The Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary.Senate Consideration of Treaty Document 112-6
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[Senate Treaty Document 112-6] [From the U.S. Government Printing Office] 112th Congress 2d Session SENATE Treaty Doc. 112-6 _______________________________________________________________________ THE CONVENTION ON THE LAW APPLICABLE TO CERTAIN RIGHTS IN RESPECT OF SECURITIES HELD WITH AN INTERMEDIARY __________ MESSAGE from THEPRESIDENTOFTHEUNITEDSTATES transmitting THE CONVENTION ON THE LAW APPLICABLE TO CERTAIN RIGHTS IN RESPECT OF SECURITIES HELD WITH AN INTERMEDIARY (THE ``CONVENTION''), DONE AT THE HAGUE ON JULY 5, 2006, AND SIGNED BY THE UNITED STATES ON THAT SAME DAY May 17, 2012.--Treaty was read the first time, and together with the accompanying papers, referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate LETTER OF TRANSMITTAL ---------- The White House, May 17, 2012. To the Senate of the United States: With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary (the ``Convention''), done at The Hague on July 5, 2006, and signed by the United States on that same day. The report of the Secretary of State, which includes an Overview of the proposed Convention, is enclosed for the information of the Senate. The United States supported the development of the Convention, which provides uniform rules for determining the law applicable to certain rights in commercial transactions involving investment securities held through intermediaries (such as brokers, banks, and other financial institutions). The Convention incorporates modern commercial finance methods already market-tested in the United States through the Uniform Commercial Code. It would ensure that countries that become party to this Convention would also apply those methods. The Convention, once in force, would improve the functioning of investment securities markets, reduce uncertainty in cross- border commerce, and reduce national and cross-border systemic risk. The Department of the Treasury, the U.S. Securities and Exchange Commission, the Commodities Futures Trading Commission, and the New York Federal Reserve Bank support ratification by the United States of this Convention, as do key private sector associations. I recommend, therefore, that the Senate give early and favorable consideration to the Convention and give its advice and consent to its ratification. Barack Obama. LETTER OF SUBMITTAL ---------- Department of State, Washington, July 18, 2011. The President, The White House. The President: I have the honor to submit to you, with a view to its transmittal to the Senate for advice and consent to ratification, the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, done at The Hague on July 5, 2006 (the ``Convention'') and signed by the United States on that date. An overview of the Convention with a detailed article-by-article analysis is enclosed with this report. Modern investment securities markets, such as those of the United States, have moved from a paper-based system largely to electronic transfer of securities, which makes possible higher volumes of transactions through ``intermediaries'' (such as brokers, banks, and other financial institutions). Such transactions can cross borders rapidly. The Convention provides uniform rules for determining the law applicable to certain rights in commercial transactions involving investment securities held through intermediaries. The question of which law governs such intermediated securities has become a matter of significant concern to market participants as well as banking supervisors and regulators. The objective of the Convention is to provide greater legal certainty in this area, thereby reducing legal and systemic risk, enhancing efficiency in market transactions, and facilitating the global flow of capital. The Convention was formulated at The Hague Conference on Private International Law by forty-five countries with substantial participation of the U.S. private sector. The rules of the Convention are compatible with modern finance law in the United States as set out in the Uniform Commercial Code, which has been adopted by all U.S. states and the District of Columbia. The U.S. government and the U.S. financial community supported the Convention's negotiation. Its ratification by the United States is supported by the relevant U.S. regulatory agencies, including the Department of the Treasury, the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the New York Federal Reserve Bank. The Convention is also supported by securities clearance and settlement entities, including the Depository Trust & Clearing Corporation (the U.S. central securities depositary), commercial market interests including custodian banks, broker- dealers, securities intermediaries, and securities industry associations including the Securities Industry and Financial Markets Association (SIFMA), the International Swaps and Derivatives Association (ISDA), the Emerging Markets Traders Association (EMTA), the Association of Global Custodians (AGC), and others. Experts from the National Conference of Commissioners on Uniform State Laws (ULC) were involved at all stages of the Convention's development and the ULC itself was represented at the Diplomatic Conference adopting the Convention. The American Bar Association has adopted a formal resolution recommending U.S. ratification on the recommendation of the Business Law and International law Sections. I recommend, therefore, that you transmit the Convention to the Senate for advice and consent to ratification. Respectfully submitted, Hillary Rodham Clinton. Enclosures: As stated. Overview The Convention provides uniform rules for rapidly determining the law applicable to certain rights in commercial transactions involving investment securities held through intermediaries. In modern capital markets, investment securities are