Below is a Leimberg Estate Planning Newsletter that sheds light on why it can be so difficult to get Medallion Signature Guarantees, which are often required when a person wants to move large sums of money, such as sale of securities. The article does a good job of explaining the mind set of large institutions that make unreasonable demands of their customers. Steve Leimberg’s Estate Planning Email Newsletter – Archive Message #2018 Date: 25-Oct-12 From: Steve Leimberg’s Estate Planning Newsletter Subject: Michel Nelson & Medallion Signature Guarantees “As securities transactions increasingly involve principals who have no employee agents on the ground who know the securities holder, how do you avoid fraudulent requests for the sale of securities? How can you assure that the request to sell is coming from the owner and not his black sheep nephew or an identity thief? The medallion stamp program was put into place to provide transfer agents and others with assurance that the transaction request is coming from someone who has the authority and capacity to make the request. If this proves to not be the case, the medallion guarantor is obligated to immediately make up any loss and pursue any ultimate remedy on its own. For providing this essential service to safeguard the efficient transfer of securities, the medallion guarantor receives basically nothing. This may be great for transfer agents, issuing companies, and mutual funds, but an increasing number of banks have reached the conclusion that it is no longer feasible to provide a service that generates no revenue, is costly to properly run, and exposes the bank to large financial risk. Many banks have concluded it is safer to say no than to incur the inevitable angry response to a quoted fee that is commensurate with the costs and risks involved. I strongly suspect that transfer agents for publicly held companies, mutual funds, insurance companies, and others who routinely demand medallion signatures have no clue how difficult it has become for many to obtain a medallion guarantee.” We close the week with Michel Nelson’s commentary on medallion signature guarantees. LISI Commentator Michel Nelson, JD, is Senior Vice President and heads trust services and investment management for Iowa Savings Bank, and is a frequent lecturer for charitable groups, bar association seminars, and estate planning councils. Here is his commentary: EXECUTIVE SUMMARY: As securities transactions increasingly involve principals who have no employee agents on the ground who know the securities holder, how do you avoid fraudulent requests for the sale of securities? How can you assure that the request to sell is coming from the owner and not his black sheep nephew or an identity thief? The medallion stamp program was put into place to provide transfer agents (and others, such as mutual fund companies) with assurance that the transaction request is coming from someone who has the authority and capacity to make the request. If this proves to not be the case, the medallion guarantor is obligated to immediately make up any loss and pursue any ultimate (to say nothing of expensive and perhaps fruitless) remedy on its own. For providing this essential service to safeguard the efficient transfer of securities, the medallion guarantor receives basically nothing. Obtaining a medallion guarantee is becoming increasingly difficult and is often a nearly impossible quest for many legitimate holders of securities. FACTS: Let’s review a typical set of transactional requirements for a mutual fund company as an example. While requirements vary widely from company to company, we’ll use Pioneer Mutual Funds as a proxy. “Pioneer requires a Medallion Signature Guarantee on certain transaction requests for your protection. When an institution provides a Medallion Signature Guarantee, it assures Pioneer that the signature and instructions are genuinely yours and that you have the authority to provide the instruction(s) contained within the request. You must provide a Medallion Signature Guarantee when you request any of the following: Redemptions: • Requests over $100,000 • Requests made payable to someone other than the registered shareholder(s) • Requests made payable to the registered shareholder(s) at an address different from the one on the account (including bank instructions) • Requests in which the address of record has been changed in the past thirty (30) days • Exchanges over $500,000 Transfers: • Requests to transfer retirement plan assets over $100,000 to a new custodian • Requests to transfer shares to an account with a different registration (i.e. beneficiary request, gift shares)” Many assume that the medallion guarantor is guaranteeing that the signature is genuine, not unlike a notary public. If that were the case, we would not be having this discussion. The medallion guarantor is pledging that the signature is genuine AND that the signer has authority AND capacity to issue the transfer instruction. In short, the bank issuing the medallion