Why You Need a Medallion Signature Guarantee

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A medallion signature guarantee is an important part of buying or selling stocks or bonds if you hold physical certificates instead of keeping them at your broker in street name.

You will likely need one when you go to sell physical stock certificates, to prove to the securities transfer agent that you are who you say you are, and that you have the right to sign over the rights to the assets you're selling. You may also need a Medallion Signature Guarantee if you're gifting shares or changing ownership on an investment account (such as if you're getting married and adding your spouse to your account).

Those medallion signature guarantees protect:

  • You as an existing shareholder, by making it less worthwhile for someone to steal your physical shares to try to cash in on them.
  • The transfer agent, whose liability is reduced by the signature guarantee.
  • You as a purchaser of someone else's shares, by providing a guarantee that you're purchasing legitimate shares of stock from someone who has the right to sell them to you.

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How do you get a Medallion Signature Guarantee?
Many banks and brokerages offer Medallion Signature Guarantee programs, but they frequently restrict it to their existing customers. According to the U.S. Securities and Exchange Commission, there are three different Medallion Signature Guarantee programs:

  • Securities Transfer Agents Medallion Program (STAMP), whose participants include more than 7,000 U.S. and Canadian financial institutions,
  • Stock Exchanges Medallion Program (SEMP), whose participants include the regional stock exchange member companies, and clearing and trust companies, and
  • New York Stock Exchange Medallion Signature Program (MSP), whose participants include NYSE member companies.

Only financial institutions belonging to one of those programs can issue Medallion Signature Guarantees. Member institutions are not required to provide the Medallion Signature Guarantees for free, and many do charge to cover the liability risks they face by offering the guarantee.

What if you're overseas?
The U.S. State department recommends that people overseas contact local branches of participating financial institutions. Occasionally, transfer agents accept alternative proof from military personnel stationed overseas or will waive the requirement entirely if the transfer of securities is small enough.

Generally speaking, though, it's much easier to keep your shares registered in "street name" with your broker, rather than hold physical certificates registered in your name. Medallion signature guarantees are not required to transfer securities held in street name.That makes it substantially easier to initiate a sale if you're not able to quickly reach an institution willing and able to initiate a guarantee for you.

Who still owns paper stock certificates?
In 2001, the New York Stock Exchange stopped requiring physical stock certificates, which helped drive the decline of their use, and many companies no longer issue them.Still, there's always the proverbial "trunk stuffed with old stock certificates found while cleaning out grandma's attic" that may turn up from time to time. From a more realistic perspective, organizations like giveashare.com and oneshare.com offer people the opportunity to buy framed actual share certificates as gifts.

For the most part, though, the market has moved to lower-cost, higher-speed electronic trading. Even many Dividend Reinvestment Plans, historically the bastion of "own just one stock to get started," have started offering "Direct Stock Purchase," allowing you to buy that first share directly from the plan.

A hassle and a cost -- but generally worth it
Despite the time, effort, and cost involved in getting a Medallion Signature Guarantee when selling shares or otherwise transferring ownership, the service provides worthwhile guarantees. They help protect the parties involved in securities transactions with a reliable paper trail. As a result, if you do find that trunk stuffed with old stock certificates when cleaning out grandma's attic, it becomes much more feasible to figure out whether those shares do have value, and if so, who they belong to.

The article Why You Need a Medallion Signature Guarantee originally appeared on Fool.com.

Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.