particular issue is partly certificated and partly uncertificated; and as a practical matter the ultimate choice will belong to the owner (Section 8-407). Compare Section 8-401 and its Comment.

3. Where an "original" certificated security has reached the hands of a bona fide purchaser, the registered owner - who was in the best position to prevent the loss, destruction or theft of his security - is now deprived of the new security issued to him as a replacement. If the security is certificated, the issuer has a right to recover it; and if the security is uncertificated, the issuer may simply cancel the registration. This changes the prior law under which the original security was ineffective after the issue of a replacement except insofar as it might represent an action for damages in the hands of a bona fide purchaser. Keller v. Eureka Brick Mach. Mfg. Co., 43 Mo. App. 84, 11 L.R.A. 472 (1890). Where both the original and the new security have reached bona fide purchasers the issuer is now required to honor both securities unless an overissue would result and the security is not reasonably available for purchase. See Section 8-104. In the latter case alone, the bona fide purchaser of the original security is relegated to an action for damages. In either case, the issuer itself may recover on the indemnity bond.

South Carolina Reporter's Comment to the 1991 Amendment

The only change to South Carolina law caused by the 1991 amendments is the provision, in subsection (2), that the issuer of a lost, destroyed or stolen certificated security may replace the security with an uncertificated one at the issuer's option. Necessarily, this option would exist only in cases of "mixed" issues -- that is, issues of securities issuable in either certificated or uncertificated form. A registered owner dissatisfied with an uncertificated security received under this section may exchange it, under Section 36-8-407.

If, after replacement, a security is presented by a bona fide purchaser, an uncertificated security issued as a replacement may be cancelled under the same conditions that a replacement certificated security could be recovered.

Section 36-8-406. Duty of authenticating trustee, transfer agent, or registrar.

(1) If a person acts as authenticating trustee, transfer agent, registrar, or other agent for an issuer in the registration of transfers of its certificated securities or in the registration of transfers, pledges, and releases of its uncertificated securities, in the issue of new securities, or in the cancellation of surrendered securities:

(a) he is under a duty to the issuer to exercise good faith and due diligence in performing his functions; and

(b) with regard to the particular functions he performs, he has the same obligation to the holder or owner of a certificated security or to the owner or pledgee of an uncertificated security and has the same rights and privileges as the issuer has in regard to those functions.

(2) Notice to an authenticating trustee, transfer agent, registrar, or other agent is notice to the issuer with respect to the functions performed by the agent.

Prior Uniform Statutory Provision:

None.

Purposes:

1. Transfer agents, registrars and the like are here expressly held liable to both the issuer and the owner for wrongful refusal to register a transfer as well as wrongful registration of a transfer in any case within the scope of their respective functions where the issuer would itself be liable. Those cases which have regarded these parties solely as agents of the issuer and have therefore refused to recognize their liability to the owner for mere non-feasance, i.e., refusal to register a transfer, are now rejected. Hulse v. Consolidated Quicksilver Mining Corp., 65 Idaho 768, 154 P.2d 149 (1944); Nicholson v. Morgan, 119 Misc. 309, 196 N.Y. Supp. 147 (1922); Lewis v. Hargadine-McKittrick Dry Goods Co., 305 Mo. 396, 274 S.W. 1041 (1924).

2. The practice frequently followed by authenticating trustees of issuing certificates of indebtedness rather than authenticating duplicate certificates where securities have been lost or stolen now becomes obsolete in view of the provisions of the preceding section of this Article, which makes express provision for the issue of substitute securities. It can no longer be considered a breach trust or lack of due diligence for trustees to authenticate new securities (or initial transaction statements). Cf. Switzerland General Ins. Co. v. N.Y.C. & H.R.R. Co., 152 App. Div. 70, 136 N.Y.S. 726 (1912).

3. "Good faith and due diligence" require the use of reasonable care and the observance of "reasonable" commercial standards, and preclude arbitrary, capricious, over-cautious and super-technical objections and requirements. See Powers v. Universal Film Mfg. Co., 162 App. Div. 806, 148 N.Y.S. 114 (1914). Compliance with the provisions of this Article as to the documents which an issuer may properly require before registering a transfer in cases where there has been no notice of adverse claims (Section 8-402) constitutes due diligence on the part of these agents, and by insisting upon more than could incur liability for wrongful refusal to register a transfer.