commonly held in electronic form by banks, securities brokers and other entities collectively known as ``securities intermediaries.'' Securities interests in computer data form move today through intermediaries in increasingly high volumes and cross borders frequently, and it is exceedingly difficult to determine in advance which law would apply to particular transactions or intermediaries if traditional choice of law principles are employed. Even when the initial parties may be located within the United States, the nature of computer-based transfers of securities through various intermediaries means that any transfer typically involves book-entries by a chain of intermediaries located in several countries all in the same day; securities moving between accounts thus may quickly involve dispositions of securities or collateral in other jurisdictions, raising issues as to which countries' laws may apply. The question of which law governs has become a matter of significant concern to market participants as well as securities and derivatives markets regulators, banking supervisors, and regulators. The objective of the Convention is to provide greater legal certainty in this area, thereby reducing legal and systemic risk, enhancing efficiency in market transactions and facilitating the global flow of capital. The rules adopted by the Convention reflect modern finance law in the U.S. as set out in Articles 8 and 9 of the Uniform Commercial Code (``UCC''), adopted by all U.S. states and the District of Columbia, which have provided the necessary legal certainty for domestic securities transactions. That certainty is absent today from most transactions that cross national borders or for other countries and foreign markets in their relations to securities interests in the U.S. The Convention's provisions would apply as stated to transactions within its scope, but would not otherwise displace applicable provisions of the UCC. An Explanatory Report on the Convention was prepared by the Conference Drafting Group on which U.S. government and securities industry experts were represented, which sets forth interpretations of the provisions of the Convention that were agreed to in the negotiation process. The Convention deals only with choice of law, and only with securities held with an intermediary and credited to a securities account. It has no effect on the substantive law that will be applied once the choice of law determination has been made. It does not otherwise deal with the relationship between an issuer and its registered owner or with interests in securities transferred by physical delivery or direct registration on the books of an issuer. Because of the transactional and regulatory risk incurred by the inability to rapidly determine applicable law in cross- border securities-based commerce, U.S. agencies and financial and securities industries were active proponents of the negotiation, seeking to achieve sufficient certainty in world markets comparable to that already achieved in the U.S. by uniform state law through the Uniform Commercial Code. The Convention would be self-executing. No implementing legislation would be required. We note that although the Convention would be self-executing, existing U.S. laws, including the Securities and Exchange Act of 1934, already provide to U.S. Government regulatory and supervisory authorities, including the Treasury Department and the Federal Reserve, authority to act in areas covered by the Convention. The U.S. and Switzerland signed the Convention together on July 5, 2006 in order to underscore the important level of support from two major banking and securities countries, and Switzerland has ratified it. U.S. ratification of the Convention is expected to have a positive effect on the willingness of other countries to take similar action. Article-by-Article Analysis chapter 1--definitions and scope Article 1--Definitions and interpretation Article 1 contains definitions and interpretive provisions. ``Securities'' (subparagraph (a)) are defined as ``any shares, bonds or other financial instruments or financial assets (other than cash), or any interest therein'', and ``intermediary'' (subparagraph (c)) is defined as ``a person that in the course of a business or other regular activity maintains securities accounts for others or both for others and its own account and is acting in that capacity'' (i.e., often brokers-dealers, banks and other financial institutions. The key Convention language, which together with Article 2 determines scope of application, is the definition in subparagraph (1) (f) of ``securities held with an intermediary'' defined as ``the rights of an account holder resulting from a credit of securities to a securities account''. Those terms have the same meaning as the Revised Uniform Commercial Code (UCC) Article 8 (uniform investment securities law) concept of a ``securities entitlement.'' The Convention does not cover transfers or security interests in securities held directly, i.e., which do not enter the intermediated system. The definition of ``securities'' under the Convention is sufficiently broad to cover various forms of financial assets that laws in any country permit to be carried in a securities account. The exclusion of cash from the definition of ``securities'' preserves the distinction between securities accounts and ordinary bank deposit accounts. Article 1(2) clarifies that ``disposition of securities held with an intermediary,'' as defined in Article 1, subparagraph (h), covers both outright transfers of title and the grant of security interests. The term ``disposition'' includes a disposition of an entire securities account, as well as some or all of the securities credited to the account. Article 1(3) covers a holding pattern in which an entity that might otherwise be acting as a central securities depository is acting only as a transfer or registration agent. Article 