Medallion Signature Guarantee

A medallion signature guarantee is a guarantee, given by an eligible financial institution that belongs to a medallion signature guarantee program, that the signature on a document transferring securities is genuine. The SEC explains the need for it this way: to transfer or sell securities held in certificate form, an owner signs the certificates and a securities power, and "you will need to get your signature guaranteed on all documents before a transfer agent will accept the transaction instructions." The guarantee shifts the risk of a forged signature away from the transfer agent.

The rule behind it. SEC Rule 17Ad-15 governs how registered transfer agents treat signature guarantees. It defines the institutions that may give one (banks, broker-dealers, credit unions, national securities exchanges, registered securities associations and clearing agencies, and savings associations), forbids transfer agents from treating any class of them inequitably, and requires written standards for accepting guarantees. A transfer agent that rejects a transfer because the guarantor does not meet its standards must tell the guarantor and the person presenting the transfer why within two business days. The word "medallion" does not appear in the rule. Paragraph (g) instead treats a transfer agent as compliant if it accepts guarantees only from institutions that belong to a "signature guarantee program" giving it adequate protection against financial loss. The medallion programs are those programs, which is why a transfer agent can refuse a guarantee from a bank that is not a member.

The three programs. The SEC names them: the Securities Transfer Agents Medallion Program (STAMP), whose participants include more than 7,000 U.S. and Canadian financial institutions; the Stock Exchanges Medallion Program (SEMP), for regional exchange member firms and clearing and trust companies; and the New York Stock Exchange Medallion Signature Program (MSP), for NYSE member firms.

Why it is not a notarization. A notary public's stamp attests to who signed. A medallion guarantee is a financial institution standing behind the signature under a program built to protect the transfer agent against loss. The two are not interchangeable: where a transfer agent asks for a medallion signature guarantee, a notarized signature is a different thing.

When it is asked for. The SEC's guidance is that an owner who wants to transfer or sell securities held in certificate form must have the signature guaranteed on all the documents, and an executor transferring a decedent's certificated shares signs the same documents. The SEC and FINRA also note that asking a transfer agent to send directly registered shares to a broker, rather than having the broker request them, may require one. The SEC points to one way to avoid the requirement: holding securities in street name, in the brokerage firm's name rather than your own.

Getting a guarantee is mostly a matter of going to the right institution with the right documents. The SEC notes that an institution is unlikely to guarantee the signature of someone who is not its customer, so the best source is a bank, savings and loan association, brokerage firm or credit union you already do business with. Call ahead to confirm the branch belongs to a medallion program and has someone authorized to give guarantees, and bring identification and the transfer documents. Guarantor firms can charge a fee, though the SEC observes that they often do not and offer the service to customers. An investor abroad may be able to use an overseas branch of a U.S. or Canadian bank, broker or credit union, and the SEC suggests contacting the transfer agent for help when no guarantor can be found.

Consider an example. Lena holds 150 shares in direct registration at a company's transfer agent, worth $9,300 at $62 a share, and wants them in her brokerage account. The more common route is for her broker to pull the shares electronically. She instead asks the transfer agent to push them, and its form calls for a medallion signature guarantee and her broker's DTC participant number. Her credit union is a STAMP member, so she has the form guaranteed there and mails it to the transfer agent. Had she gone to a bank where she has no account, it would most likely have declined.

Pros

• It makes forging a transfer of someone's securities much harder, which protects the owner as well as the transfer agent.
• It is widely available through ordinary banks, credit unions and brokerage firms, and is often free to existing customers.
• Holding shares in street name avoids the requirement altogether.

Cons

• An institution where you are not a customer will usually refuse, which can be a real obstacle for an executor or for someone living abroad.
• Not every branch has an authorized officer or belongs to a program, so a trip can be wasted without a call first.
• A document rejected for a missing or wrong guarantee has to be redone, which delays the transfer and any estate waiting on it.