The Corner

by Bart Ward

Before a stock or bond certificate that has been sold can be delivered, it must be in good delivery form. It is the broker’s responsibility to inquire of the seller who calls with a sell order whether the security is negotiable, is in compliance with the contract of sale, can be delivered to the broker-dealer and is ready to be transferred from seller to purchaser. Here are a few terms associated with a stock and bond certificates.

Proper assignment: Whenever a client delivers a certificate to complete a sale, it must be endorsed exactly as it is registered. Customer signatures must be guaranteed. The only acceptable abbreviations are “Co.” for company or an ampersand “&” for and. A certificate in the names of two or more persons must be endorsed for sale by every person named on the certificate.

Assignment and stock and bond power: To comply with the rules of good delivery, a registered security (like a personal check) must be assigned or endorsed. Assignment is executed on the back of the certificate or on a separate paper called a stock or bond power. One stock or bond power can be used with any number of certificates for one security, but a separate power is required for each security of a different company. Stock certificates are often incorrectly endorsed, signed in the wrong place or not signed at all. Such errors delay transfer.

Risk of lost certificate: If there is a risk that the certificate may be lost, the customer should either fill in the line granting power of attorney to another party or use a stock power. A client mailing a certificate, for example, can give the broker-dealer power of attorney to transfer the title. This protects the owner if the certificate is lost or misdirected because the securities cannot be transferred without the firm’s approval.

Street name: For convenience and safety sake most investors keep their securities with their brokerage firm. Your name is not actually on the securities certificate. The brokerage firm’s name appears on the certificate. This is what is meant as being held in street name. These days the brokerage firm rarely holds the actual certificates. Electronic forms of possession are used most often. These electronic records are called book entries instead of the traditional paper certificates.

Certificate unavailable: If the registered owner of a security does not have the certificate available for endorsement, a stock power can be used to assign the stock. The only acceptable reason for the unavailability of the stock certificate is that it is at the broker-dealer (that is, the certificate is being held by the broker-dealer in the customer’s name for safekeeping). No assignment is necessary if the stock is in street name.

Legal opinion: In municipal bond trading, unless the bond is traded and stamped ex-legal (which means without legal opinion), the legal opinion must be printed on or attached to the bond as evidence of the validity of the bond offering. Securities traded ex-legal are in good delivery condition without the legal opinion.

Good condition of security: If a certificate is mutilated, appropriate authentication (by the transfer agent, registrar or issuer) must be obtained before the transfer agent can accept the security for replacement. If damage is so extensive that there is doubt about the authenticity of the certificate, the transfer agent will require a surety bond.

Proper denominations: Certificates must be delivered in the unit of trading which are typically 100 shares for stocks and one for bonds. For stocks, a multiple of trading unit or in smaller amounts that can be combined into 100 share lots. For example, a seller of 300 shares could deliver six certificates of 50 shares each. Odd lots (less than 100 shares) are separated from round-lot certificates (100 shares even).

Not a called security: Any bond or preferred stock called for redemption is not in “good delivery” form unless the whole issue has been called. If part of the issue is called, the securities are not in “good delivery” form unless they are identified as called at the time of the trade.  Securities called after the trade date are considered in “good delivery” form.

Quote of the Week: “I buy when other people are selling.” —J Paul Getty

Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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