Signature Guarantee: How They Work, Examples

What Is a Signature Guarantee?

A signature guarantee is a form of authentication, issued by a bank or other financial institution, which verifies the legitimacy of a signature and the signatory's overall request. This type of guarantee is often used in situations where financial instruments, such as securities, are being transferred.

In most cases, the guarantor, generally a bank or other financial institution, accepts all consequences in the event that the signature is fraudulent.

How a Signature Guarantee Works

With the number of crimes related to identity theft rising each year, using a signature guarantee service is a great way to prevent others from stealing your identity. A signature guarantee is required when an individual investor wants to sell or transfer securities, such as stocks or bonds, held in physical certificate form. If an owner holds securities through a broker, they will not need to obtain a signature guarantee to sell or transfer the securities.

An investor can obtain a signature guarantee from a financial institution. However, this institution must be a member of a recognized securities guarantee program, such as Medallion.

The three Medallion programs include STAMP (the Securities Transfer Agents Medallion Program), SEMP (the Stock Exchange Medallion Program), and MSP (the New York Stock Exchange Medallion Signature Program). STAMP participants include more than 7,000 U.S. and Canadian financial institutions; SEMP consists of regional stock exchange member firms and clearing and trust companies; NYSE member firms belong to MSP.

Membership with the Medallion program ensures that transfer agents will immediately accept certificates for processing.

Example of Using a Signature Guarantee

Imagine an investor, Alex, wants to sell their shares of ABC Company. Alex did not purchase these shares through a broker, and instead holds a share certificate, which is a written document that serves as legal proof of ownership of a set number of a company’s shares. Alex must sign this certificate in order to sell them, however, before the transfer agent accepts the certificates, the agent requires a signature guarantee to ensure Alex's identity and intention.

At this point, Alex must reach out to their financial institution in order to obtain a signature guarantee. While some banks may charge a small fee for this service, others, such as Bank of America, provide guarantees free of charge, as long as you have been a BofA client for at least six months.

Signature guarantees transfer the liabilities of losses to the transfer agent and away from the individual investor. One means of avoiding a signature guarantee is to have securities held in street name. This means that the securities are held in the name of a brokerage firm (instead of an individual’s name).

Signature Guarantees and Other Forms of Identity Theft Protection

While increasingly widespread, identity theft can still be prevented. Regularly checking personal accounts and quickly correcting discrepancies can help mitigate the effects of a breach. Choosing multi-factor authentication when logging into sensitive apps is also helpful. Multi-factor authentication relies on something more than simply a password to access an account. For example, the Google Authenticator requests the use of a time-sensitive six-digit code. This is sent to a user’s phone. Using a password manager for online banking accounts can also add another layer of protection.