I. INTRODUCTION
The Securities and Exchange Commission (SEC) adopted Rule 17Ad-15, effective February 24, 1992, requiring securities transfer agents to establish written standards and procedures pertaining to the acceptance of signature guarantees. Rule 17Ad-15(d) provides that a transfer agent may reject a request for transfer of a security on the basis on an unacceptable guarantee from an eligible guarantor institution (financial institution) only when the guarantor does not satisfy the transfer agent’s written standards. As a result, financial institutions involved in the transfer or sale of securities for their customers are required to comply with the new rules regarding signature guarantees.
II. ACCEPTANCE OF SIGNATURE GUARANTEES – WRITTEN STANDARDS AND PROCEDURES
Pursuant to the SEC rule, transfer agents are permitted to reject signature guarantees submitted by financial institutions that are not participants in a signature-guarantee program. Effective February 24, 1992, all registered transfer agents were required to establish written standards for the acceptance of guarantees of securities transfers from eligible guarantor institutions and procedures to ensure that the written standards are used to determine whether to accept or reject guarantees of securities transfers fromeligible guarantor institutions. “Eligible Guarantor Institutions” include banks, brokers, dealers, municipal securities dealers, municipal securities brokers, government securities dealers, government securities brokers, credit unions, national securities exchanges, registered securities associations, clearing agencies, and savings associations.
The written standards and procedures may not treat different classes of eligible guarantor institutions inequitably or result in the rejection of a guarantee from an eligible guarantor institution solely because it is of a particular type. Under the SEC rule, a transfer agent complies with the “standards and procedures” requirement if its standards and procedures provide that a securities transfer request will be rejected if the presenting signature guarantor institution (financial institution) is neither a member nor a participant in a recognized signature-guarantee program (SEC Rule 17 Ad-15(g)).
III. SIGNATURE GUARANTEE PROGRAM
The most common use for the medallion signature guarantee is for transferring or selling securities. If an individual holds securities in physical certificate form and wants to transfer or sell them, he or she will need to sign the certificates or securities powers. The individual’s signature will need to be “guaranteed” before a transfer agent will accept the transaction. This process protects the person who owns the stock or certificate by making it harder for someone toforge their signature. Transfer agents insist on signature guarantees because they limit their liability and losses if a signature turns out to be forged. That liability remains with the financial institution that accepted the signature and put the Medallion Stamp on the certificate.
A guaranteeing financial institution is required to obtain a security agent’s medallion and stamp and a surety bond issued by an insurance company listed by the US Treasury. Signature guarantee programs currently recognized by transfer agents that have been approved by the securities exchange commission include STAMP (Securities Transfer Agents Medallion Program) and SEMP (Stock Exchanges Medallion Program). For more information regarding signature guarantee programs see: http://www.kemark.com/programs.html.
IV. PAPERLESS LEGAL PROGRAM
The Securities Transfer Association (STA), which establishes rules applicable to the Medallion Signature Guarantee Programs (STAMP), instituted its Paperless Legals program in July of 2005. With the implementation of the Paperless Legals Program, transfer agents no longer require supporting documentation for transfer requests accompanied by an acceptable signature guarantee and are relying exclusively on the signature guarantee.
The “Legals” referred to in the Paperless Legals Program are the documents reflecting that the person seeking a signature guarantee has the legal capacity to transfer a security to which the guarantee will relate. Examples of “legals” might include:
For “Paperless Legals” presentations, the STA recommends to guarantors that they have any agents, representatives, or fiduciaries sign in their official capacity. Transfer agents, however, will not review items presented through the Paperless Legals Program for such capacities and will not reject items for failure to indicate capacity. As a result, guarantors should not present any supporting documentation along with transfer requests as transfer agents will not be reviewing or relying on such documentation and will have no responsibility to maintain such documentation on behalf of guarantors.
Transfer agents are now relying on the warranties made by medallion signature guarantors rather than reviewing the documents themselves. Under Uniform Commercial Code Section 8-306, which spells out the warrantees of the guarantor at the time of signing, the guarantor makes the following warranties:
The STA recommends that guarantors keep copies of the “legals,” although there is no requirement to do so. The reason for retaining copies of the “legals,” stems from the fact that if the signature is challenged, the transfer agent will look to the guarantor to defend any claim based on the warranties made by the guarantor under UCC Section 8-306.
As originally proposed, the Paperless Legals Program would have required presentations of “decedent transactions” to be accompanied by an inheritance tax waiver or a stamped certification (waiver). However, the STA has indefinitely delayed the portion of its “Paperless Legals” project mandating that guarantors determine whether an inheritance tax waiver is required on decedent transactions. This means that for the time being, bank guarantors will not have to consult the STA list of states to determine whether a waiver is required under the law of the state in which the decedent lived or otherwise purchase stamps certifying to this fact.
V. GUARANTOR CERTIFICATION PROGRAM
New Procedures were promulgated by STAMP on November 1, 2006, to address training issues associated with institutional dissemination of information regarding Medallion Program best practices. These Procedures require that all Guarantors undergo a “certification” process that is based on individual user certification, achieved through the satisfactory completion of six Internet-based core training modules available at a new website.
A. Timeframes
On or about January 8, 2007, STAMP placed a new website into production located at www.STAMPeSource.com. STAMPeSource.com has been designed to be compatible with Microsoft Internet Explorer 6 and Adobe Macromedia Flash Player 7.
