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What Are Negotiable Instruments?
• What we today call “negotiable instruments” were once known under the more general category of “commercial paper.”
• Negotiable Instrument: An unconditional promise or order to pay a fixed amount of money, with or without interest.
Cash versus Negotiable Instruments
• Currency is designed to be anonymous and to pass freely from person to person.
• Negotiable instruments, on the other hand, can be converted into cash at some point.
Negotiable Instruments Are Governed By The UCC
• The Uniform Commercial Code also governs negotiable instruments under Article 3.
What Makes a Document Negotiable?
• UCC §3-104 explains that a document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.
Organization of Article 3
• Article 3 is divided into subparts that deal with a broad spectrum of negotiable instruments.
Part 1, Article 3
• Article 3 only applies to instruments that are payable to the bearer or to order at the time that they are issued.
Identifying Parties to be Paid
• Article 3 provides that the means for identifying the party to be paid must come from the language of the document and the intent of the signor.
Holder in Due Course
• The Holder in Due Course Rule grants complete and legal title to an instrument even when there are outstanding claims against it.
• It protects buyers who act in good faith.
Warranties
• Article 3 provides specific warranties including:
• That the signatures on the instrument are authentic and authorized
• That the instrument has not been altered
• That the person who transferred the instrument has no knowledge of an insolvency proceeding concerning the transaction
Accord and Satisfaction
• Article 3-311 provides that when an instrument contains a conspicuous statement that the instrument was tendered as payment in full, the debt is discharged and no further actions are warranted.
Negotiable Instruments and Securities
• Securities and negotiable instruments are sometimes confused with one another.
• A security is a share or ownership interest in a company.
• A negotiable instrument promises payment; a security is evidence of company ownership.
What Qualifies as a Security?
• A security is defined as a share in a corporation or an obligation by an issuing company.
Securities and Federal Law
• Securities law is controlled not only by state law, through the Uniform Commercial Code, but also through various federal statutes.
Federal Laws that Apply to Securities
• The first of a series of federal legislative initiatives aimed at the securities field was the Securities Act of 1933.
• The Securities Act was quickly followed by the Securities Exchange Act of 1934 which authorized the creation of the Securities and Exchange Commission.
The Securities and Exchange Commission
• The Securities and Exchange Commission (SEC) has been a potent force in the securities field since its inception.
• It polices stock exchanges, brokers, investment advisors, financial institutions and publicly-traded companies.
Registration with the SEC
• One way of ensuring that investors receive accurate information is the SEC’s requirement that all securities sold in the United States must be registered.
Viewing Registration Information
• The SEC maintains all of this information in a public-access database called EDGAR. This database can be accessed directly from the SEC’s web page at <http://www.sec.gov>
Provisions of Article 8 of the UCC
• Other features in Article 8 include a provision making the Statute of Frauds inapplicable to securities agreements.
• The Article is comprehensive in its coverage of securities and should always be referred to whenever a securities question arises.
Common Stock
• Common stock is the stock that a company issues in order to raise capital.
• This stock is sold on stock exchanges around the world.
Preferred Stock
• Preferred stock is a class of stock that entitles the person who possesses it with priority when it comes to paying dividends.
Article 9
• Article 9 of the UCC concerns secured transactions.
• A secured transaction is any promise to pay on a loan that is guaranteed by some form of collateral.
Care and Maintenance of the Collateral
• Other rules enforced under Article 9 include the requirement to care for the collateral.
• Article 9-207 requires the party in possession of collateral to use reasonable care in its custody and preservation.
Priority in Paying Claims
• Priority refers to the order in which claims will be paid.
• Article 9 creates rules for priority of claims.