Stock Power

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.

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.

Honoria Vessey holds physical certificates for 8,000 shares registered in her own name and wants to sell them through Ledworth Crane Securities. Her agent explains that she must sign a stock power. She asks why the firm does not simply have her endorse the back of each certificate, and why the firm wants the signed stock power mailed in a separate envelope from the certificates themselves. What is the correct explanation?

1. A.A stock power is required whenever shares are registered in the holder's own name; endorsement is permitted only for street name positions.Either method transfers the shares. A stock power is simply a separate assignment doing the same work as an endorsement.
2. B.The separate mailing lets the firm process the sale before the certificates arrive, shortening settlement.The firm cannot transfer shares without the certificates. The separation is about security in transit, not speed.
3. C.The signature must match the registered name exactly, and separating the signed power from the certificates prevents an interceptor from transferring the shares.Correct. Exact signature matching is a transfer agent requirement, and splitting the mailing prevents the two negotiable pieces from travelling together.
4. D.A stock power is revocable while an endorsement is not, so the separate mailing preserves the customer's right to cancel the sale.A stock power is not a cancellation mechanism, and the separate mailing has nothing to do with revoking the transaction.

Why: A stock power is a separate assignment that does the same job as an endorsement on the reverse of the certificate: it transfers the shares and appoints an attorney with power of substitution to effect the transfer on the issuer's books. Two practical points follow. First, the signature must appear EXACTLY as the name is registered on the face of the certificate, because the transfer agent matches them character for character and will reject a variation. Second, a certificate endorsed on its back, or travelling with its signed stock power, is effectively bearer property: anyone who obtains the envelope can transfer the shares. Sending the certificates and the signed stock power separately means that intercepting either one alone is useless, which is precisely why the practice exists.

A customer wants to deliver a certificate for a pending sale, but the trade could still fall through before completion. Why might the firm prefer to use a separate stock power rather than having the customer endorse the certificate itself?

1. A.Using a separate stock power keeps the certificate itself unendorsed and clean, so if the transaction does not go through as expected, the certificate remains usable without having been marked up with an endorsement tied to a transaction that never completed, unlike an endorsed certificate, which effectively becomes committed to that specific transfer.Correct. A separate stock power keeps the certificate clean and reusable if the pending transaction falls through.
2. B.A separate stock power is required by law for every delivery regardless of circumstances, making the certificate's own endorsement legally impermissible in any transaction.Wrong. A separate stock power is not legally required for every delivery; endorsing the certificate directly is also a valid option.
3. C.A separate stock power eliminates the need for a signature guarantee entirely, unlike an endorsement directly on the certificate, which always requires one.Wrong. A signature guarantee requirement is not eliminated simply by using a separate stock power.
4. D.A separate stock power allows the certificate to be delivered without identifying the number of shares involved, unlike an endorsement directly on the certificate, which must specify the exact quantity.Wrong. A separate stock power must still specify the correct quantity matching the certificate; it does not omit this requirement.

Why: Using a separate stock power keeps the certificate itself unendorsed and clean, so if the transaction does not go through as expected, the certificate remains usable without having been marked up with an endorsement tied to a transaction that never completed, unlike an endorsed certificate, which effectively becomes committed to that specific transfer.