1(4) clarifies that a central securities depository is treated as an intermediary for purposes of the Convention. Article 2--Scope of the Convention and of the applicable law Article 2(1) sets forth the issues that are to be governed by the applicable law once that is determined pursuant to Articles 4 and 5 of the Convention. These issues parallel the securities transaction issues currently governed under Articles 8 and 9 of the UCC once the ``securities intermediary's jurisdiction'' under UCC has been determined. Under the Convention, if the applicable law is the law of a particular state in the United States, the relevant law would be Articles 8 and 9 of the UCC dealing with indirect holdings and interests in securities entitlements. That will be so regardless of the location, if determinable, of any security certificates, any securities register, any securities account, any intermediary, any issuer or any office. That result will apply in any transaction subject to the Convention. The issues identified in Article 2(1)(d), whether a person's interest in securities held with an intermediary extinguishes or has priority over another person's interest, covers the issues that, in current U.S. law, are commonly referred to as ``bona fide purchase'' issues. The Convention would ensure that an investor to whose account securities are credited need look only to the law applicable pursuant to Article 4 or 5 of the Convention to determine whether the investor acquires its interest free from adverse claims. Existing choice of law rules in jurisdictions outside the United States often leave that in considerable doubt. Article 2(1)(e) ensures that the law applicable pursuant to Article 4 or 5 governs the question of whether the intermediary owes any duties to a person who asserts an adverse claim to position held through that intermediary. This provision is very important to the safe and sound operation of the international and national central securities depositories and securities settlement systems. It ensures that an intermediary can look to the law applicable pursuant to Articles 4 or 5 alone to determine whether it owes any duties to persons asserting adverse claims. UCC Article 8-115 achieves a similar result with respect to intermediary protection against adverse claims. Article 2(1)(e) would ensure predictability for U.S. intermediaries, whenever U.S. law is the governing law, regardless of where the transaction takes place. Article 2(2) clarifies that the Convention determines the law applicable to all of the issues identified in paragraph 1, irrespective of whether the rights resulting from the credit of the securities to a securities account are determined to be contractual in nature. This is consistent with Article 2(3), which provides that the Convention does not otherwise determine the law applicable to the purely contractual or personal rights and duties arising from the credit of securities to a securities account or of parties to a disposition. Article 2(3)(c) provides that the Convention does not determine the law applicable to the rights and duties of an issuer of securities or the issuer's registrar or transfer agent. Article 3--Internationality Article 3 provides that the Convention applies ``in all cases involving a choice between the laws of different States.'' This broad application provision means the Convention would determine the applicable law regarding issues that arise, among other things, in transactional, credit assessment and other circumstances in addition to any matters in dispute or litigation. The reference in the text to ``cases'' means in U.S. usage ``situations''--it does not mean that the Convention applies only in a judicial proceeding or formal dispute. The Explanatory Report on the Convention issued by the Hague Conference states that Article 3 would mean that the Convention would generally apply whenever any two of the following factors are in different States: (i) the account holder; (ii) any of the parties to a disposition of the securities or the securities account, or an interest in either; (iii) the relevant intermediary; or (iv) the issuer or issuers of the securities. The foregoing list is not exclusive; particular fact patterns may raise additional factors that make the choice of which countries' law applies necessary to resolve, which then would result in the application of the Convention. By avoiding a fixed rule on timing, Article 3 also means that the Convention's application is not limited temporally to the moment of litigation or other occurrence of a particular transaction, but can apply at any time to a later party in interest when it acquired its rights. CHAPTER II--APPLICABLE LAW Article 4--Primary Rule on Applicable Law Article 4 sets forth the primary rule for determining the law applicable to the matters covered by the Convention, a straightforward choice of law rule, wherein the law of a single State applies. The basic Article 4 rule provides that the law applicable to the issues specified in Article 2(1) is ``the law in force in the State expressly agreed in the account agreement as the State whose law governs the account agreement or, if the account agreement expressly provides that another law is applicable to all such issues, that other law.'' The second clause was included primarily to cover cases where the law of one State is selected for contractual matters under the account agreement, but another law is expressly selected to govern the issues listed in Article 2(1) of the Convention. Under section 8-110(e)(1) and (2) of the UCC, the parties are permitted to select as the ``securities intermediary's jurisdiction'' the law of a jurisdiction different from the law selected to govern the account agreement itself. The Article 4 rule determining the applicable law turns on the agreement between the customer and the intermediary that maintains the account. If a customer