If your bank offers signature guarantees to customers or even if management is just thinking about offering this service, then you will probably get questions about the procedures to use and rules to follow. Although not quite a compliance issue, it seems that compliance officers are the “go-to” employees for all questions related to federal regulations. In this article we offer you a primer on the Securities and Exchange Commission’s (SEC’s) signature guarantee program.

SEC Rule 17Ad-15 requires that transfer agents adopt a standard method for accepting signature guarantees from eligible guarantor institutions. According to the rule, an eligible guarantor institution means:

• Banks;
• Brokers, dealers, municipal securities dealers, municipal securities brokers, government securities dealers, and government securities brokers, as those terms are defined under the act;
• Credit unions;
• Savings associations; and
• National securities exchanges, registered securities associations, and clearing agencies. 

The guarantor of a signature of an endorser of a securities certificate warrants that at the time the security certificate or documents related thereto were signed:

• The signature was genuine;
• The signer was an appropriate person to endorse; and
• The signer had the legal capacity to sign.

The guarantor of a signature of the originator of an instruction warrants that at the time of signing:

• The signature was genuine;
• The signer was an appropriate person to originate the instruction if the person specified in the instruction as the registered owner or registered pledgee of a book-entry security was, in fact, the registered owner or registered pledgee. The guarantor of the signature provides no guarantee that the signer is in fact the registered owner or registered pledgee;
• The signer had the legal capacity to sign; and
• The taxpayer identification number, if any, appearing on the instruction as that of the registered owner or registered pledgee was the taxpayer identification number of the signer or of the owner or pledgee for whom the owner was acting.

Specially guaranteeing the signature of the originator of an instruction to transfer provides the warranty, in addition to the signature warranties provided, that:

• The person specified in the instruction as the registered owner or registered pledgee of the uncertificated security will be the registered owner or registered pledgee; and the transfer, pledge, or release of the uncertificated security requested in the instruction will be registered by the issuer free from all liens, security interests, restrictions, and claims other than those specified in the instruction.

Registered transfer agents cannot engage in any activity in connection with a guarantee, including the acceptance or rejection of such guarantee, that results in the inequitable treatment of any eligible guarantor institution or a class of institutions. Therefore, every registered transfer agent, including your bank if you are registered with the SEC, must implement:

• Written standards for the acceptance of guarantees of securities transfers from eligible guarantor institutions; and
• Procedures, including written guidelines where appropriate, to ensure that those standards are used in determining whether to accept or reject guarantees from eligible guarantor institutions.

A registered transfer agent may not reject a request for transfer of a certificated or uncertificated security because the certificate, instruction, or documents accompanying the certificate or instruction include an unacceptable guarantee, unless the transfer agent determines that the guarantor has not satisfied the transfer agent's written standards or procedures.

If a transfer agency rejects your guarantee, they must notify both your institution and the presentor of the security of the reasons for the rejection within two business days after rejecting a transfer request. They may notify the presentor by making the rejected item available to them. They may notify the guarantor by telephone, facsimile, or ordinary mail.

The transfer agent must keep copies of the standards and procedures on file and must send them to anyone who requests a copy within three days of the date of the request. The agent must keep copies of the rejection of a transfer for three years.

Transfer agents may also reject a request for transfer of a certificated or uncertificated security for the following reasons unrelated to the acceptance of a signature guarantee:

• Because the person acting on behalf of the guarantor institution is not authorized by that institution to act on its behalf, provided that the transfer agent maintains a list of people authorized to act on behalf of that guarantor institution; or
• Because the eligible guarantor institution is neither a member of a clearing corporation nor maintains net capital of at least $100,000.

Signature Guarantees

You can see the potential liability that a transfer agent assumes when securities are transferred based on improper endorsements, i.e., endorsements or instructions provided by persons other than the appropriate person(s). If you are a transfer agent, you must have controls designed to prevent the unauthorized transfer of securities for which the institution serves as transfer agent. One control that is almost universal among transfer agents is the requirement that a signature guarantee accompany all endorsements.

Medallion Guarantees

Medallion signature guarantee programs (so called due to the medallion stamp that is placed next to the signatures being guaranteed) guarantee the financial performance of the individual guarantors participating in the program. Transfer agents accepting signature guarantees issued under a medallion program greatly reduce the risk of loss from signature guarantors failing to honor signature guarantees.

Although a transfer agent may accept a signature guarantee from any person or organization, it has become an industry practice to accept signature guarantees only from participants in a medallion signature guarantee program. The SEC, which has established rules governing transfer agents’ acceptance of signature guarantees, permits registered transfer agents to reject signature guarantees from guarantors that are not participants in an SEC-approved medallion program.  The Securities Transfer Association (STA), a trade organization for transfer agents, runs two medallion signature guarantee programs, the STAMP and SEMP programs. The New York Stock Exchange runs another program, MSP.