South Carolina Reporter's Comment to the 1991 Amendment

The 1991 amendments made no change in this section, except to add new language to expand its coverage to the agents of an issuer of uncertificated securities.

Section 36-8-407. Exchangeability of Securities.

(1) No issuer is subject to the requirements of this section unless it regularly maintains a system for issuing the class of securities involved under which both certificated and uncertificated securities are regularly issued to the category of owners, which includes the person in whose name the new security is to be registered.

(2) Upon surrender of a certificated security with all necessary indorsements and presentation of a written request by the person surrendering the security, the issuer, if he has no duty as to adverse claims or has discharged the duty (Section 36-8-403), shall issue to the person or a person designated by him an equivalent uncertificated security subject to all liens, restrictions, and claims that were noted on the certificated security.

(3) Upon receipt of a transfer instruction originated by an appropriate person who so requests, the issuer of an uncertificated security shall cancel the uncertificated security and issue an equivalent certificated security on which must be noted conspicuously any liens and restrictions of the issuer and any adverse claims (as to which the issuer has a duty under subsection (4) of Section 36-8-403) to which the uncertificated security was subject. The certificated security must be registered in the name of and delivered to:

(a) the registered owner, if the uncertificated security was not subject to a registered pledge; or

(b) the registered pledgee, if the uncertificated security was subject to a registered pledge.

Prior Uniform Statutory Provision:

None.

Purposes:

This section deals with the right of the holder of a certificated security to exchange it for an equivalent uncertificated security and the right of the registered owner or registered pledge of an uncertificated security to obtain a certificated security in exchange for it. This section is applicable only in those situations where both certificated and uncertificated securities exist within the same issue and either form is available to the particular owner. Subsection (1) so limits its applicability.

Neither this nor any other section of this Article is intended to mandate the establishment or continuance of a dual system of registration. It is contemplated that some issuers may provide for both forms of securities on a more or less indefinite basis. Issuers of existing issues which are necessarily wholly certificated may make uncertificated securities available with the intention to phase out the certificated securities over a period of time. Some issuers, if permitted by relevant law, may restrict the availability of uncertificated securities to particular categories of owners, e.g., brokers, banks and institutions.

Subsection (2) provides the mechanism for the holder of a certificated security to surrender it to the issuer and have an equivalent uncertificated security issued in exchange. Subsection (3) provides an analogous mechanism for the registered owner of an unencumbered uncertificated security or the registered pledgee of an otherwise unencumbered uncertificated security to obtain equivalent certificated securities from the issuer. Since Section 8-403 treats adverse claims with respect to certificated securities differently from adverse claims with respect to uncertificated securities, subsection (2) requires the issuer to honor the request only if it has no duty as to adverse claims. If it honored the request despite the presence of such a duty, the adverse claimant's right to block transfer might be modified. For example, if the issuer of a certificated security had received written notice from the claimant, it would be under a duty to inquire and to delay registration of transfer pending the results of the inquiry. However, if it issued an uncertificated security in place of the certificate, then it would no longer be under a duty (Section 8-403(4)(b)) and would register transfer to a bona fide purchaser without including any notation of the claim (Section 8-403(5)).

On the other hand, if the issuer is under a duty as to adverse claims with respect to an uncertificated security it will also be under a similar duty with respect to a certificate security issued to represent the same interest. Compare subsections (1) and (4) of Section 8-403. Potential purchasers will be unable to purchase free of the claim, since they will be given notice through notation on the certificate. See Sections 8-304, 8-202 and 1-201(25).

South Carolina Reporter's Comment to the 1991 Amendment

This section, new with the 1991 amendments, establishes the limited duty of an issuer to exchange certificated for uncertificated securities and vice versa. The section is not intended to require issuers to establish or maintain dual systems of registration. Except for establishing this duty, no change was made in South Carolina law by this new section.

Section 36-8-408. Statements of Uncertificated Securities.

(1) Within two business days after the transfer of an uncertificated security has been registered, the issuer shall send to the new registered owner and, if the security has been transferred subject to a registered pledge, to the registered pledgee a written statement containing:

(a) a description of the issue of which the uncertificated security is a part;

(b) the number of shares or units transferred;

(c) the name and address and any taxpayer identification number of the new registered owner and, if the security has been transferred subject to a registered pledge, the name and address and any taxpayer identification number of the registered pledgee;

(d) a notation of any liens and restrictions of the issuer and any adverse claims (as to which the issuer has a duty under subsection (4) of Section 36-8-403) to which the uncertificated security is or may be subject at the time of registration or a statement that there are none of those liens, restrictions, or adverse claims; and

(e) the date the transfer was registered.