holds securities through an account with a broker and wishes to use its holdings as collateral for a loan from a lender, the Article 4 test provides that the governing law is determined by the agreement between the customer and the broker concerning the account, not the loan or collateral agreement between the customer and the lender. While under the UCC, the securities intermediary's jurisdiction can be determined entirely by agreement between the intermediary and the customer, there is an additional requirement under Convention Article 4 that the selection of governing law is effective only if certain minimal conditions are met, including the requirement that the intermediary had, at the time the law is selected, an office in that country that engaged in relevant securities work. Under Article 1(1), ``office'' is defined to mean a place of business of the intermediary that carries out functions relating to the maintenance of securities accounts. It does not have to have dealt with the particular accounts or securities at issue in order to qualify for this purpose. As an alternative to the activities related to securities account maintenance, a qualifying office can also be established by identification through an account number, bank code, or other specific means of identifying the office as one which maintains securities accounts in the chosen State. Article 5--Applicable law fall-back rules Article 5 of the Convention contains a set of ``fall-back'' rules that apply when Article 4 does not determine the law applicable to the Article 2(1) issues. This can occur if the parties have not expressly agreed upon a governing law in the account agreement, or if the agreement as to governing law is ineffective for purposes of the Convention by reason of failure to meet the qualifying office test. Article 5 also provides the fall-back rules when the analysis of pre-Convention account agreements and securities accounts under Article 16 fails to produce a result. These fall-back rules, as do their counterparts in the UCC, are designed to provide a rapid means of determining applicable law. Article 5(1) provides that, if the parties expressly agree in writing that the intermediary entered into the account agreement through a particular office, then the law applicable to all the Article 2(1) issues is to be the law where that office was then located, provided that the office then satisfied the qualified office test in Article 4. In order to simplify the diligence process, Article 5(1) also lists a series of provisions commonly found in account agreements that are not to be considered as implying such an agreement, such as notice provisions and consents to jurisdiction for legal process. If Article 5(1) is not applicable, Article 5(2) provides that the law under which an intermediary is incorporated or organized will govern the Article 2(1) issues, unless that law is the national law of a country with a federal structure, such as the United States, in which case the law of the place of its business (or its principal place of business if it has more than one place of business) will govern. If Article 5(2) is not applicable, Article 5(3) provides that the law applicable in the intermediary's place of business will apply or if the intermediary has more than one place of business, its principal place of business. The choice of law in both of the Article 5(2) or 5(3) fall- back rules is fixed at the time the account agreement is executed or, in the absence of a written agreement, at the time the relevant securities account is opened. Article 6--Factors to be disregarded Article 6 sets forth factors to be disregarded in a manner similar to the list of factors to be disregarded under UCC Section 8-110(f) in determining the ``securities intermediary's jurisdiction,'' including (1) the place where the issuer is incorporated, or otherwise organized or has its statutory seat or registered office, central administration or place or principle place of business, (2) the place where security certificates are located, (3) the place where any securities register is located, or (4) the place where any intermediary other than the relevant intermediary is located. The Convention reflects the view of the United States and others that the ``look-through'' approach that has in the past been applied even in the United States to choice of law for securities held with intermediaries, and which requires a detailed and time- consuming analysis, is impractical in an age of rapidly moving electronic transactions. Absent the Convention or laws similar to the UCC, use as collateral of a portfolio of securities issued by companies around the globe would be costly and difficult, even if held through a single account with an intermediary, since a lender could not be assured that appropriate steps had been taken to perfect an interest unless the transaction were examined under (1) the laws of all of the various jurisdictions of the issuers of all of the securities held through the account, (2) the location in which certificates representing the underlying securities might be held, (3) the various places where the account might be deemed to be located, and (4) the various offices that might be deemed to maintain the account. Article 7--Protection of rights on change of the applicable law Article 7 deals with the situation in which an account agreement is amended so as to change the applicable law. The Convention includes rules to protect a secured party or other transferee against potential adverse effects of such a change, and was included in the Convention primarily for the benefit of countries, unlike the United States, where establishing a security interest does not as readily permit a secured party to eliminate the problem of change in law. In the United States, Article 9 of the UCC generally provides certain grace periods to address these issues. Article 7 uses the terms ``old