Good Delivery

A customer delivers a certificate to Cadmus Brokerage for sale but does not want to endorse the certificate itself. What does the firm ask for instead, and what must be true of it?

1. A.A letter of authorization instructing the firm to sell the shares.Wrong. That document authorises the transaction and does nothing to transfer title in the underlying instrument.
2. B.A medallion stamp applied by the firm to the face of the certificate.Wrong. A guarantee attests to a signature that already exists rather than substituting for one that is missing.
3. C.A new certificate issued by the transfer agent in the nominee name of the firm.Wrong. Re-registration is the outcome of a valid assignment, not an alternative to producing one.
4. D.A stock power executed by the registered owner, signed exactly as the certificate is registered.Correct. It carries the assignment separately so the certificate itself can travel unendorsed.

Why: An assignment can live on the back of the certificate or on a separate document called a stock power, and the two are equivalent. Using a stock power lets the certificate travel without an endorsement on its face, which matters because an endorsed certificate is negotiable by whoever holds it. Either way the signature must correspond exactly to the registration on the certificate, so a certificate registered to a trust, an estate or a corporation needs the assignment signed in that capacity, and a signature guarantee is normally required so the transfer agent can rely on it. If the name signed does not match the registration, the item is not good delivery no matter which document carries the signature.

Corwin Estabrook wants his newly purchased shares recorded in his own name on the issuer's transfer agent books, with no physical certificate printed and no registration in his broker-dealer's name. Which arrangement is he describing?

1. A.Street name registration, the standard method for shares held at a broker-dealerStreet name registers the shares in the firm's nominee name. Corwin specifically wants his own name on the issuer's books.
2. B.Safekeeping, in which the firm holds the customer's certificates in its vaultSafekeeping involves the firm storing certificates registered in the customer's name. It presumes a certificate exists.
3. C.Direct registration, with electronic book entry ownership in his own name at the transfer agentCorrect. Direct registration puts the shares in the investor's own name electronically, with no certificate and no nominee.
4. D.Transfer and ship, in which the transfer agent registers the shares and delivers them to the ownerTransfer and ship also puts the shares in the owner's name, but it produces a physical certificate, which Corwin does not want.

Why: The Direct Registration System records ownership in the investor's own name on the issuer's books in electronic book entry form. The investor receives a statement from the transfer agent rather than a certificate and deals directly with the issuer for dividends and proxies, while shares can still be moved electronically to a broker-dealer for sale. Street name registers the shares in the firm's nominee name, and transfer and ship means a physical certificate is issued and mailed to the customer.

A bond trade's confirmation includes an accrued interest calculation as part of the money settlement. Does an error in that accrued interest calculation affect whether the physical bond certificate itself qualifies as good delivery?

1. A.Yes -- any error anywhere in the trade's money settlement, including the accrued interest figure, automatically makes the physical certificate itself defective for good delivery purposes.Wrong. An error in the money settlement's accrued interest calculation does not automatically make the certificate itself defective.
2. B.No -- good delivery of the certificate turns on the physical and legal form of the instrument itself, such as proper endorsement, condition, and denomination, not on whether the accrued interest calculation in the accompanying money settlement happens to be correct, which is a separate, purely computational matter.Correct. Good delivery concerns the certificate's own physical and legal form, separate from an accrued interest calculation error.
3. C.Yes, but only for bonds trading at a premium to face value, since accrued interest calculations are irrelevant to bonds trading at or below face value.Wrong. The premium or discount status of the bond does not change whether an accrued interest error affects the certificate's good delivery status.
4. D.No, because bonds are never subject to a good delivery standard of any kind, unlike equity securities.Wrong. Bonds are also subject to a good delivery standard; the point is that the accrued interest error is a separate, computational matter.

Why: Good delivery of the certificate turns on the physical and legal form of the instrument itself, such as proper endorsement, condition, and denomination, not on whether the accrued interest calculation in the accompanying money settlement happens to be correct, which is a separate, purely computational matter.

A customer delivers a certificate that still bears an issuer's old corporate name, even though that company has since completed a name change (with no other change to the underlying security itself). Is this certificate automatically bad delivery simply because the name printed on it is outdated?

1. A.Yes -- any certificate bearing an outdated corporate name is automatically bad delivery and must be physically reissued under the new name before it may ever be delivered again.Wrong. An outdated name alone does not automatically make the certificate bad delivery if it can be reconciled to the surviving entity.
2. B.Yes, but only if the name change also involved a change in the security's CUSIP number, in which case the old certificate becomes worthless rather than simply outdated.Wrong. A CUSIP change does not render the old certificate worthless; it can still be identified and reconciled to the surviving entity.
3. C.No, and the outdated name has no significance whatsoever, meaning the transfer agent need not even be aware that a name change ever took place.Wrong. The transfer agent does need to be aware of the name change to properly reconcile the certificate; it is not entirely insignificant.
4. D.Not automatically -- a certificate bearing the pre-change name can still be good delivery as long as it can be properly identified and reconciled to the surviving entity under its current name, since a corporate name change alone does not necessarily invalidate certificates that were validly issued before the change occurred.Correct. A pre-change certificate can still be good delivery if it can be identified and reconciled to the surviving entity.

Why: A corporate name change, standing alone, does not retroactively invalidate certificates that were properly issued before the change took effect -- the underlying security and the shareholder's ownership interest have not changed, only the name printed on the issuer's letterhead and certificates going forward. As long as the older certificate can be properly identified and reconciled to the surviving entity under its current name, it remains good delivery despite bearing the outdated name.