guarantee must engage in fact finding, document examination, reach a legal conclusion, document the decision making process, and retain copies of all documents relied upon. It is a fact that this is not a task that can be performed by anyone other than someone with significant skill levels and legal expertise. Some situations are slam dunks, but skill is needed to notice those that may not be. If the bank is wrong on the identity of the signer, capacity, or authority conclusions it is obligated to immediately indemnify for the full amount of the security wrongly transferred. Surety insurance is available, but a significant expense and subject to large deductibles. Even physically holding the actual medallion stamp at bank locations is risky. The bank remains a guarantor if there is unauthorized use of the stamp. Participation in the medallion program requires formal certification (through Kemark and the STAMP program), significant staff training time, and the development and monitoring of safe procedures. The actual medallion stamp is unique to each institution and uses a special green ink that is difficult to replicate. The guarantee limit of the medallion program participant is shown by a code letter on the stamp. The limit shown on the stamp must be equal to or greater than the transaction in question. How might this all affect you? • If you are affiliated with a broker-dealer or bank custodian who handles all of your account application paperwork and transfer requests, it may not affect you at all. In essence, you are the investigator for the broker-dealer’s back room and they rely on your representations and paperwork to affix any required medallion guarantee. • If you are personally responsible for securing medallion signatures on account transfer requests, estate transfers, etc., you may already have discovered or will soon discover that medallion guarantees are difficult to obtain from unaffiliated medallion guarantors. • If you are an estate attorney, serving as executor, are using a Power of Attorney for someone else, or have been appointed as a conservator, you will be experiencing the difficulty of securing medallion guarantees when needed. COMMENT: Transfer agents successfully put together a program that eliminates their financial exposure at little or no expense to them (or issuing company who selects the transfer agent) by creating the medallion guarantee network that places all of the investigation responsibility and financial risk on medallion guarantors. This may be great for transfer agents, issuing companies, and mutual funds, but an increasing number of banks have reached the conclusion that it is no longer feasible to provide a service that generates no revenue, is costly to properly run, and exposes the bank to large financial risk. It has not been helpful that those demanding medallion guarantees consistently note that guarantees may be obtained for a “nominal fee”. Inquiring individuals equate the medallion guarantee with a notarization which generally is easy to obtain and costs almost nothing. Over time, the initial assumption of financial center transfer agents that entities would agree to serve as absolute guarantors of securities transactions in exchange for nothing is proving to be wrong. Many banks have concluded it is safer to say no than to incur the inevitable angry response to a quoted fee that is commensurate with the costs and risks involved. I strongly suspect that transfer agents for publicly held companies, mutual funds, insurance companies, and others who routinely demand medallion signatures have no clue how difficult it has become for many to obtain a medallion guarantee. For those dealing solely on-line with brokers, mutual fund companies, DRIPs, and the like so that they don’t have to deal with local institutions, obtaining a medallion guarantee will generally prove to be a daunting task. It is a downside to the lack on “on the ground” infrastructure that those programs have. They depend on the medallion program to combat fraud, but are unwilling to absorb any of the cost. Put more coldly, consider that when companies such as Vanguard demand a medallion guarantee, they are requiring their customers to get a different financial institution to guarantee that no fraud is occurring. Ask yourself why that different financial institution should do Vanguard a favor and protect it from fraud in exchange for a nominal fee. HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE! Michel Nelson CITE AS: LISI Estate Planning Newsletter #2018 (October 25, 2012) at https://www.leimbergservices.com/ Copyright 2012 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission CITES: https://www.stai.org/stamp.php The Securities Transfer Association, Inc. description of the medallion guarantee program; https://www.sec.gov/answers/sigguar.htm The U.S. Securities and Exchange Commission summary of medallion guarantees; Pioneer Mutual Fund medallion requirements taken from https://us.pioneerinvestments.com/misc/pdfs/forms/15577.pdf