law'' and ``new law'' as, respectively, the law determined under the Convention before and after the change in the agreement. The most important part of Article 7 is subsection (3), which provides that, except as stated in subsection (4) to Article 7, the new law governs all of the issues governed by the Convention. Exceptions to that general rule are set forth in Article 7(4). Article 8--Insolvency The Convention is consistent with U.S. insolvency laws. The Convention provides that the applicable law determined under Articles 4 or 5 will govern the Article 2(1) issues with respect to any event that occurred prior to the opening of an insolvency proceeding. This is consistent with the U.S. Bankruptcy Code. It is also consistent with Section 210 of the Dodd-Frank Wall Street and Consumer Protection Act and with the bank resolution provisions of the Federal Deposit Insurance Act and the resolution provisions applicable to the GSEs and the Federal Home Loan Banks under the Housing and Economic Recovery Act. Article 8(1) thus provides that the applicable law determined by Articles 4 or 5 governs the Article 2(1) issues with respect to any event that occurred prior to the opening of an insolvency proceeding (a defined term in Article 1), subject to Article 8(2) which provides that the ``substantive or procedural'' insolvency rules of the insolvency forum State shall govern the ranking of claims, voidable transactions such as preferences and fraudulent conveyances and statutory or judicial stays on realization of collateral. Thus, under the Convention (as in the case under the U.S. Bankruptcy Code), a creditor's security interest perfected under the law governing the Article 2(1) issues would be subject to the automatic stay and to avoidance rules on preferential transfers. CHAPTER III--GENERAL PROVISIONS Article 9--General applicability of the Convention Under Article 9, the Convention applies in a ratifying State or when the law of such a State is being applied, whether or not the law determined to be applicable under the Convention is that of a State party to the Convention. Article 10--Exclusion of choice of law rules (renvoi) Article 10 provides that the law to be applied by operation of the Convention's rules is the law in force in a State other than its choice of law rules. This is also consistent with the choice of law rules in Articles 8 and 9 of the UCC. Article 11--Public policy and internationally mandatory rules Article 11 deals with the extent to which a forum court may decline to apply the Convention's choice of law rules on grounds of public policy of the forum. Subsection (1) provides that a forum state can refuse to apply the substantive law determined under the Convention only if application of that law would be ``manifestly contrary to the public policy of the forum.'' The Explanatory Report clarifies that this public policy exception applies only in the admittedly extremely rare cases where the relevant foreign rule, as applied to the facts of the case, would produce a result that departs so radically from the forum's concepts of fundamental justice that its application would be intolerably offensive to the forum's basic values. Subsection (2) provides that the Convention does not preclude application of any rules of the forum that must be applied irrespective of conflict of law rules. The more significant feature of Article 11 is found in subparagraph (3), which provides that the exception for rules of public policy and internationally mandatory rules does not apply to rules of the forum relating to perfection and priorities. Those are key factors on which parties must be able to rely for the treaty to be effective, and were specifically requested by the United States and other countries that wanted the Convention to provide an adequate level of legal certainty for secured transactions. Article 12--Determination of the applicable law for Multi-unit States Article 12 contains a number of interpretive rules for Multi-unit States. The term Multi-unit State is defined in Article 1 as ``a State within which two or more territorial units of that State, or both the State and one or more of its territorial units, have their own rules of law governing the issues specified in Article 2(1).'' The United States qualifies as such a ``Multi-unit State,'' given that there are U.S. federal laws that apply to U.S. government and agency securities, and state laws that apply to state, municipal and private sector corporate securities. The fundamental interpretive rule of Article 12 provides that, when an account agreement specifies that it is to be governed by the laws of a territorial unit, (1) the laws of that territorial unit are to be the law applicable to the Article 2(1) issues, but (2) that the local office requirement of Article 4 applies to the Multi-unit State as a whole. Thus, if an account agreement specifies that it is governed by the law of a particular U.S. state, that designation will be effective under Article 4 if the intermediary has a qualifying office anywhere within the United States. Article 12(2)(a) provides that, in applying the Convention, the law in force in a territorial unit of a Multi-unit State (such as the law of a particular U.S. state) will include not only the law of that unit but also national law of that country to the extent applicable in the territorial unit. This would preserve the application of federal law in the context of U.S. government and agency securities. Article 12(2) also preserves choice of law rules applicable pursuant to the law in force in a territorial unit in respect of perfection by filing. Article 13--Uniform interpretation Article 13, a standard provision in Hague Conventions and other international private law conventions, provides that in interpreting the Convention regard is to be had to its international character and to the need to promote uniformity in its application. Article 