(2) Within two business days after the pledge of an uncertificated security has been registered, the issuer shall send to the registered owner and the registered pledgee a written statement containing:

(a) a description of the issue of which the uncertificated security is a part;

(b) the number of shares or units pledged;

(c) the name and address and any taxpayer identification number of the registered owner and the registered pledgee;

(d) a notation of any liens and restrictions of the issuer and any adverse claims (as to which the issuer has a duty under subsection (4) of Section 36-8-403) to which the uncertificated security is or may be subject at the time of registration or a statement that there are none of those liens, restrictions, or adverse claims; and

(e) the date the pledge was registered.

(3) Within two business days after the release from pledge of an uncertificated security has been registered, the issuer shall send to the registered owner and the pledgee whose interest was released a written statement containing:

(a) a description of the issue of which the uncertificated security is a part;

(b) the number of shares or units released from pledge;

(c) the name and address and any taxpayer identification number of the registered owner and the pledgee whose interest was released;

(d) a notation of any liens and restrictions of the issuer and any adverse claims (as to which the issuer has a duty under subsection (4) of Section 36-8-403) to which the uncertificated security is or may be subject at the time of registration or a statement that there are none of those liens, restrictions, or adverse claims; and

(e) the date the release was registered.

(4) An `initial transaction statement' is the statement sent to:

(a) the new registered owner and, if applicable, to the registered pledgee pursuant to subsection (1);

(b) the registered pledgee pursuant to subsection (2); or

(c) the registered owner pursuant to subsection (3).

Each initial transaction statement must be signed by or on behalf of the issuer and must be identified as `Initial Transaction Statement'.

(5) Within two business days after the transfer of an uncertificated security has been registered, the issuer shall send to the former registered owner and the former registered pledgee, if any, a written statement containing:

(a) a description of the issue of which the uncertificated security is a part;

(b) the number of shares or units transferred;

(c) the name and address and any taxpayer identification number of the former registered owner and of any former registered pledgee; and

(d) the date the transfer was registered.

(6) At periodic intervals no less frequent than annually and at any time upon the reasonable written request of the registered owner, the issuer shall send to the registered owner of each uncertificated security a dated written statement containing:

(a) a description of the issue of which the uncertificated security is a part;

(b) the name and address and any taxpayer identification number of the registered owner;

(c) the number of shares or units of the uncertificated security registered in the name of the registered owner on the date of the statement;

(d) the name and address and any taxpayer identification number of any registered pledgee and the number of shares or units subject to the pledge; and

(e) a notation of any liens and restrictions of the issuer and any adverse claims (as to which the issuer has a duty under subsection (4) of Section 36-8-403) to which the uncertificated security is or may be subject or a statement that there are none of those liens, restrictions, or adverse claims.

(7) At periodic intervals no less frequent than annually and at any time upon the reasonable written request of the registered pledgee the issuer shall send to the registered pledgee of each uncertificated security a dated written statement containing:

(a) a description of the issue of which the uncertificated security is a part;

(b) the name and address and any taxpayer identification number of the registered owner;

(c) the name and address and any taxpayer identification number of the registered pledgee;

(d) the number of shares or units subject to the pledge; and

(e) a notation of any liens and restrictions of the issuer and any adverse claims (as to which the issuer has a duty under subsection (4) of Section 36-8-403) to which the uncertificated security is or may be subject or a statement that there are none of those liens, restrictions, or adverse claims.

(8) If the issuer sends the statements described in subsections (6) and (7) at periodic intervals no less frequent than quarterly the issuer is not obliged to send additional statements upon request unless the owner or pledgee requesting them pays to the issuer the reasonable cost of furnishing them.

(9) Each statement sent pursuant to this section must bear a conspicuous legend reading substantially as follows: `This statement is merely a record of the rights of the addressee as of the time of its issuance. Delivery of this statement, of itself, confers no rights on the recipient. This statement is neither a negotiable instrument nor a security.'"

Prior Uniform Statutory Provision:

None.

Purposes:

1. This section obliges the issuer of uncertificated securities to send certain statements. The required statements are of two types. Transaction statements, required by subsections (1), (2), (3) and (5) are analogous to debit and credit advices and the periodic statements can be reconciled from them. Periodic statements, required by subsections (6) and (7) are analogous to bank statements and will advise owners and pledgees of their positions at given points in time.

