Securities Transfers

When stocks and bonds are bought and sold, the securities ownership is transferred from the seller to the buyer. No matter how the securities are held, the customer's broker-dealer will either assist with or complete the process.
Both stocks and bonds are evidenced by certificates. A bond certificate is a paper or electronic document stating the details of the bond:
•    issuer's name
•    par value or face amount
•    interest rate
•    maturity date
•    call date (if any)

There are four different forms that a bond can take in terms of the certificate itself In olden days, bonds were issued as bearer bonds, which meant that whoever had possession of the bond was assumed to be the owner. No owner name at all on the certificate. The bond certificate said, "pay to the bearer," so whoever presented the bond at maturity received the principal. To receive the interest, investors holding bearer bonds used to clip coupons attached to the bond certificate every six months.

There was no name on the interest coupon, either, so the IRS had no way of tracking the principal or the interest income. Bonds haven't been issued in bearer form for many years. That doesn't mean they don't exist. A few are out there in safe-deposit boxes surely.

Bonds also used to be registered as to principal only. That meant we had a name on the bond certificate the person who would receive the principal amount at maturity. But, again, we had the unnamed interest coupons. Therefore, only the principal was registered, thus the name "registered as to principal only."

Eventually, issuers started registering the name of the owner [principal] and automatically making an interest payment every six months for the interest. We call these bonds fully registered, because both pieces of the debt service (interest, principal) are registered.

Book entry/journal entry bonds are also fully registered. It's just that it's done on computer, rather than on paper. The investor keeps the trade confirmation as proof of ownership, but the issuer's paying agent has an owner name on computer, and automatically pays interest to the registered owner. Book entry/journal entry is how virtually all securities are issued these days. But, since bonds often have 30-year maturities, there are investors out there with bond certificates in their possession.

Private companies often issue paper certificates to their investors, and transferring these securities is also subject to federal and state securities law if you are a business owner with a corporation, your corporate books contain stock certificates. You would be wise to consult a business/securities attorney before offering any of them.

Good Delivery
After a trade is executed, the buy side must remit the funds to the clearing agency, while the sell side must deliver securities. Some customers still choose to have their securities "transferred and shipped," so when they sell stock, they are in possession of the certificates and must deliver them. Or, they must direct their bank to do so. Either way, if the stock or bond certificate is registered to Joe B. Kuhl, it must be signed exactly as: Joe B. Kuhl. If he signs it Joey Kuhl, the transfer agent will reject it.
Also, a security registered to more than one individual must be signed properly by all owners, and a security registered to a trust, an estate, a corporation, etc. must be properly signed by an executor, trustee, or corporate officer.

The back of the certificate often has a stock power form the owner fills out and signs. If the security is a bond, we refer to the form as a bond power. If the certificate lacks such a form, the broker-dealer provides a separate form for the customer to fill in and sign.

These forms are also known as powers of substitution. It is usually the power of substitution that is signed, rather than having the customer fill in and sign the back of the stock or bond certificate. That way, if the customer messes up the signature, they haven't destroyed anything of value. They can always try again until they get it right.

To complete the transfer of securities, the transfer agent first must accept the signature as valid. Therefore, a medallion signature guarantee is required.
The transfer agent would reject the following signatures:
•    Signature of a minor child
•    Signature of an individual now deceased
•    Signature of just one person in a joint account

If a sale were executed, with the securities endorsed by a person who has since died, the securities must be re-issued by the transfer agent in the name of the estate or trust, with the executor or trustee properly signing after that has been taken care of Bond certificates delivered between broker-dealers must be $1,000 or $5,000 par value. If there are coupons (bearer, principal-only) missing, that's a problem. The receiving broker-dealer would cop such an attitude that if the missing coupon represented $60 of interest, they would deduct $60 from the money they send to the other firm. So there. If it's a municipal bond, the legal opinion must be attached. If there was no legal opinion obtained, the certificate needs to be stamped "ex-legal." Ex-means "without," as in "ex-dividend," which means the stock is trading without the dividend.

Delivery can be rejected by the firm representing the buyer if:
•    Certificates are mutilated
•    Certificates don't comply with the round and odd lot requirements
•    All attachments are not present (affidavit of domicile, stock power, etc.)
•    Signature is invalid
•    Signatures are not guaranteed
•    Securities are delivered prior to the settlement date

If a stock is purchased on or after the ex-dividend date, the seller is entitled to the dividend, and if the stock is purchased before the ex-date, the buyer is entitled to the dividend. Sometimes things get screwed up. The buyer purchases the stock before the ex-date, but the seller still ends up getting the dividend. In this case, the customer's broker-dealer would send a due bill for the dividend to the other broker-dealer and would expect them to fork over the cash that is due.

When securities are sent to a broker-dealer and are not in good delivery form, the broker dealer should file a reclamation with the other side. As the name indicates, it's time to reclaim things here and get them right.


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