1. This section contains rules that supplement the definitions of "financial asset" and "security" in section 8-102. The section 8-102 definitions are worded in general terms, because they must be sufficiently comprehensive and flexible to cover the wide variety of investment products that now exist or may develop. The rules in this section are intended to foreclose interpretive issues concerning the application of the general definitions to several specific investment products. No implication is made about the application of the section 8-102 definitions to investment products not covered by this section.
2. Subsection (a) establishes an unconditional rule that ordinary corporate stock is a security. That is so whether or not the particular issue is dealt in or traded on securities exchanges or in securities markets. Thus, shares of closely held corporations are article 8 securities.
3. Subsection (b) establishes that the article 8 term "security" includes the various forms of the investment vehicles offered to the public by investment companies registered as such under the federal Investment Company Act of 1940, as amended. This clarification is prompted principally by the fact that the typical transaction in shares of open-end investment companies is an issuance or redemption, rather than a transfer of shares from one person to another as is the case with ordinary corporate stock. For similar reasons, the definitions of indorsement, instruction, and entitlement order in section 8-102 refer to "redemptions" as well as "transfers", to ensure that the article 8 rules on such matters as signature guaranties, section 8-306, assurances, sections 8-402 and 8-507, and effectiveness, section 8-107, apply to directions to redeem mutual fund shares. The exclusion of insurance products is needed because some insurance company separate accounts are registered under the Investment Company Act of 1940, but these are not traded under the usual article 8 mechanics.
4. Subsection (c) is designed to foreclose interpretive questions that might otherwise be raised by the application of the "of a type" language of section 8-102(a)(15)(iii) to partnership interests. Subsection (c) establishes the general rule that partnership interests or shares of limited liability companies are not article 8 securities unless they are in fact dealt in or traded on securities exchanges or in securities markets. The issuer, however, may explicitly "opt-in" by specifying that the interests or shares are securities governed by article 8. Partnership interests or shares of limited liability companies are included in the broader term "financial asset". Thus, if they are held through a securities account, the indirect holding system rules of part 5 apply, and the interest of a person who holds them through such an account is a security entitlement.
5. Subsection (d) deals with the line between article 3 negotiable instruments and article 8 investment securities. It continues the rule of the prior version of article 8 that a writing that meets the article 8 definition is covered by article 8 rather than article 3, even though it also meets the definition of negotiable instrument. However, subsection (d) provides that an article 3 negotiable instrument is a "financial asset" so that the indirect holding system rules apply if the instrument is held through a securities intermediary. This facilitates making items such as money market instruments eligible for deposit in clearing corporations.
6. Subsection (e) is included to clarify the treatment of investment products such as traded stock options, which are treated as financial assets but not securities. Thus, the indirect holding system rules of part 5 apply, but the direct holding system rules of parts 2, 3, and 4 do not.
7. Subsection (f) excludes commodity contracts from all of article 8. However, the article 9 rules on security interests in investment property do apply to security interests in commodity positions. "Commodity contract" is defined in section 9-102(a)(15).
8. Subsection (g) allows a document of title to be a financial asset and thus subject to the indirect holding system rules of part 5 only to the extent that the intermediary and the person entitled under the document agree to do so. This is to prevent the inadvertent application of the part 5 rules to intermediaries who may hold either electronic or tangible documents of title.
Definitional Cross References:
"Clearing corporation". Section 8-102(a)(5).
"Commodity contract". Section 9-102(a)(15).
"Financial asset". Section 8-102(a)(9).
"Security". Section 8-102(a)(15).
"Security certificate". Section 8-102(a)(16).