The transaction statements, which are mandated upon the registration of transfer, pledge or release, must be sent within two days after the relevant registration, but it is contemplated that such statements will be prepared virtually simultaneously with the actual registration and sent immediately thereafter. They are intended to serve two functions. They are notice to the transferor - (the owner in the case of transfer or pledge, the pledgee in the case of release from pledge, and both the owner and the pledgee in the case of transfer subject to a pledge, transfer of the pledge interest alone or simultaneous transfer and release from pledge) - that his interest has been altered. In the event of fraudulent, unauthorized or otherwise improper registration, the transaction statement will serve as notice that timely action should be taken.

More importantly, these statements are notice to the transferee (new owner in the case of a transfer, pledgee in the case of a pledge, present owner in the case of a release) that the increase of his interest has, in fact, been registered. Furthermore, since all statements except those required by subsection (5) must include a notation of defeats or an express statement that there are none, these statements will give the transferee the assurance equivalent to that afforded by a "clean" certificated security and create an estoppel against the issuer. Since registration is the critical step in the transfer of rights, the issuer's transaction statement should include, and the purchaser who receives the statement should be charged with notice of, only those claims, liens and restrictions existing at the time of registration. Compare Section 8-304(2).

It is contemplated that transferees will and should be able to rely on these statements and in many cases, will not part with their consideration until they receive them. To ensure that the statements will have the desired effect of establishing rights for the transferee against the issuer, subsection (4) requires that the copy of each transaction statement sent to the transferee, called an "initial transaction statement," be signed. Note that Section 1-201(39) does not require a manual signature for compliance with this requirement. Compare also Sections 8-103(b), 8-105(3)(d), 8-202, 8-204(b), 8-205, 8-206, 8-208, 8-304, 8-311, 8-319 and 8-403 for the effects of initial transaction statements.

2. Whenever the issuer registers a transfer of the pledge interest alone, subsections (2) and (3) read together require the issuer to send transaction statements to both the registered owner and the former registered pledgee as well as to the new registered pledgee. Compare Section 8-207(4) and its Comment 1.

3. The frequency of one year, with which periodic statements must be sent to owners and pledgees, is intended to be a minimum requirement for all issuers, including closely held corporations. Owners and pledgees are entitled to request additional statements of position at any time. It is contemplated, however, that publicly held issuers will adopt the practice of sending quarterly statements conforming to the common practice of sending quarterly reports and dividend checks. For those that do, subsection (8) eliminates the obligation to furnish additional statements of position on request unless the issuer is reimbursed for the additional cost.

4. Subsection (9) requires that a conspicuous legend be borne by each statement as a protection against unjustified reliance on statements of uncertificated securities by persons who might deal with them. Except for this requirement and the requirement of subsection (4) that the words "Initial Transaction Statement" be included, the form of the statements required by this section is not prescribed. Perhaps the forms now used by the transfer agents of mutual funds to confirm acquisitions, dispositions, reinvestment of dividends, periodic liquidations and statements of position will serve as a model.

South Carolina Reporter's Comment to the 1991 Amendment

This section, new with the 1991 amendments, establishes the requirements that issuers of uncertificated securities produce transaction and periodic statements relating to such securities, and defines the contents of such statements. This section does not affect prior law relating to certificated securities.

Other 1976 Code section provisions revised

SECTION 2. (A) Section 36-1-201(5), (14), and (20) of the 1976 Code are respectively amended to read:

"(5) `Bearer' means the person in possession of an instrument, document of title, or certificated security payable to bearer or indorsed in blank.

(14) `Delivery' with respect to instruments, documents of title, chattel paper or certificated securities means voluntary transfer of possession.

(20) `Holder' means a person who is in possession of a document of title or an instrument or a certificated investment security drawn, issued, or indorsed to him or to his order or to bearer or in blank."

South Carolina Reporter's Comment to 1991 Amendment

Subsections (5), (14) and (20) were amended in 1991 to distinguish securities represented by certificates ("certificated securities") from those not so represented. See Section 36-8-102(a) and (b). Subsections (5), (14) and (20), each of which contemplates a physical act or a writing, apply only to certificated securities.

