Legal Certainty

Legal certainty sounds like a good thing, right? Not always. When we are talking about The Great Taking we’ve got certainty under law no doubt. But the legal certainty here is that banks - the largest banks – are certain they are protected with legal title to your stocks, bonds, 401(k), and IRA in a financial crisis.

This must have been what Votaire had in mind when he said “Uncertainty is an uncomfortable position. But certainty is an absurd one.” A law protecting the big banks at your expense is certainly absurd, but that law is on the books in your state today. An insurance policy waiting to pay off.

David R. Webb brilliantly lays this out in The Great Taking. I and others on Substack and elsewhere have added our thoughts as well. Further, the special interest attorneys who wrote the Uniform Commercial Code (UCC) Article 8 revision (a law on the books of all 50 states today) were concerned about this ‘legal certainty’ in their Official Comments to the model Bill.

Even ChatGPT weighed in when asked, a short summation of ChatGPT’s response:

Prompt: Does the UCC protect banks over investors?

Final, Direct Answer to You:

Yes, even if broker-dealers are illegally pledging customer securities, banks can end up with a perfected, enforceable lien. Customers have almost no recourse against the bank itself. The UCC, while purporting to protect customer entitlements, ultimately prioritizes the rights of secured creditors who act in good faith and perfect properly.

Thus, the system — deliberately — favors banks and financial stability over protecting individual investors. (emphasis added)

Seems pretty cut and dried.

The banking lobby continues to fight our efforts at the state level to protect your property rights. We do have Bills alive and moving in ID, UT, and TN as I write this and legislators in several other states are working on it. But so far, the bank lobby is successfully labeling The Great Taking as a conspiracy theory. This despite the number of conspiracy theories that turned out to be true just in the last five years. Even so it has been a winning strategy for the bank lobby – so far.

Our position is that a law in your state gives priority (ownership) over your investments to the too big to fail banks to if (when?) we see a significant financial crash. Your state law, specifically UCC Article 8-511 picks winners and losers - if both you and a large bank have a claim to your investments – the bank wins and you lose. That’s how the law in your state works today.

Conspiracy theory? let’s see what the banking industry itself has to say regarding the legal certainty of UCC Article 8?

In March 2006 the Deputy General Counsel (attorney) for the Federal Reserve Bank of New York responded in writing to a number of questions from the European Commission’s ‘Legal Certainty Group’. The 20-page response is amazing, a link to this letter is available in the References section of The Great Taking. A pdf of this book is available for free at our website trunorthpublicpolicy.com A hard copy is also available on our website for those of you who (like me) want to hold a book in your hands.

Again, remember ‘legal certainty’ means providing ironclad protection for the big banks.

The context for these questions from the Legal Certainty Group is that the European Union was being pressured to adopt the securities market reforms that were put in place in the United States in the preceding 25 years. The reforms that favor the largest banks over you and me. The questions they asked of the NY Federal Reserve cover a broad range of topics, but it is the responses provided by the Fed that erase any doubt about the truth behind The Great Taking. Pertinent excerpts are below.

Q. 10 Where securities are held in pooled form (e.g. a collective securities position, rather than segregated individual positions per person), does the investor have rights attaching to particular securities in the pool?

A. No. The security entitlement holder does not have rights attaching to particular securities in the pool, he has a pro rata share of the interests in the financial asset held by its securities intermediary to the amount needed to satisfy the aggregate claims of the entitlement holders in that issue. This is true even if investor positions are“segregated.” (emphasis added)

Q. 15 Is the investor protected against the insolvency of an intermediary and, if so, how? Does the investor have to rely on the intervention of a court or liquidator? In what way is the answer different if the insolvency is of an upper-tier intermediary?

A. Under Article 8, an investor is protected against the insolvency of its securities intermediary insofar as the security entitlements credited to the investor’s securities account are not part of the securities intermediary’s bankruptcy estate (and likewise, an investor is protected from the insolvency of an upper-tier intermediary). However, an investor is always vulnerable to a securities intermediary that does not itself have interests in a financial asset sufficient to cover all of the securities entitlements that it has created in that financial asset. (emphasis added) ‘Always vulnerable’ - not very comforting.

Article 8’s limited protection for investors is “premised on the view that the important policy of protecting investors against the risk of wrongful conduct by their intermediaries is sufficiently treated by other law.” 8-511, comment 2. The “other law” includes, among others, Federal and State banking law and Federal securities law which require a securities intermediary to separately account for customer securities versus proprietary securities, and the Securities Investor Protection Act, which protects investors against losses up to $500,000 for cash and securities (of which only $100,000 can be to reimburse cash claims) held at firms which are members of the Securities Investor Protection Corporation (as are all securities firms that are also required to register as broker-dealers).

[Author note: This paragraph makes one thing clear – UCC Article 8 does not, and is not intended to, protect investors, ChatGPT’s said the same thing above. Any investor protections are left to ‘other law’. I have written about these ‘other laws’ and the SIPC in earlier articles on this Substack.]

Q. 26 Can the investor enforce rights against an upper-tier intermediary (i) normally, (ii) in the event of breach of duty by the intermediary, (iii) in the event of breach of duty by the upper-tier intermediary, (iv) if the event is insolvency rather than breach of duty?

A. Generally, no. The investor has no rights under Article 8 against an upper-tier intermediary, as upper-tier intermediary per se. The investor may have rights against an upper-tier intermediary to the extent it colluded with the investor’s securities intermediary to violate the securities intermediary’s obligations to entitlement holders and certain other conditions, detailed in the answer to question 24. 8-503(d). (emphasis added)

There are several questions from the Legal Certainty Group about ‘shortfalls’. A shortfall is when a broker or other securities firm does not have enough of a specific stock or security to cover the rights of the investors. The response from the NY Fed is long – and very interesting. But the last sentence is revealing “In actual fact, shortfalls occur frequently due to fails and for other reasons, but are of no general consequence except in the case of the securities intermediary’s insolvency.” (emphasis added)

The ‘fails’ referenced in the response refer to ‘Failure to Deliver’ (FTDs). I wrote about FTDs in a post last year, this is a huge and growing area of Wall Street fraud you should be aware of and I urge you to follow this issue.

In the response the NY Fed said that shortfalls ‘are of no general consequence except in the case of the securities intermediary’s insolvency’. This is the nail in the coffin to the conspiracy theory shtick.

The two exceptions in UCC 8-511 (b) and (c) that pick the banks as the winners and you and me as the losers kick in when a financial firm becomes insolvent. At that point even the NY Fed believes there will be consequences if there is a ‘shortfall’.

Consequences indeed.

The bank wins and you lose - take it from the NY Fed.

The quote “Nothing is certain except death and taxes” often attributed to Ben Franklin needs updating.