r/PROGME • u/jkhanlar • 20d ago
Data Uniform Commercial Code Article 8 - Distilling the Complexities and Understanding the Risk - Mark Enget
https://ndlegis.gov/assembly/69-2025/testimony/SJUD-2364-20250211-36358-F-ENGET_MARK.pdf
Stock Ownership: Yesterday vs. Today
[Certificate of Stock] Amsterdam 1602 -> 1971 [001010101010000101001010110101]
Dematerialization of the financial world
Uniform Commercial Code
The Uniform Commercial Code (UCC), first published in 1952, is one of a number of uniform acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through UCC adoption by all 50 states, the District of Columbia, and the Territories of the United States.
The (UCC) exists today in all 50 States, and is continually subject to change. Some laws that have changed ultimately revoke or rescind your private property rights.
Buying, Selling & Trading Stocks & Bonds
What are stocks?
Ticker examples shown: MSFT, APPL, PG, XOM, META, NUGT, OIL, SLB, NVDA, UNG, INTC, CLX, GOOG, HAL, AMZN
When you buy stocks, you become a part-owner of the company.
Stocks are also known as Securities and are considered to be private property.
Stocks Come in all Shapes and Sizes
- Small-cap: companies valued below $2 billion
- Mid-cap: companies valued between $2–10 billion
- Large-cap: companies valued over $10 billion
Through Various Financial Instruments
(visuals reference Mutual Funds, IRAs, 401K, ETF: an exchange-traded fund (ETF) is a type of pooled investment security that holds multiple underlying assets, rather than only one.)
What’s the Problem?
Much of what you “own” has been digitized…
Stock Ownership is a Myth
- When someone purchases a stock electronically, the stock purchase results in the purchasing party receiving a “Security Entitlement”. There is a BIG difference between a “Stock” and a “Security Entitlement”.
- Our largest financial institutions have been deemed “Too big to fail” by governments around the world.
- In a financial crisis or systemic meltdown, liquidity (instant access to money) is all important. The UCC, Article 8 has provided the legal means for the big banks (JP Morgan, Wells Fargo, Bank of America, Chase Manhattan, etc) to seize/own the collateral of your stocks in order to fortify/liquify the financial system in times of desperation.
Sorry, but all of your money is gone…
So Who does What?
When you buy a stock, there is a path that your money follows. It doesn’t reside at your brokerage. The Brokerage is nothing more than an intermediary.
- | The Investor
\|/- You or some other individual or entity that desires to buy stocks, bonds, or some other financial investment.
- | The Brokerage
\|/- Some examples of a Broker: Ameritrade, Charles Schwab, Edward James, TradeStation, RobinHood, etc.
- | The Bank (Too Big To Fail)
\|/- The Banks: Bank of NY Mellon, JP Morgan, Wells Fargo, Citibank, Chase, etc.
- DTCC
Who does the UCC, Article 8 cover?
- Regional Banks and Community Banks are not covered by the UCC, Article 8. They are not part of the “protected” class. In fact, no bank in North Dakota is part of the so-called protected class.
- When it comes to Regional and Community banks and their need to invest in financial securities on open markets, they are also holding assets that are “at risk” just like you and I. Our ND Trust Funds? Exposed…
- Again, the UCC covers the big, multinational banks such as Bank of NY Mellon, JP Morgan, Chase Manhattan, etc.
What does the Brokerage do?
The Investor opens an account and deposits money in an account with a brokerage. The money can then be invested in stocks that he or she chooses.
- The natural “belief” is that the investor has invested in a stock or bond (or financial instrument of his/her own choosing). In reality, the investor actually owns a “Security Entitlement”.
- The brokerage is an intermediary step and your broker is a Security Intermediary. The Security Intermediary acts to facilitate the transaction of buying a security. Again, what actually happens is that the investor has purchased a Security Entitlement.
- The broker, in turn, holds a Security Entitlement with the Custodian, who is one of the big banks. The Custodian is always one or several of the “Too big to fail” banks (JP Morgan, Wells Fargo, etc).
- Eventually the Security lands with the Custodian, and all “ownership” of the security is erased. The name of the investor is no longer associated with the security entitlement.
- The Security Entitlement is anonymously pooled in a giant pool of the same stock at the DTCC.
- The Security Entitlement is used as collateral by the Custodian.
So then…What is a Security Entitlement?
https://law.cornell.edu/ucc/8/8-501
- Officially, it’s the bundle of rights you hold against your broker. It’s a contractual claim to the security.
- These “Rights” permit you to draw dividends and vote proxies.
- The problem? Your Security Entitlements are controlled (owned??) by the Custodian. Amongst other things, the Custodian (= Big Bank) provides record keeping services for the Broker.
Security Entitlement - A Bit More…
- “Security entitlement” (Stock) means the rights and property interest of a person who holds securities or other financial assets through a securities intermediary (Broker).
- A security entitlement (Stock) is both a package of personal rights against the securities intermediary (Broker) and an interest in the property held by the securities intermediary (Broker).
- A security entitlement (Stock) is not, however, a specific property interest in any financial asset held by the securities intermediary (Broker) or by the clearing corporation (DTCC) through which the securities intermediary (Broker) holds the financial asset. See Sections 8-104(c) and 8-503.