(B) Section 36-5-114(2) of the 1976 Code is amended to read:

"(2) Unless otherwise agreed when documents appear on their face to comply with the terms of a credit but a required document does not in fact conform to the warranties made on negotiation or transfer of a document of title (Section 36-7-507) or of a certificated security (Section 36-8-306) or is forged or fraudulent or there is fraud in the transaction:

(a) the issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank or other holder of the draft or demand under the credit and under circumstances which would make it a holder in due course (Section 36-3-302) and in an appropriate case would make it a person to whom a document of title has been duly negotiated (Section 36-7-502) or a bona fide purchaser of a certificated security (Section 36-8-302); and

(b) in all other cases as against its customer, an issuer acting in good faith may honor the draft or demand for payment despite notification from the customer of fraud, forgery, or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor."

South Carolina Reporter's Comments to 1991 Amendment

Subsection (2) was amended by addition of the word "certificated" in two places, to make clear that the provisions of the subsection apply to securities only when represented by certificates. See Section 36-8-102(a) and (b). No other change was made in this section by the 1991 amendment.

(C) Section 36-9-103(3)(a) of the 1976 Code, as last amended by Act 494 of 1988, is further amended to read:

"(a) This subsection applies to accounts (other than an account described in subsection (5) on minerals) and general intangibles (other than uncertificated securities) and to goods which are mobile and which are of a type normally used in more than one jurisdiction, such as motor vehicles, trailers, rolling stock, airplanes, shipping containers, road building and construction machinery, and commercial harvesting machinery, and the like, if the goods are equipment or are inventory leased or held for lease by the debtor to others and are not covered by a certificate of title described in subsection (2)."

(D) Section 36-9-103 of the 1976 Code is amended by adding a new subsection (6) to read:

"(6) Uncertificated securities. The law (including the conflict of laws rules) of the jurisdiction of organization of the issuer governs the perfection and the effect of perfection or nonperfection of a security interest in uncertificated securities."

South Carolina Reporter's Comment to 1991 Amendment

Subsection (3) was amended to make clear that uncertificated securities (see Section 36-8-102(a) and (b)) are not intended to be general intangibles. A new subsection (6) was added to designate the law governing matters relating to perfection of uncertificated securities.

(E) Section 36-9-105(1)(i) of the 1976 Code, as last amended by Act 494 of 1988, is further amended to read:

"(i) `Instrument' means a negotiable instrument (defined in Section 36-3-104) or a certificated security (defined in Section 36-8-102) or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in ordinary course of business transferred by delivery with any necessary endorsement or assignment;".

South Carolina Reporter's Comment to 1991 Amendment

Subsection (1)(i) was amended by the addition of the word "certificated", to make clear that securities represented by certificates, but not uncertificated securities, are instruments. See Section 36-8-102(a) and (b).

(F) Section 36-9-203(1) of the 1976 Code, as last amended by Act 494 of 1988, is further amended to read:

"(1) Subject to the provisions of Section 36-4-208 on the security interest of a collecting bank, Section 36-8-321 on security interests in securities, and Section 36-9-113 on a security interest arising under the chapter on Sales, a security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless:

(a) the collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral and in addition, when the security interest covers crops growing or to be grown or timber to be cut, a description of the land concerned;

(b) value has been given;

(c) the debtor has rights in the collateral."

South Carolina Reporter's Comment to 1991 Amendment

Subsection (1) was amended by reference to Section 36-8-321, to make clear that the operation of this section is expressly subject to the operation of Section 36-8-321. See the South Carolina Reporter's Comment to the 1991 Amendment to Section 36-8-321.

(G) Section 36-9-302(1)(f) of the 1976 Code is amended to read:

"(f) a security interest of a collecting bank (Section 36-4-208) or in securities (Section 36-8-321) or arising under the chapter on Sales (Section 36-9-113) or covered in subsection (3) of this section;".

South Carolina Reporter's Comment to 1991 Amendment

Subsection (1)(f) was amended by the addition of a reference to securities, to make clear that the provisions for perfection in a security were moved, by the 1991 amendments, to Section 36-8-321.

(H) Section 36-9-304 of the 1976 Code, as last amended by Act 494 of 1988, is further amended to read:

"Section 36-9-304. (1) A security interest in chattel paper or negotiable documents may be perfected by filing. A security interest in money or instruments (other than certificated securities or instruments which constitute part of chattel paper) can be perfected only by the secured party's taking possession, except as provided in subsections (4) and (5) of this section and subsections (2) and (3) of Section 36-9-306 on proceeds.

