How to establish collateral on investment certificates of closed-end investment funds? | In Principle

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How to establish collateral on investment certificates of closed-end investment funds?

In 2019, legal regulations came into force providing for a mandatory dematerialisation of investment certificates issued by closed-end investment funds, including those which are not a part of a public offering and have not been admitted to an organised trading market. Newly issued certificates will no longer be able to be issued as a document, or function as an entry in the record of investment certificates kept by an investment fund company. They will have to be registered in the depository of securities kept by the Krajowy Depozyt Papierów Wartościowych (National Depository for Securities, KDPW). These regulations were then supplemented by rules for how an issuing agent must operate a register of investment certificates before their registration in KDPW. This fundamental change entails a number of practical and formal consequences that are significant in establishing and enforcing collateral on investment certificates.

Under the previous legal status, the establishment of a pledge (whether registered, financial or civil) on investment certificates required the conclusion of a pledge agreement, while a registered pledge required in addition an entry in the register of pledges. Since in most cases no documents were issued for investment certificates and they functioned as securities registered in the records of fund participants kept by the investment fund company, the firm managing the fund issuing the pledged certificates also had to be notified of the establishment of pledges.

Currently, a pledge on investment certificates may be established in two ways, depending on whether the pledge is to be arise at the very creation of the securities or only after their registration in the KDPW.

Entry in the records of persons with rights to the securities

An important role in the process of establishing collateral on newly issued certificates is played by the issuing agent, which, as a brokerage house or bank, has to ensure that the certificates are being issued in accordance with the law. Above all, until the certificates have been registered with the KDPW, the issuing agent must keep records of the persons with rights to the securities. An entry in the records is of key importance for determining the persons who are the owners of the securities, because the agreement obliging the transfer of those securities transfers them at the time when the entry is made in the records.

Therefore, it would appear that it is obligatory to enter a pledge in the records of investment certificates kept by the issuing agent. However, the question arises whether the pledge will be effective, if the issuing agent has failed to record the establishment of this limited property right on the investment certificates. In relation to a registered pledge, one may ponder whether an entry in the register of pledges is sufficient to make the pledge effective. However, this does not change the fact that, for practical reasons, it is recommended that the issuing agent be notified in writing of the pledge’s establishment, and that the agent should also confirm this fact in writing.

Investment certificates recorded in the securities account

The establishment of a pledge on investment certificates that have already been registered with the KDPW will be made in the same way as for shares in a listed company. In addition to concluding a pledge agreement and registering it in the register, it is essential that the collateral is recorded in the securities account of the holder of the investment certificates by the account holder blocking them. This is done on the basis of an instruction issued by the account holder. The market practice is fairly well developed in this respect and the regulations do not raise significant issues.

However, it is worth noting several aspects that may increase the pledgee’s legal security. For the purposes of evidence and any potential enforcement, it is recommended that a deposit certificate be obtained from the brokerage house managing the securities account that confirms the establishment of pledges and the blocking of any trading in the certificates due to the encumbrance of the certificates with a pledge. It is worth noting that, as a rule, all payments, including those to be received by the pledgee (e.g. benefits from the pledged certificates), will be paid out via the KDPW through the securities account and transferred to the account holder (debtor), unless the parties to the pledge agreement agree otherwise.

Classification of the object of the registered pledge

A technical but important aspect is the correct classification of the object of the pledge in accordance with the Schedule of Methods for Describing Objects of Pledges. This Schedule is quite antiquated and requires urgent amendment to take account of the legal and technological changes occurring in relation to securities. At this point in time, the only valid category for entering a pledge on investment certificates seems to be item F6.

Should the investment fund company (TFI) be informed?

In view of the change in the regulation, the question arises whether one should continue to notify the firm managing the investment fund which issued the certificates that they have been encumbered. In our opinion, such a notification is justified because the investment fund as the issuer may be a debtor with respect to the holder of the investment certificates. In addition, it is worth imposing an obligation on the TFI to notify the pledgee of all amendments or terminations of the agreement for acting as the issue agent that was concluded between the investment fund and the issue agent, to which the certificate holder is not a party. This is relevant until the certificates have been registered with KDPW and transferred to the holder’s individual securities account. The notification should be addressed to the appropriate investment fund company which manages the relevant investment fund issuing the certificates.

