The Uncertificated Securities Regulations 1992

Explanatory Note

(This note is not part of the Regulations)

1.  These Regulations make provision for the transfer of title to a unit of a security of a company (for example a share or a debenture) and the evidencing of such title without a written instrument in accordance with a computer-based system of procedures devised by the London Stock Exchange and known as Taurus. These computer-based procedures are enshrined in the procedures set out in these Regulations, together with additional procedures and requirements to be contained in rules made under them (in the Regulations the procedures so set out are known as “the system”). A security, units of which are transferred under the Regulations, is known in them as an “uncertificated security”.

2.  The new procedures centre round a power, known in the Regulations as an “entitlement”, to issue instructions to register a person as the holder of a unit of an uncertificated security. This power will be conferred upon persons known as “controllers” in the Regulations, whose function (and duty) is to hold entitlements, and to exercise them, on behalf of their clients (who are known as “account holders” in the Regulations)—in particular to instruct their clients' registration as the holders of the underlying units of securities. Whether or not a particular controller has the power to register a person as holder of a particular unit of an uncertificated security is to be determined by whether it is recorded as holding that entitlement on a “record of entitlements”. The entitlements held by a controller are held to the order of the clients for whom they hold them. The entitlements are themselves transferable by book entries in records of entitlements.

3.  Title to a unit of an uncertificated security is transferred, under the Regulations, as a consequence of the registration by the issuing company of a person on the register of holders of the security in question (known as “the appropriate register”), in response to an instruction (known as “a proper instruction to register”) issued by a controller. The Regulations require the appropriate register to be updated periodically, rather than continuously, as consequence of the fact that proper instructions to register need only identify the transferee of a unit and not its transferor (and therefore there is a need for the instructions to be given with respect to a specified date).

4.  The new procedures depend upon the existence of a person known as “the Operator” who is to provide or stipulate for the computer-based facilities for the operation of the major part of the system and is to operate that part (the part being known in the Regulations as “the Operator’s part of the system”). As this part of the system is computer-based, provision is made in the Regulations as to the reliance that can be placed on electronic communications passing through it which purport to be given by, or on behalf of, persons. It will be possible under the system to transfer units of a security by dealing directly with company-appointed controllers without involving the Operator; the paper-based procedures for doing so constitute the other part of the system.

5.  The Operator in addition has conferred on it, or is the potential recipient of a delegation of, certain ancillary functions, such as functions with respect to the admission of securities and participants into the system.

6.  Part I of the Regulations defines certain terms for the Regulations as a whole and deals with the delegation of functions to the Operator.

7.  Part II of the Regulations, in Chapter I, makes provision with respect to the commencement of the operation of the system and the supervision of the Operator. Chapter II of Part II makes provision with respect to how controllers become authorised to hold entitlements on behalf of account holders and related matters. Two types of controllers are provided for in the Regulations, controllers appointed by the company to act without charge for investors (known as “company controllers”) and controllers who are to perform their functions for investors on a commercial basis under contract (known as “commercial controllers”). A person using a commercial controller is required to appoint that controller as his agent for the effecting of certain communications through the Operator’s part of the system. Chapter III of the Part makes provisions for persons (known as “approved persons”) who have the function under the Regulations of being the means whereby instructions may be given to company controllers through the Operator’s computer-based procedures. Otherwise such controllers receive instructions in writing. (Commercial con-trollers and their account holders make their own arrangements by contract.)

8.  Part III of the Regulations sets out how the title to a unit of an uncertiticated security is transferred and recorded. Regulation 16 provides that the holders of the units of an uncertificated security are to continue to be recorded in the register appropriate for that security. Regulation 17 provides that that register (if it would not otherwise be) is to be prima facie evidence of title. Regulation 18 provides that transfers of units of an uncertificated security may only be effected in accordance with the Regulations. Regulation 19 provides that the transfer of title to a unit of an uncertificated security is effected by registration of a person on the appropriate register as transferee in response to a proper instruction to register. Regulation 20 defines a proper instruction to register as an instruction to register containing certain particulars which is issued by a controller holding the entitlement to the unit concerned (in most cases) at the date by reference to which the register is made up. Regulation 21 requires a company to act upon a proper instruction to register when received, save in certain limited circumstances.