• STAMP — Securities Transfer Agents Medallion Program. This program is open to all eligible guarantors, which includes commercial banks, credit unions, savings associations, trust companies, and broker-dealers.
• SEMP — Stock Exchanges Medallion Program. This program is open to members of the American, Boston, Midwest, Pacific, and Philadelphia stock exchanges and clearing and trust companies.
• MSP — New York Stock Exchange Inc. Medallion Signature Program. This program is open to all members of the New York Stock Exchange.

In order to be an eligible guarantor institution that is a participant in a signature guarantee program, the SEC, STA, and Securities Transfer Corporation (STC) must approve its application.

The medallion signature guarantee is not the same as a notary public stamp. When you provide a notary stamp and signature, you are only verifying the identity of the person signing a document and not making any statement about the document being signed. However, when your bank guarantees the authenticity of the signature on a security, it becomes liable for the financial value of the transaction. Since the certificate’s worth could be substantial, you must be very careful to establish the identity of the person whose signature you are guaranteeing.

How to Apply for the Medallion Program

Kemark Financial Services, Inc. runs the medallion signature program for the SEC. You may apply for qualification in the program on their website at http://www.kemarkfinancial.com/index.html. According to their website, each enrollment package contains:

• Application and subscription agreement
• Indemnity agreement
• Surety bond form, to be executed by the Seaboard Surety Company or an insurance company of your choice that is approved by the US Treasury Department to write surety bonds.

To begin the application process, you must arrange for the surety bond and then complete the program application and subscription agreement. All of the forms are available for download from Kemark’s website.

The first annual subscription fee is currently $395 and covers the first 13 months of membership. After you are approved, Kemark supplies the official stamp you must use for all signature guarantees. You may also attend training workshops conducted by Kemark that include proper uses of the medallion and medallion control best practices.

Security and Internal Controls

The liability for loss for your bank associated with the loss of the stamp or a fraudulent use is significant. You must have a surety insurance bond covering your use of the stamp and may have to review your bank’s blanket bond to determine if there is another insurance rider you can purchase. Here are a few suggestions for protecting the stamp.

• Assign the stamp to a specific person.
• Maintain the stamp under dual control in a secure location when it is not in use (e.g., do not keep it in a teller drawer).
• Keep a strict log of when the stamp was used and for what types of securities.
• Train appropriate staff annually.
• Conduct annual audits of the use and security of the stamp.

Lost and Stolen Securities Program

You may receive securities certificates through transactions for your own investment, as collateral for loans, as trust assets, or through transfer agent activities. In each situation, you may have securities certificate in your possession that have been reported as lost, stolen, counterfeit, or missing. In 1979, the Securities and Exchange Commission (SEC) implemented rule 17 CFR 240.17f-1 to require reporting and recordkeeping of such securities, so that the certificates are not later used erroneously or fraudulently. The regulation authorized the SEC to delegate the recordkeeping function and named Securities Information Center (SIC) as the central repository. SIC may be contacted at the Securities Information Center, Inc., P.O. Box 55151, Boston, MA 02205-5151 or via the Internet at www.secic.com.

All insured banks that possess or plan to possess securities certificates should be registered as either a direct or indirect inquirer. For direct inquirers, the bank has direct access to the SIC. For indirect inquirers, the bank submits information through another bank, such as a correspondent bank, to inquire on your behalf. In either event, institutions may inquire of the SIC whether a certificate has been reported as lost, stolen, counterfeit, or missing.

For the purposes of this rule, the following definitions are applicable:

• Securities are defined as corporate securities (those with a CUSIP number), municipal securities, and bearer U.S. government and agency securities that have actual certificates (not book-entry securities).
• Missing is defined as any certificate that cannot be located, but which is not believed to be lost or stolen, or that the transfer agent believes was destroyed, but was not destroyed according to the certificate destruction procedures required by SEC Rule 17Ad-19.

Securities exempt from the reporting requirements are:

• Registered securities of the U.S. government and federal agencies thereof,
• Securities that have not been assigned CUSIP numbers, and
• Bond coupons.

Securities exempt from the inquiry requirements are:

• Securities received directly from the issuer or its agent at issuance,
• Securities received from another reporting institution or from a Federal Reserve Bank or Branch,
• Securities received from a customer of the reporting institution in the name of the customer or nominee, and
• Securities that are a part of a transaction of $10,000 or less (aggregate face value for bonds or market value for stocks).

All securities certificates identified as lost, stolen, counterfeit, or missing, which are or were in the bank’s possession or control, must be reported to the SIC on Form X17FIA. The transfer agent for the certificate should receive a copy of the report, also. For each report submitted, the bank shall maintain and preserve copies of the forms for three years, along with other information received from the SIC as a result of the inquiry. Banks that are registered as indirect inquirers should maintain evidence of the inquiries made via the indirect inquirer to the same extent required of the direct inquirers.

Counterfeit securities certificates and stolen certificates involving suspected criminal activity must also be promptly reported to the FBI if there is a “substantial basis” for believing that criminal activity was involved. All counterfeit securities must also be reported to the FBI. A Suspicious Activity Report (SAR) is required for:

• Insider abuse involving any amount;
• Transactions aggregating $5,000 or more where a suspect can be identified;
• Transactions aggregating $25,000 or more regardless of potential suspects.