“Additionally securing” a pledge – additional blocking

The regulation of the Minister of Finance on the procedures and conditions of conduct of investment firms and banks, referred to in Art. 70 para. 2 of the Act on Trading in Financial Instruments and Custodian Banks of 30 May 2018, applies to the establishment of collateral on investment certificates issued after 1 July 2019 and its enforcement. It defines the rules of conduct for investment firms when establishing collateral on financial instruments recorded on their accounts.

Under the regulation, a pledgee may additionally consider establishing separate collateral in the pledge agreement in the form of an autonomous block on the pledged securities. The blocking bars trading in the certificates, but the pledgee is granted an additional power of attorney to sell the blocked certificates through a brokerage house. Therefore, the agreement or a separate document should contain a power of attorney authorising the creditor to sell the blocked certificates.

Typically, satisfaction under a block using the mentioned power of attorney will become possible upon a breach of the credit agreement (or other agreement secured by a pledge agreement and a block). It is worth reading the regulations of the given brokerage house, which may have additional requirements for granting such a power of attorney, especially in terms of its form (notarial deed, signatures certified by a notary, etc.). A block gives the pledgee the option to satisfy its receivable outside enforcement proceedings. Additionally, in the case of a civil and financial pledge, it introduces a legal mechanism that prevents trade in certificates without the pledgee’s consent (for a registered pledge, it is possible to bar its transferability and enter this in the register of pledges, which makes the sale of the object of the pledge invalid if against the pledgee’s will).

The regulation governs also technical aspects associated with the enforcement of collateral on investment certificates. If the certificates are not publicly traded securities, then it is possible, in principle, to use also standard non-enforcement methods of satisfaction from the object of the registered pledge specified in the Registered Pledge and Register of Pledges Act. This involves primarily the acquisition of ownership of certificates or their sale through a public tender conducted by a notary or bailiff. However, due to the certificates’ registration with the KDPW, the pledgee’s satisfaction, even if using the above mentioned methods, will have to be carried out with the participation of the entity maintaining the securities account where the certificates are recorded.

The regulation contains provisions allowing the entity maintaining the securities account to take part in such non-enforcement ways of satisfying the pledgee. For example, if the satisfaction of the pledgee consists in the acquisition of ownership of financial instruments under the terms and conditions set out in the Registered Pledge Act, the investment firm maintaining the account where the certificates are recorded will immediately transfer the certificates to the pledgee at the request of the pledgee on the receivable’s due date. The value of the acquired financial instruments is determined in under the rules set out in the Registered Pledge Act (in practice, the rules for determining the acquisition’s value are included in the pledge agreement, however, the agreement usually leaves the actual choice of a specific valuation method to the discretion of the pledgee). On the other hand, if the pledgee is to be satisfied through a sale of the financial instruments by way of a public tender, then at the purchaser’s request, made in writing and upon presentation of the tender report, the investment firm immediately transfers the financial instruments to the purchaser.

The entity maintaining the securities account in which the pledged investment certificates have been recorded is therefore legally obliged to cooperate with the pledgee in satisfying the pledge on investment certificates. In acquiring ownership of the certificates, the only practical problem may involve determining the value at which the pledgee will acquire ownership of the certificates. In accordance with Supreme Court case law, this should generally be the market value. Various approaches to a valuation may be considered, such as using an expert valuer, or referring to the net value of the assets of the closed-end investment fund issuing the certificates.

Time frames

The new rules apply to investment certificates issued from 1 July 2019. Whereas hitherto regulations apply to earlier released issues, and especially with regard to collateral on certificates established before that date. This means that no changes need to be made to documents regarding collateral on investment certificates that were concluded before 1 July 2019.


In summary, there have been significant modifications to the rules for establishing collateral and enforcing collateral on investment certificates issued by closed-end investment funds. In relation to collateral established on investment certificates recorded in the securities depository maintained by the KDPW, the rules are similar to those for collateral established on shares in public companies. Entities that are taking part in a transaction in which investment certificates are to be used as collateral for their receivables should actively cooperate with the issuing agent and the firm maintaining the securities account where the investment certificates are recorded. The fund management company has a much less important role to play now than hitherto.

Mateusz Tusznio, adwokat, Banking & Project Finance practice, Wardyński & Partners

Marcin Pietkiewicz, attorney-at-law, Financial Institutions & Capital Markets practice, Wardyński & Partners