14--Review of practical operation of the Convention Article 14, also a standard provision in Hague Conventions, provides for the Permanent Bureau (Secretariat) of the Hague Conference to convene meetings to review the operation of the Convention. CHAPTER IV--TRANSITION PROVISIONS Article 15--Priority between pre-Convention and post-Convention interests Article 15 addresses one situation involving pre-Convention interests, but does not provide a general rule as to prospective effect of the Convention. It provides that the substantive law determined under the Convention rules will determine whether an interest acquired after the Convention enters into force extinguishes or has priority over an interest acquired prior to the Convention entering into force. The effect of this provision is that the law determined applicable under the Convention will apply to disputes on matters covered by the Convention as between other post-Convention interests, and to such disputes between the post-Convention interest and any pre-Convention interests. This is consistent with the 1994 revision of UCC Article 8 and the subsequent revision of UCC Article 9. Article 16--Pre-Convention account agreements and securities accounts Under the basic rule of Article 4, the parties to an account agreement can include an explicit provision specifying the law that will govern the issues covered by the Convention. The Convention will also apply, however, to transactions where the relevant account agreement was entered into before the Convention came into force. Article 16 provides transitional rules on the extent to which the Convention applies to pre- Convention account agreements and securities accounts. Article 16(1) provides that references in the Convention to account agreements and securities accounts include those entered into or opened before the Convention entered into force. Article 16(2) makes clear that the transitional rules contained in that subparagraph do not apply if the account agreement makes express reference to the Convention. Article 16(3) sets out a transitional rule designed primarily with U.S. account agreements in mind, that is, agreements that were entered into in contemplation of the choice of law rules contained in UCC Articles 8 and 9. Article 16(3) provides that if the agreement contains a provision that would have the effect under its governing law--e.g., under U.S. law as set out in the UCC--that the issues covered by the Convention are governed by a particular law, then the agreement shall be treated as if it referred to the Hague Convention and selected that law. For example, if parties operating under Articles 8 and 9 of the UCC include in their account agreement a provision specifying that ``the securities intermediary's jurisdiction'' is a particular U.S. state, the fact that the Hague Convention uses a different formulation could, absent this provision, create doubt whether that pre-Convention agreement has the expected effect under the Convention. Article 16(3) is designed to remove doubt on this point. Article 16(4) sets out a transitional rule intended primarily for non-U.S. agreements. Under Article 16(4), if the parties to an account agreement have agreed that the securities account is maintained in a particular State, then the law of that State shall be the law applicable to the Article 2(1) issues, provided that the relevant intermediary satisfied the qualified office test in Article 4(1) at the time it entered into the agreement. Unlike the rules in Articles 4, 5 and 16(3), the agreement as to the account location in pre- Convention agreements may be express or implied from the circumstances. Article 16 also provides that a State may, upon ratification of the Convention, make various declarations limiting the effect of Article 16. We do not recommend that the United States make such declarations, so that the applicable transitional rules would be those set out in Article 16(2) or 16(3). CHAPTER V--FINAL PROVISIONS Article 17--Signature, ratification, or accession This article, standard in Hague Conventions, provides the technical rules describing the way in which a State can become bound by the Convention, thus becoming a ``Contracting State''. Article 18--Regional Economic Integration Organizations Article 18 deals with the way in which a Regional Economic Integration Organization (such as the European Union) can become bound by the Convention to the extent such Organization has competence over matters governed by the Convention. The United States supports the possible assumption by the European Union of the obligations of a Contracting State in view of the shared competence in securities law and regulation between the European Union and its member states. Article 19--Entry into force This article provides that the Convention will enter into force three months after three States have become Contracting States, and provides for the date of entry into force for subsequent ratifying States. Article 20--Multi-unit States Article 20 permits Multi-unit States to apply the Convention by way of declaration only to certain of its territorial units. We do not recommend that the United States make such a declaration in view of the need of securities markets to apply common rules to transactions throughout the U.S. Article 21--Reservations Article 21 states that reservations to this Convention are not permitted. Article 22--Declarations Article 22 provides the technical rules governing the manner in which the various declarations permitted to be made under the terms of the Convention become effective, modified or withdrawn. No declarations are recommended to be made by the United States. Article 23--Withdrawal Article 23 permits a Contracting State to withdraw from the Convention by notification in writing to the Depositary, which will become effective twelve months after the date on which the notification is received by the Depositary.