(2) During the period that goods are in the possession of the issuer of a negotiable document therefor, a security interest in the goods is perfected by perfecting a security interest in the document, and any security interest in the goods otherwise perfected during such period is subject thereto.

(3) A security interest in goods in the possession of a bailee other than one who has issued a negotiable document therefor is perfected by the issuance of a document in the name of the secured party or by the bailee's receipt of notification of the secured party's interest or by filing as to the goods.

(4) A security interest in instruments or negotiable documents is perfected without filing or the taking of possession for a period of twenty-one days from the time it attaches to the extent that it arises for new value given under a written security agreement.

(5) A security interest remains perfected for a period of twenty-one days without filing where a secured party having a perfected security interest in an instrument (other than a certificated security), a negotiable document, or goods in possession of a bailee other than one who has issued a negotiable document for the goods:

(a) makes available to the debtor the goods or documents representing the goods for the purpose of ultimate sale or exchange or for the purpose of loading, unloading, storing, shipping, transshipping, manufacturing, processing, or otherwise dealing with them in a manner preliminary to their sale or exchange, but priority between conflicting security interest in the goods is subject to subsection (3) of Section 36-9-312; or

(b) delivers the instrument to the debtor for the purpose of ultimate sale or exchange or of presentation, collection, renewal, or registration of transfer.

(6) After the twenty-one day period in subsections (4) and (5) perfection depends upon compliance with the applicable provisions of this chapter."

South Carolina Reporter's Comment to 1991 Amendment

Subsections (1) and (5) were amended to make clear that perfection in securities, including those represented by certificates which are treated as instruments (Section 36-9-105(1)(i)), is no longer dealt with by this section. See Section 36-8-321.

(I) Section 36-9-305 of the 1976 Code, as last amended by Act 494 of 1988, is further amended to read:

"Section 36-9-305. A security interest in letters of credit and advice of credit (subsection (2)(a) of Section 36-5-116), goods, instruments (other than certificated securities), money, negotiable documents, or chattel paper may be perfected by the secured party's taking possession of the collateral. If such collateral other than goods covered by a negotiable document is held by a bailee, the secured party is considered to have possession from the time the bailee receives notification of the secured party's interest. A security interest is perfected by possession from the time possession is taken without a relation back and continues only so long as possession is retained, unless otherwise specified in this chapter. The security interest may be otherwise perfected as provided in this chapter before or after the period of possession by the secured party."

South Carolina Reporter's Comment to 1991 Amendment

This section was amended in 1991 by addition of the parenthetical in the first sentence, making clear that matters relating to perfection in securities represented by certificates are now found in Chapter 8 of this Title. See Section 36-8-321.

(J) Section 36-9-309 of the 1976 Code, as last amended by Act 494 of 1988, is further amended to read:

"Section 36-9-309. Nothing in this chapter limits the rights of a holder in due course of a negotiable instrument (Section 36-3-302) or a holder to whom a negotiable document of title has been duly negotiated (Section 36-7-501) or a bona fide purchaser of a security (Section 36-8-302), and the holders or purchasers take priority over an earlier security interest even though perfected. Filing under this chapter does not constitute notice of the security interest to the holders or purchasers."

South Carolina Reporter's Comment to 1991 Amendment

This section was amended in 1991 to reflect the movement of the definition of a bona fide purchaser of a security to Section 36-8-302.

(K) Section 36-9-312(7) of the 1976 Code, as added by Act 494 of 1988, is amended to read:

"(7) If future advances are made while a security interest is perfected by filing or the taking of possession or under Section 36-8-321 on securities, the security interest has the same priority for the purposes of subsection (5) with respect to the future advances as it does with respect to the first advance. If a commitment is made before or while the security interest is perfected, the security interest has the same priority with respect to advances made thereto. In other cases a perfected security interest has priority from the date the advance is made."

South Carolina Reporter's Comment to 1991 Amendment

Subsection (7) was amended in 1991 to reflect the movement of provisions governing perfection in securities to Section 36-8-321.

Analysis lines, Official Comments, and Reporter's Comments

SECTION 3. The analysis lines, the amended official comments, and the South Carolina Reporter's Comments in or after each code section of Chapter 8 of Title 36 of the 1976 Code, as contained in Section 1 are for informational purposes only and are not deemed to be part of the code section itself.

Time effective

SECTION 4. This act takes effect upon approval by the Governor.

Approved the 12th day of June, 1991.