Should you offer a signature guarantee program?

COMPLIANCE

M A T T E R S

Doing so provides a valuable service for members

If a member walked into your credit union and asked for a "signature guarantee" on a stock certificate so he or she could sell or transfer the stock, would you: 1) let the member know that the person responsible for signature guarantees would be available shortly; or 2) suggest that the member check with the bank down the street because the credit union doesn't do signature guarantees?

Unfortunately, too many credit unions choose the second option because they don't have signature guarantee programs. And, let's face it, most banks won't guarantee a signature unless your member first opens an account at that institution. So by not offering signature guarantees, your credit union risks losing the member's deposits and future business.

You don't want that outcome. So let's look at signature guarantees so you can decide whether they're right for your credit union and members.

WHAT'S A SIGNATURE GUARANTEE?

A signature guarantee is designed to protect against fraudulent securities transactions by unauthorized people. Financial institutions provide signature guarantees as a service to their customers or members.

The institution guarantees to the issuer of the securities or its transfer agent that the registered owner's signature, or that of an agent authorized to act for the owner on the security (such as a stock certificate) or transfer form, is genuine. All transfer agents require a signature guarantee before an individual can sell or transfer securities.

Under the Uniform Commercial Code as adopted by most states, the issuer or its transfer agent may be liable if it transfers securities with a forged signature, even if it wasn't aware of the forgery. To protect the issuer and the transfer agent, the financial institution guarantees signatures on securities via the signature guarantee program. In general, the financial institution guarantees the signature is genuine, the signer has legal capacity to sign, and the signer is the appropriate person to sign.

If the security's issuer discovers after the transfer that the signature was forged, the financial institution that guaranteed the signature becomes liable for the security's entire value. This is why credit unions and other financial institutions are required to have surety bond coverage for their signature guarantee programs. The bond coverage most credit unions hold would pay in the event that the credit union became liable for the security's value. Surety bond coverage for other financial institutions only pays in the event that the institution can't afford to do so.

A NEW SERVICE

Only in the past 10 years have stock transfer agents accepted signature guarantees from credit unions. Before 1992, even though no rule prohibited credit unions from acting as intermediaries and guaranteeing signatures, transfer agents generally refused to accept signature guarantees from any institution other than a commercial bank or broker dealer that was a national stock exchange member.

During the 1980s, CUNA & Affiliates lobbied Congress and the Securities and Exchange Commission (SEC) to permit the nationwide acceptance of credit unions as signature guarantors by transfer agents. In 1990, Congress passed legislation that gave the SEC authority to write "nondiscriminatory" regulations to permit credit unions to act as signature guarantors.

In 1992, the SEC issued Rule 17Ad-15 under the Securities and Exchange Act of 1934 prohibiting transfer agents from discriminating against credit unions regarding signature guarantees. The SEC's rule also permits banks, savings associations, and brokerage firms to offer signature guarantees.

SEC's Rule 17Ad-15 defines eligible guarantor institutions to include "federally insured credit unions" and "any credit union eligible" to apply for federal share insurance. Since 1986, National Credit Union Administration (NCUA) legal opinion letters consistently have stated that federal credit unions have the authority to offer signature guarantees.

Plus, changes in 2001 to NCUA's Incidental Powers regulation (Part 721) specifically authorize federal credit unions to provide certification services including signature guarantees.

State-chartered credit unions are another matter. The authority for statechartered credit unions to offer signature guarantees would have to come from state regulations or state supervisory agencies. A state-chartered credit union should review its state laws and regulations or contact its state supervisory agency to determine whether it has the authority to offer a signature-guarantee program.

GETTING STARTED

CUNA worked with CUNA Mutual Group's CUMIS Insurance Society, Madison, Wis., the Securities Transfer Association, Hazlet, N.J., and Kemark Financial Services Inc., Pearl River, N.Y., to develop a signature guarantee program for credit unions called the Securities Transfer Agents Medallion Program (STAMP).

Kemark Financial is the program administrator for STAMP, which is recognized by all major financial services associations and is endorsed by the Securities Transfer Association. This association represents the major transfer agents in the U.S. and Canada.

To participate, credit unions must contact Kemark Financial by calling 845-620-9300 or visiting www.kemarkfinancial.com to request a STAMP application packet. This packet contains a STAMP application, subscription agreement, and a STAMP indemnity agreement.

The credit union must complete and return the required forms to Kemark, pay an administrative fee (currently about $295 a year), and obtain the required surety bond protection from an approved supplier such as CUMIS. The credit union also

must order signature guarantee STAMP equipment, including stamps and ink cartridges, from Kemark.

Kemark's STAMP limit ranges from $100,000 to $2 million. Credit unions initially should request a STAMP limit based on the value of the securities for which they expect to provide signature guarantees.

Additionally, the credit union should develop policies for signature guarantees that identify which employees are authorized to provide signature guarantees, what forms of identification are required for members requesting guarantees, and what safekeeping procedures to follow regarding STAMP equipment and materials.

Finally, the credit union should develop procedures regarding signature guarantees. For example, the member must sign the security in front of the credit union employee authorized to provide signature guarantees. The employee must witness the actual signing. The credit union also should keep a log or record of all signature guarantees, including the date of the guarantee, specific documents guaranteed, member name, photo identification used, and the security's type and value.

A credit union may only provide a signature guarantee when the value of the security transaction (i.e., the value of the stocks, bonds, or mutual funds being sold or transferred) doesn't exceed its STAMP limit. For example, if the credit union has a $100,000 STAMP limit and a member requests a signature guarantee on a stock certificate for 10,000 shares of "X Company" with a current market price of $20 per share or total value of $200,000, the credit union can't provide a signature guarantee.

If a credit union exceeds its STAMP limit, the transfer agent or issuer can reject the initial signature guarantee and require the owner to take the documents to a financial institution that has a sufficient STAMP limit to cover the transaction.

BOND COVERAGE

Financial institutions must have signature guarantee surety bond protection at least equal to the STAMP limit before Kemark will issue a signature guarantee stamp. CUMIS provides signature guarantee bond coverage to credit unions for losses resulting from guaranteeing a signature to sell, transfer, surrender, or exchange securities. Signature guarantee bond limits range from $100,000 to $2 million depending on the credit union's STAMP limit.

The maximum amount payable on a signature guarantee claim is the "single loss limit of liability" in effect at the time the loss is discovered. The "loss limit" applies each time the stamp is used on a document. There's no limit on the number of signatures that can be guaranteed, nor is there any annual aggregate limit Credit unions should check with their CUNA Mutual marketing representative for additional information.

Signature guarantee programs are relatively easy and inexpensive to set up, and they provide a valuable service to members. If your credit union isn't one of the approximately 1,500 credit unions that currently offer signature guarantees, it may be time to consider offering this valuable service.

For more information, consult CUNA's e-Guide to Federal Laws and Regulations at www. cuna.org.

By Michael McLain

CUNA & Affiliates

MICHAEL MCLAIN is assistant general counsel and senior compliance counsel for CUNA &Affiliates.

Copyright Credit Union National Association, Inc. Feb 2003
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