Upon the first visit to the site, users are requested to create a set of login credentials (Username and Password) that must be used throughout the certification process. To create their credentials, users need to know their institution’s STAMP Program Number and the Location ID of their particular Medallion stamp. Both the eight digit alpha numeric Program Number and the Location ID can be found on the Medallion imprint itself. In addition, users need a corporate security code that is to be provided to you by the Program Administrator at the time your firm is invited to begin certification.
Guarantors were invited to begin certification based upon certain predetermined selection criteria and requests from Guarantors wishing to certify immediately were also considered. While the vast majority of STAMP and SEMP Guarantors were expected to become certified during 2007, allowances have been made for Guarantors requiring more time. The objective, however, is that all Guarantors be certified within 18 months from the introduction of the certification program. New Guarantors are required to become certified upon enrollment.
B. Certification Criteria
Guarantors possessing an equipment inventory of less than 100 Medallion imprinting devices will be designated Certified Guarantor Institutions when 100% of their employees engaged in providing Medallion signature guarantees achieve individual certification. Once a Guarantor in this classification begins the process, all of its designated employees must be certified within three months.
Guarantors possessing an equipment inventory of 100 or more Medallion imprinting devices will be designated Certified Guarantor Institutions when 90% of their employees engaged in providing Medallion signature guarantees achieve individual certification. A Guarantor so classified is afforded a completion timetable customized to reflect the uniqueness of its operation.
C. Fees
Each Guarantor is assessed and invoiced an annual service fee of $20 for each Medallion imprinting device in its possession beginning at the time that it is invited to begin the certification process. The service fee of $20 includes registration of up to three Usernames. Additional users beyond three on a particular imprinting device incur a surcharge of $10 per Username. For Guarantors possessing more than 1,000 Medallions, each will be assessed a maximum annual fee of $20,000. The annual Program subscription fee of $395 remains unaffected, as do any applicable surcharge fees.
VI. SIGNATURE VALIDATION PROGRAM FOR NON-SECURITIES TRANSACTIONS
In response to the many improper requests for medallion guarantees, the STAMP has developed a new program to certify signatures associated with non-securities business-related commercial transactions, such as account maintenance changes, beneficiary changes, or authorizations to wire transfers. The new signature authentication program for non-securities related commercial transactions became available as of July 1, 2008. The Signature Validation Program was developed to fill a void that exists between notarization and the more robust medallion signature guarantees, which are intended for securities transactions only.
Guarantors that are members of the Medallion Signature Guarantee Programs are to a large extent, refusing to provide Medallion Signature Guarantees (MSGs) to guarantee signatures when requested for non-securities transactions (Non-Securities Events). Examples of the types of improper requests for MSGs include anything from an account maintenance change, a beneficiary change, or an authorization to wire transfer, among many others.
A Non-Securities Event is defined as any commercial transaction that does not pertain to a sale, assignment, transfer or redemption of a security. SVP will actually fill the void that currently exists between the notarial acts performed by Notaries Public and the MSGs presently provided by the participating Guarantors under the Medallion Signature Guarantee Programs.
Article 8 of the Uniform Commercial Code (UCC) entitled Investment Securities, specifically UCC Section 8-306, provides the Securities Industry with warranties attached to the use of a signature guarantee that may be relied upon by industry participants. It does, however, explicitly limit the use of signature guarantees to signatures made by security owners or their representatives for the purpose of transferring or redeeming securities.
Guarantor firms are now beginning to understand that providing MSGs on Non-Securities Events is improper, but they also understand the need to provide a customer service for Non-Securities Events. Since not all Guarantors have achieved this same level of awareness, some continue to provide MSGs in connection with Non-Securities Events, and in fact, Guarantors that have properly refused to provide MSGs on Non-Securities Events have actually lost customers to other Guarantors that were willing to do just that.
Just as Guarantors have exhibited a growing awareness of improper MSG use, there has been an understanding among the requesting firms that MSGs should not be used for Non-Securities Events; in part perhaps, because of the realization that the MSG Surety Bond would not apply to non-securities commercial transactions, and subsequent claims adjudication in these circumstances would be extremely difficult within the framework of UCC Article 8.
Since the equipment used by Requestors to read the SVP imprints is the same as that used for the Medallion Signature Guarantee Programs, there is no direct cost to the Requestor to implement this program.
Signature Validation Program Attributes:
∗ Unique bar code symbology to facilitate processing; and
∗ Patented security ink to deter counterfeiting.
VII. CONCLUSION
Although there is no requirement that a financial institution join a “signature guarantee” program, the failure to do so will most likely result in rejection of your signature-guarantees in connection with the sale or transfer of securities by your customers. If a transfer request is rejected due to an unacceptable guarantee from an eligible guarantor, the guarantor and the presentor must be notified of the rejection and the reasons within two business days after the rejection. The presentor should be notified by making the rejected item available and the guarantor should be notified by mail, telephone or FAX (SEC Rule 17Ad-15(d)). Transfer agents are required to treat equitably all eligible guarantor institutions and all classes of institutions (SEC Rule 17Ad-15(b)). The SEC rule imposes additional costs on financial institutions wishing to provide signature guarantee services. Some banks may find it uneconomical to incur the expenditures required to continue to provide this service for their customers.