Rights of certificate-holders: Overview, definition, and example
What are rights of certificate-holders?
Rights of certificate-holders refers to the specific legal and contractual entitlements granted to individuals or entities that hold certificates in a trust or structured finance arrangement—such as mortgage-backed securities or asset-backed notes. These rights are typically set out in the trust agreement or indenture and define what certificate-holders can and cannot do in relation to the trust, its assets, and the trustee.
Why are rights of certificate-holders important?
Certificate-holders usually have a beneficial—not legal—interest in the trust assets. This clause makes it clear what protections, payments, voting rights, or other privileges they hold. It also helps define limits—for example, stating that certificate-holders cannot direct the trustee’s day-to-day decisions or claim ownership over individual assets. Clearly outlining these rights helps manage expectations and reduces legal risk for both the trustee and the investors.
Understanding rights of certificate-holders through an example
A group of investors holds certificates in a trust backed by commercial real estate loans. The trust agreement includes a clause stating that certificate-holders are entitled to monthly distributions, periodic reports, and the right to vote on major amendments to the agreement. However, they are not permitted to demand loan modifications or interfere with the trustee’s servicing of the loans. This balance ensures they benefit from the trust without disrupting its operation.
Example of a rights of certificate-holders clause
Here’s how a rights of certificate-holders clause may look like in a contract:
"The certificate-holders shall have the rights expressly set forth in this agreement, including the right to receive distributions in accordance with the priority of payments, the right to receive reports and notices as provided herein, and the right to vote on specified matters requiring certificate-holder approval. No certificate-holder shall have any legal title to, or right to control or manage, the trust estate."
Conclusion
The rights of certificate-holders clause defines the scope of an investor’s involvement and protections in a structured finance transaction. It ensures clarity over what certificate-holders are entitled to and what authority they do or do not have. For trustees, issuers, and investors alike, this clause helps preserve the legal and operational structure of the trust.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.