9.  Part IV of the Regulations makes provision for entitlements and their transfer. It also deals with the relationship between a controller and its account holders. Regulation 22 defines what an entitlement is and provides that a record of entitlements maintained by the Operator or a company under regulations 24 or 25 is to be conclusive (except in certain limited circumstances) of whether a controller has an entitlement. Regulations 30 to 32 deal with the transfer of entitlements where such transfer is required to give effect to an underlying transaction with respect to a unit of a security (because transferor and transferee of the security are account holders of different controllers). Regulation 33 makes provision where no transfer of an entitlement is necessary to give effect to an underlying transaction with respect to a unit of security, because both transferor and transferee are, or are to be, clients of the same controller. Regulation 34 permits equitable mortgages to be created under the uncertificated procedures under the law of England and Wales and Northern Ireland, notwithstanding the fact that no certificates are in issue which may be deposited with a lender.

10.  Part V of the Regulations makes further provision with respect to registration and the maintenance of the appropriate register for an uncertificated security. Chapter I puts a duty on controllers to issue proper instructions to register in certain circumstances and deals with the consequences where they fail to do so, or issue too many instructions. Chapter II deals with the maintenance of an appropriate register, requiring that it be updated periodically, though allowing intermediate registrations where a transferor is in fact identified in a proper instruction to register. It provides that the register must be updated upon the occurrence of certain events (by the company calling for the issue of proper instructions to register) and in any event at least once in every five weeks. Chapter III of the Part makes provision with respect to the updating of an appropriate register where the company concerned is being wound up.

11.  Part VI of the Regulations makes a number of ancillary provisions necessitated by the creation of uncertificated securities. It excludes certain inconsistent requirements of enactments and rules of law, implies certain terms into contracts for the transfer of units of an uncertificated security, ensures that trustees may hold (consistently with their duties) units of such a security and deals with circumstances under which there is a transfer of a unit of an—uncertificated security or rights in relation to it by operation of law, the imposition of a restriction on its transfer as a result of a court order and a prohibition on its transfer under an enactment.

12.  Part VII of the Regulations makes further provision with respect to the Operator, controllers and other participants in the system. It in particular contains provisions dealing with the management by the Operator of the system, the making of communications by means of the system and for persons known as “default nominees” of controllers (whose function it is to be registered as the holder of a unit of an uncertiticated security where a controller for any reason fails to issue a proper instruction to register in respect of the unit or the company, for any lawful reason, refuses to act upon a proper instruction to register). It also makes provision with respect to service of documents on the Operator and controllers and with respect to statements of account to be sent by controllers to their account holders.

13.  Part VIII of the Regulations makes a number of provisions with respect to the procedures and records and registers to be maintained under the Regulations. Amongst other things, it allows rectification of records and registers by the person maintaining them or by court order.

14.  Part IX of the Regulations makes provision with respect to the conversion of certificated securities into uncertificated securities transferable under the Regulations. Conversion is effected by the signature of a certificate by two Directors or a Director and Secretary. It is however the duty of a company not to convert any securities inter alia unless (save in certain defined cases) it has made adequate preparations and two resolutions have been passed by a three quarters majority: one by the shareholders of the company approving the entry of any securities of the company into the system, the other by the holders of the security to be converted consenting to the conversion.

15.  Part X of the Regulations makes provision for the re-conversion of uncertificated securities into certificated securities. Procedures are established for voluntary re-conversion and also (in certain circumstances) for compulsory re-conversion (for example where the holders of an uncertiticated security have resolved upon conversion or a company has failed to perform its functions under the Regulations with respect to the security).

16.  Part XI of the Regulations makes special provision for certain securities and for interests in securities. It, inter alia, enables issues of debentures to be transferred under the Regulations (provided that those debentures have certain characteristics) and enables interests in units of securities to be transferred in the same manner as units of the securities themselves.

17.  Part XII of the Regulations concerns the admission and supervision of participants in the system.

18.  Part XIII deals with investigations and complaints in respect of the system. It provides for the appointment of a Complaints Commissioner to investigate complaints, for him to make reports and for references to the Financial Services Tribunal to consider findings made by the Complaints Commissioner upon the application of persons aggrieved.

19.  Part XIV makes provision for a compensation scheme for those persons who have suffered loss as a result of the failure of a participant to perform functions under the Regulations. Payment under the scheme is to be made in certain defined circumstances.

20.  Part XV makes miscellaneous and general provisions. It permits the charging of fees and makes provision for competition scrutiny of the system. Regulation 112 empowers the making of rules inter alia providing for ancillary and supplementary procedures and requirements. Regulation 116 provides that any duty imposed by the Regulations is actionable as a breach of statutory duty, subject to the usual defences. However, Regulation 118 provides that any breach of duty is not to avoid any act done in contravention of the duty. Certain consequential and transitional provisions are made and regulation 123 adapts the Regulations in so far as they apply to the law of Northern Ireland.