Signature Guarantee

A customer mails Sedgemoor Lyle Securities a certificate registered in her own name together with a stock power she signed at her kitchen table and had witnessed by her neighbour. The firm returns the documents and tells her the signature must carry a MEDALLION SIGNATURE GUARANTEE. She protests that her neighbour watched her sign and that a notary would surely be sufficient. Why does the firm insist on a signature guarantee?

1. A.Because a notary is not permitted to witness documents relating to securities transfers.Notaries may witness such documents. The point is that notarisation does not supply the warranty a transfer agent requires.
2. B.Because the guarantee must be renewed each time the customer trades, whereas a notarisation is a one-time act.A signature guarantee is not a renewable standing authorisation. It relates to the particular transfer.
3. C.Because the guarantor warrants the signature's genuineness and the signer's capacity and authority, and accepts liability if it is wrong.Correct. The transfer agent relies on that financial warranty, which a witness or notary does not provide.
4. D.Because only the issuing corporation may guarantee signatures on its own certificates.Eligible financial institutions in a recognised medallion programme give the guarantee, not the issuer.

Why: A witness confirms that a signature was made; a notary confirms the identity of the person who made it. A signature guarantee does something materially different and stronger: the guaranteeing institution warrants that the signature is genuine AND that the signer had the legal capacity and authority to transfer the securities, and it accepts financial liability if that warranty proves false. Transfer agents rely on that warranty when they cancel one certificate and issue another, because an improper transfer is very difficult to unwind once new shares are in a third party's hands. Only eligible financial institutions participating in a recognised medallion programme can give the guarantee, and the guarantee is backed by the guarantor's own funds, which is exactly the protection a notarised or witnessed signature does not provide.

Ardenfield Securities' cashiering department obtains a medallion signature guarantee on a customer's securities transfer request. What does the guarantee actually warrant?

1. A.That the certificate presented is authentic and free of any adverse claim.Wrong. The warranty attaches to the signature, and the genuineness of the instrument itself remains the transfer agent's problem.
2. B.That the signature is genuine, the signer is an appropriate person to sign, and the signer had legal capacity.Correct. Those three warranties are exactly what a participating institution gives, and the guarantee reaches no further.
3. C.That the transfer has been reviewed for suitability and approved by a registered principal.Wrong. Suitability review is a sales-practice duty owed to the customer and has nothing to do with a guarantor's warranty.
4. D.That the signer's identity was verified under the firm's customer identification program.Wrong. Identity verification at account opening serves the firm's own program and is not a warranty running to anyone outside it.

Why: A medallion signature guarantee is a warranty given by a participating financial institution, and it covers three things: the signature is genuine, the person signing is an appropriate person to sign for the registered owner, and that person had the legal capacity to do so. It says nothing about the security being transferred, the merits of the transaction, or whether anyone has done anti-money-laundering work on the signer. That is why a transfer agent will still refuse an instrument that is defective on its face even with a medallion stamp on it. If the question were whether the shares themselves were validly issued, the guarantee would be no help at all.

A customer moving to Bellamy Clearing holds mutual fund shares registered in her own name on the fund's books rather than in street name at the delivering firm. How does that position move?

1. A.Through ACATS, with the fund's transfer agent standing in as carrying member for that position.Wrong. A transfer agent is not a member firm and cannot occupy either side of a customer account transfer contract.
2. B.Outside ACATS, by instruction to the fund's transfer agent to re-register or deliver the shares.Correct. The registration sits on the fund's books, so the instruction has to go to the party that actually holds it.
3. C.It cannot move; directly held fund shares must be redeemed and the proceeds wired instead.Wrong. Redemption is one disposition the customer might choose, not the only route, and it forces a taxable event nobody asked for.
4. D.Through ACATS as a residual credit once the rest of the account has settled at the new firm.Wrong. That mechanic forwards amounts accruing after a transfer, not positions that were in the account from the start.

Why: The automated system moves what one broker-dealer carries for a customer to another broker-dealer. Shares registered directly on the fund's own books are not carried by the delivering firm at all, because the fund's transfer agent holds the registration, so there is nothing on the delivering firm's books for the system to move. Such positions are handled outside it, by instruction to the transfer agent, usually on the fund's own form and commonly requiring a signature guarantee. The same logic explains most non-ACATS transfers: the asset is not sitting where the automated system can reach it.