Signature Authentications and Guarantees:
Preventing the unauthorized transfer of securities
The signature guarantee thwarts forgeries that could result in the unauthorized transfer of stock. If securities are held in physical certificate form and the shareholder seeks (a) to sell the shares in a private transaction, (b) to clear the restrictive legend from the certificate so that the shares can be sold in the public markets or (c) to have one or more new certificates issued as part of (i) planning your estate, (ii) making gifts or (d) breaking up shares represented by one certificate into more than one certificate for any reason, the shareholder is required to sign a stock power and that signature should always be guaranteed or authenticated in some way.
A Medallion Signature Guarantee (sometimes referred to as “MSG”) is one of the most commonly required forms of signature guarantee, but, depending on the circumstances, other forms of signature authentication may be accepted by stock transfer agents. The dilemma in the securities industry is that MSGs are not always available. Alternative forms of authentication or guarantees provide less assurance that an authentication source or guarantor would have the capacity or willingness to pay damages without litigation. This is particularly true in foreign countries where there are additional uncertainties about, for example, whether a notary in a particular country could be sued and whether a judgment would be honored by the government that appointed the notary. Additionally, many banks, credit unions and broker-dealers in the United States do not participate in the Medallion Signature Guarantee programs, thus creating challenges for many shareholders.
One of the reasons why the Medallion Signature Guarantee programs were adopted is that there were many abuses involving signature guarantees by notary publics. Notaries in the U.S. are not adequately regulated in many states and the surety bond required for notaries in the United States is uniformly quite low (in some states as little as $5,000.00). A complete waiver of a signature guarantee has potential to create losses that cannot be recovered. An issuer or stock transfer agent that offers to waive the Medallion Signature Guarantee requirement or a reasonable alternative if it is not practical to obtain a Medallion Signature Guarantee takes a significant risk. If a notarization is negligently or fraudulently provided for a person other than the actual holder of the stock, there could be a claim for damages in excess of the amount of the notary’s surety bond against the assets of the notary and/or the notary’s employer if the signature authentication was provided in the ordinary course of the employer’s business.
Before a Medallion Signature Guarantee was offered by eSignatureGuarantee, many shareholders in the United States had significant problems obtaining a Medallion Signature Guarantee for various reasons. Now, if a financial institution does not participate in the Medallion Signature Guarantee program or if obtaining that guarantee is difficult, eSignatureGuarantee is an excellent resource for U.S. residents.
The Medallion Signature Guarantee Programs
An investor can obtain a signature guarantee from a financial institution such as a commercial bank, credit union, savings and loan or securities broker dealer that participates in one of the Medallion Signature Guarantee programs. The Medallion signature guarantee programs of the banking and securities industry are the:
* Securities Transfer Agents Medallion Program (STAMP) whose participants include thousands of U.S. and Canadian financial institutions.
* Stock Exchanges Medallion Program (SEMP) whose participants include the regional stock exchange member firms and clearing and trust companies.
* New York Stock Exchange Medallion Signature Program (MSP) whose participants include NYSE member firms.
If a financial institution is not a member of a recognized Medallion Signature Guarantee Program, it cannot provide signature guarantees. Also, you must be a customer of a participating financial institution before the participating financial institution will guarantee your signature. The most practical alternative to obtaining a Medallion Signature Guarantee from a bank, savings and loan association, brokerage firm, or credit union is the online medallion stamp service provided by eSignatureGuarantee and other Internet providers.
A Medallion imprint or stamp indicates that the financial institution or other provider is a member of a Medallion Signature Guarantee program and is an acceptable signature guarantor. By participating in the program, participants in the Medallion program can guarantee customer signatures with the assurance that their guarantees will be immediately accepted for processing by transfer agents.
Transfer agents typically require that the shareholder use a Medallion program recognized by the transfer agent. The cost of a Medallion Signature Guarantee may vary from provider to provider but it is usually less than $200.00.
Obtaining a Medallion Signature Guarantee outside the United States
Some banks and brokerage firms in the United States offer Medallion Signature Guarantees to customers of their corresponded banks and securities brokers in other countries. If you a shareholder is not located in the United States or Canada, contact your bank or securities broker and ask if it has a correspondent relationship with a financial institution in the United States that can provide an MSG. If your cannot obtain a MSG in your country, the United States Embassy in the country in which the shareholder resides can provide information regarding where to obtain an alternative signature guarantee acceptable to the stock transfer agent for the issuer of your securities.
Should a shareholder use the stock power on the back of the certificate or a separate stock power?
You will find a stock power on the back of each stock certificate. However, the best practice is to use a stock power separate from the one found on the back of the paper certificate. The use of a separate stock power protects you against fraud. If you need a form of stock power, Logan Law Firm will send one to you without charge. There are also special forms of stock power for book entry shares. If you need any form of stock power, contact our firm.
If the shareholder is selling shares represented by a paper stock certificate in a private secondary market transaction, what precautions should be taken when the certificate is sent to the stock transfer agent?
To minimize the shareholder’s risk, the shareholder should send signed, signature guaranteed/authenticated stock power(s) to the stock transfer agent in a separate envelope from the envelope for the original stock certificate(s). Both envelopes should be sent by a delivery method that has a tracking number and requires a signature acknowledging receipt. The envelope that contains the original stock certificate should be insured for the cost of a surety bond if the stock certificate is lost, stolen or destroyed in transit. The usual surety bond premium is 2% of the stock’s value.
When should the shareholder sign a stock power?
If a shareholder is providing a Medallion Signature Guarantee, the procedures of the Medallion Signature Guarantee program that will be used must be followed. Banks and credit unions always require that you sign in the presence of the officer authorized to guarantee the signature. Securities brokers typically do not require you to be present when the stock power is signed if the brokerage firm has a specimen of the shareholder’s original signature (which was likely obtained when the brokerage account was opened). eSignatureGuarantee is one of very few medallion stamp providers that allows verification of the shareholder’s identity online.