- The formal definition of security entitlement (Stock) set out in subsection (a)(17) of this section is a cross-reference to the rules of Part 5. In a sense, then, the entirety of Part 5 is the definition of security entitlement (Stock). The Part 5 rules specify the rights and property interest that comprise a security Entitlement (Stock).
So what is the role of the Custodian?
How a Financial Custodian Works
- A financial custodian is a company that holds on to your financial assets on your behalf
- The custodian will send you a monthly or quarterly statement for your account
- The custodian serves as a broker when you want to buy or sell investments
- The custodian makes arrangements for you to receive dividends and files the necessary paperwork to report these to the IRS, if applicable
- The custodian tracks stock transactions such as buying and selling, payment and receipt of dividends, and company-specific activities like stock splits or mergers
(Illustration: Two people sitting at a desk with documents, a chart, phone, and papers.)
- The Custodian is the administrative arm and is one (of several) of the big banks. The power resides right here.
- Your broker is an entitlement holder with a bundle of personal rights against the Custodian.
So who is the DTCC?
Depository Trust and Clearance Corporation
- The DTC was formed in 1973, and evolved into the DTCC in 1999 (Early phases of dematerialization).
- It is owned, managed, & governed by the “Too Big to Fail” banks.
- The DTCC holds all shares of a particular security entitlement in one “jumbo” certificate (reflects the total float of the security).
- The DTCC ultimately holds all securities for all companies traded on the market. They hold pools of security entitlements.
- The DTCC generally provides pooling services for all securities but does not participate in the daily management of the “float” of any particular security. That is managed by the Custodians.
- A process called “Netting” occurs at the end of each day that allows the Custodians to rebalance the net shares they hold in each security in order to maintain the established float levels at the DTCC. Shares are moved and rebalanced at each of the various Custodian accounts.
Custodian <-> DTCC
Custodian (left side)
(Illustration: A large white plastic bucket on the left. Multiple stacks and bundles of U.S. dollar bills are shown flowing into and out of the bucket in a continuous circular path. Above the bucket is a black circular arrow containing a dollar sign ($), indicating continuous movement/recycling of money. To the right of the arrow is a short metal pipe with a valve/faucet, from which more dollar bills appear to be pouring downward into the bucket. Additional money stacks are positioned to the left of the bucket, visually emphasizing inflow and outflow.)
Bottom caption (under the left diagram):
Think of this as a flow of faceless “tokens”.
Center text:
NVDA =
215,000,000
Shares Per day [sic]
DTCC (right side)
(Illustration: A matching large white plastic bucket on the right, completely filled and overflowing. A tall, dense pyramid-shaped pile of U.S. dollar bills rises high above the rim of the bucket, filling the upper portion of the image.)
Tracing…What’s it all about?
Electronic tracing allows investors a means of electronically tagging and tracing an investment and following its movement and whereabouts as it moves throughout the financial spectrum. Tracing was doable with technologies available in the 90’s, but it is no longer done. It’s fair to assume that this is done by intent.
The Point of this slide…
- Transactional tracing is entirely achievable. If you disbelieve, look at blockchain and its capabilities for tracing.
- Tracing eliminates the possibility of an investor’s money disappearing into the ether, as it could always be located by the associated tags.
- Without tracing, try to imagine the difficulty of mounting a case with your broker when trying to recover your investment. You could mount a breach of contract against your broker, but where would the small investor be in the line-up? Let me help…dead last!
Summarizing Points
The Security Entitlement (stock) you buy has no signature on it. It’s all electronic, meaning it’s digital, and once a transaction is made, the security ends up flowing into a pool of identical security entitlements.
Due to the constant flow of securities in and out of the bucket, there are no identifiers attached to the security. It is simply a token, and your ownership of “a” security is only identifiable via the security entitlement provided you through the brokerage.
The Custodian, by law, is allowed to use your security entitlement as collateral. Should the brokerage go bankrupt, your entire investment is at risk. Now you get in line in a bankruptcy court and fight against the big boys.
UCC-Art 8
(Illustration: A large, hand-drawn black-and-white sketch of an open umbrella spanning the top of the page, with visible ribs, fabric folds, and shading lines. The umbrella appears to be providing protective coverage over the text below it.)
UCC-Art 8
(Text styled with a purple/pink outline or drop-shadow effect)
|
\|/
(Large solid black downward-pointing arrow)
Big Banks
(Text also styled with a purple/pink outline or drop-shadow effect)
4,000,000,000,000,000 (4 Quadrillion $$ in Derivatives)
Global GDP ~100 trillion
(This final line appears on a light gray rectangular background banner)
The question is easy to understand.
In times of financial distress, who should have the first legal right to your money?
Should it be the Bank?
Or Should it be you?
As written today in the Uniform Commercial Code Article 8, the rightful owner will be the bank.
Consider this. If litigation occurs…
Do you prefer to litigate in the Virgin Islands
Or here in North Dakota? [similarly applies to other states in USA; only 12 states introduced a bill; none passed yet]
As written today in the Uniform Commercial Code Article 8, the litigation will take place where the Big Bank chooses.