When providing an alternative form of signature authentication, a shareholder must sign a stock power or other document requiring a signature authentication only when the shareholder is in the presence of the notary or official providing a signature authentication and only when instructed to do so.
Problems obtaining a Medallion Signature Guarantee that can make it extraordinarily difficult to resell restricted stock
Many banks and securities brokers have dropped out of their respective Medallion Signature Guarantee programs. Wells Fargo and Bank of America ceased providing MSGs in September of 2021. There is a list of providers that can be reviewed at: www.MSGlookup.com Unfortunately, this list has not been updated since 2017 and still lists banks and broker-dealers that have withdrawn from the program.
Also, despite incorrect claims by some stock transfer agents, Medallion Signature Guarantees are not available outside the United States and Canada. If a shareholder outside the U.S. seeks to clear the legend from shares as part of the process for reselling the shares in the public markets, most stock transfer agents allow other forms of signature guarantee, such as one by a notary. In countries outside the U.S., notaries are, unlike notary public’s in the U.S., judicial officers who are empowered to authenticate documents and guarantee the authenticity of signatures. Some consulates and embassies provide signature guarantees.
The Securities and Exchange Commission mentions Medallion Signature Guarantees as one of the forms of signature authentication, but does not identify it as the only acceptable form of signature authentication and references other types of signature guarantees.
The Community Bankers Webinar Network has a webinar ($245.00) about Medallion and signature guarantees for financial institutions that is an excellent resource for stock transfer agents and issuers that want to know more about the programs.
Some stock transfer agents mistakenly assert that they have the right to unilaterally require a specific form of signature guarantee. There are no state or federal statutes, rules or regulations that require a shareholder to provide a Medallion Signature Guarantee for the signature on a stock power, a request for transfer of stock to another person or entity or on any other document that is part of the process of changing legal and/or beneficial interest in stock or changing the name of a shareholder when there is no change of legal or beneficial interest.
Some transfer agents, when challenged about their demand for an MSG (even when it is impossible for a shareholder to obtain one) fall back on a claim that “it is our policy” to require an MSG. Such “policies” cannot be imposed on a shareholder who has not consented to be bound by those policies. If an issuer consented to be bound by a stock transfer agent’s policies in its contract for the transfer agent’s services, the issuer may be responsible for any damages suffered by a shareholder which is not reasonably able to obtain a Medallion Signature Guarantee. If, for example, a shareholder must establish an account at a new bank to obtain the MSG and that bank has a policy that it will not provide a MSG unless a customer meets certain requirements, such as having the account open for four months, before a customer may obtain an MSG, the issuer as well as the stock transfer agent could be liable for any loss in share value during the delay.
I have not seen an agreement between a shareholder and an issuer in which the shareholder agreed to provide a Medallion Signature Guarantee if demanded by the issuer of the securities and/or its stock transfer agent in the event of a transfer or name change. If that requirement is included in an agreement, it would be very important for the issuer to explain that MSG’s are not provided by all banks, securities brokers, savings and loans and credit unions and that they are unavailable outside the United States unless the investor’s bank has a correspondent relationship with a United States bank that provides MSG’s for the customers of its correspondents. The shareholder should be asked to represent and warrant that it has confirmed that a Medallion Signature Guarantee is available from a bank, savings and loan, credit union or broker-dealer with which the shareholder has an existing account. Of course, that situation may change because banks and broker-dealer exit the Medallion Signature Guarantee programs every month, sometimes without updating their websites. Bank of America, for example, still has a webpage declaring that it provides MSGs but it, in fact, does not provide that service at this time.
Absent a contractual right to require a Medallion Signature Guarantee, how can a stock transfer agent or issuer properly demand one? I am not aware of any legal authority allowing either an issuer or a stock transfer agent to require a Medallion Signature Guarantee, let alone when one is not reasonably available to a shareholder who has not consented in writing to provide one.
What is the remedy of a shareholder if the stock transfer agent or issuer demands a Medallion Signature Guarantee when it is not reasonably available to the shareholder?
Most stock transfer agents are flexible and reasonable when a Medallion Signature Guarantee is not available. Other transfer agents are arbitrary and inflexible and the shareholder should be prepared to litigate if the value of the shares is sufficient to warrant the expense.
The suit should name both the issuer and the stock transfer agent as defendants and assert (1) a violation of the shareholder’s rights under Uniform Commercial Code Article VIII, Sections 401-408, and (2) a common law claim that (a) the issuer is denying the shareholder the benefit of the shareholder’s bargain and (b) the stock transfer agent has committed tortious interference with the shareholder’s rights under its agreement to acquire the shares from the issuer. What are the possible damages? The damages are potentially any loss in value of the stock during the dispute (the high point in trading price compared to the actual sale price) and, if the original agreement between the shareholder and the issuer contained a provision that the prevailing party would be entitled to its attorneys’ fees and costs if a suit were filed for breach of the agreement, all of the shareholder’s attorneys’ fees and court costs from the issuer.
If the share value is too low to justify a law suit, file a complaint against the transfer agent with the Securities and Exchange Commission, which regulates stock transfer agents.
If the issuer and transfer agent inform a shareholder that the Medallion Signature Guarantee requirement can be waived and that an alternative signature guarantee can be provided, what should the shareholder do?
Many microcap issuers allow shareholders to provide a notarized signature or other form of signature guarantee on a stock power if the shareholder informs the issuer that the shareholder’s bank and broker-dealer do not participate in their industries’ Medallion Signature Guarantee programs. Most banks and credit unions provide notary services for their customers.