Medallion Signature Guarantee Considerations

and Alternatives

JANUARY 2017
The content contained in this document is proprietary property of ICI and should not be reproduced or disseminated without ICI’s prior
consent. The illustrations and considerations set forth in this document are not intended to be, and should not be construed as, legal
advice or a recommendation as to how mutual funds or other interested market participants should evaluate their options for adopting or
modifying policies and practices related to the use of Medallion Signature Guarantees (MSGs). All market participants must make their own
independent and unilateral decisions about any such matters.

Copyright © 2017 by the Investment Company Institute. All rights reserved.

Medallion Signature Guarantee Considerations
and Alternatives
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Benefits of Reevaluating MSG Policies and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Applicable Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Transactions Where Other Controls Are Available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Requirements Based on Dollar Threshold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Alternatives for High-Risk Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Nonfinancial Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Alternative Authentication Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Online Processing as a Secure Alternative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Other Secure Alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Administrative Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Insurance Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Policies and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Forms and Website Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Resources and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Prospectus and Statement of Additional Information (SAI) Updates. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Introduction
Signature guarantees, as governed by Section 8-306 of the Uniform Commercial Code (UCC), are a
warranty by the signature guarantor that, among other things, the signature is genuine, the endorser
was an appropriate person to endorse, and the endorser has the legal capacity to sign. One particular
type, Medallion Signature Guarantees (MSGs), have become a critical tool used by mutual fund
transfer agents to protect shareholders, limit liability, and protect against fraudulent transactions. An
MSG provides protection for the receiving transfer agent against losses due to a fraudulent signature/
transaction up to specified dollar amounts. Under Securities and Exchange Commission Rule 17Ad-15,
transfer agents are required to maintain a signature guarantee program that facilitates the equitable
treatment of guarantors, governs the receipt of MSGs, and establishes written policies and procedures
for the acceptance of signature guarantees. Shareholders may obtain a signature guarantee from a
financial institution 1 that participates in an MSG program.2

In recent years, some financial institutions have reevaluated their risk profile and made the decision
to limit their guarantor activities or to exit the MSG program all together. This shift has significantly
reduced the number of financial institutions offering MSGs and made it more difficult for shareholders
to obtain an MSG when necessary. The reduction of available guarantors also has affected transfer
agents, who have traditionally relied upon MSGs for protection against fraudulent transactions and as a
tool to validate the authenticity of shareholder requests for certain financial transactions. Shareholders
are increasingly looking to transfer agents to provide a solution or alternative to the requirement to
obtain an MSG.

An Investment Company Institute (ICI) industry working group developed this paper to share
considerations and alternatives for the requirement of an MSG and to help funds and transfer agents
reevaluate their policies and procedures related to MSGs. This document is not intended to provide
legal advice and should not be relied on for that purpose. It is intended to serve only as a tool to assist
transfer agents and operations staff in their independent evaluation of situations in which a shareholder
may not be able to obtain a requested MSG.

1 Financial institutions include commercial banks, credit unions, or broker-dealers.

2 There are three Medallion Signature Guarantee programs—the Securities Transfer Agents Medallion Program, the Stock Exchanges
Medallion Program, and the New York Stock Exchange Medallion Signature Program. Participation may vary by program.

MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES 3

Benefits of Reevaluating MSG Policies and Procedures
Given the increasing difficulty shareholders are experiencing in obtaining an MSG, the following are
potential benefits to funds and transfer agents of reevaluating their MSG policies and procedures:

»» Increase in shareholder satisfaction by reducing the frustration and challenges associated with
obtaining an MSG

»» Reduction in shareholder complaints related to the inability to obtain an MSG

»» Lower volume of transaction requests that must be rejected and returned to the shareholder for failure
to obtain an MSG

»» Reduction in calls from shareholders complaining about the MSG requirement, asking where an MSG
may be obtained, and requesting an exemption to the MSG requirement

»» Enabling transfer agents to stay current with contemporary practices in other financial industries (e.g.,
banking, brokerage)

Applicable Transactions
Under the UCC, an MSG is appropriate for use when providing an endorsement on a certificate or a
separate document for “the purpose of assigning, transferring, or redeeming” a security or granting the
power to assign, transfer, or redeem a security. An MSG is specific to an individual financial transaction
request and provides insurance to the mutual fund up to the specific amount associated with that MSG.3
In short, an MSG is intended to be used in conjunction with a specific financial transaction.

Transactions Where Other Controls Are Available

Transfer agents may want to consider whether an MSG should be required for certain transactions when
other controls would mitigate the risk of a fraudulent transaction occurring. For example, some transfer
agents no longer require an MSG for any redemptions by a check that is made payable to the shareholder
and mailed to the address of record. This is because other recourses exist in the case of fraud—for
example, if the check is endorsed by someone other than the shareholder or deposited into a bank account
registered to a third party, the transfer agent can pursue an affidavit of forgery against the bank to recover
any losses associated with a fraudulent transaction.

The following are possible risk-mitigating activities that funds and transfer agents may want to consider as
they determine whether to continue to require an MSG in connection with redemption requests.

3 MSGs are affixed with a specified surety limit ranging from $100,000 to $10,000,000. The surety bond associated with the MSG is
a financial guarantee to the obligee (i.e., transfer agent) that if there is a loss due to a “signature guarantee” by the principal (i.e., the
guarantor) that the surety will pay a claim made by the obligee for the amount of the loss up to the bond limit.

4 MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES

 »» For redemption checks made payable to an account owner and delivered to the owner’s address of
record:4

»» If the redemption request is made by phone, phone security verification protocols may provide
greater comfort that the request is coming from the shareholder.

»» If the redemption request is submitted through the website, web authentication verification may
provide greater comfort that the shareholder is making the request.

»» Making the redemption check payable to the shareholder will help protect the account from fraud
attempted by a third party. In the case of fraud, the transfer agent may pursue an affidavit of
forgery against the bank should the check be endorsed by some other party or deposited into a
bank account registered to someone other than who the check is made payable to.

»» Making a courtesy callout to the shareholder to confirm the request will provide additional
security.

»» Sending the check to the address of record will provide a safeguard that the redemption proceeds
are being sent to a known address and not to an address unrelated to the one that the fund or
transfer agent has on file for the shareholder.

»» For redemptions from an estate account:

»» If the redemption request is made by phone, phone security verification protocols will provide
greater comfort that the authorized executor is making the request.

»» If the redemption is requested in writing by an attorney authorized to transact business on the

account, the fact that the attorney is an attorney in good standing with a state bar, and that the
request is submitted on the attorney’s letterhead and includes a state bar number, should help
protect the account from fraud.5

»» Making the redemption check payable to the estate account with the executor’s name also provides
a safeguard that redemption proceeds are payable to the estate and not a third party. In the case of
fraud, the transfer agent may pursue an affidavit of forgery against the bank should the check be
endorsed by other party or deposited into a bank account registered to someone other than who the
check is made payable to.

»» Sending the check to the estate’s address of record provides a safeguard that the redemption
proceeds are being sent to a known address and are not being sent to an address unrelated to that
of the estate.

4 This assumes that the shareholder’s address has not been changed within a specified time frame per the transfer agent’s current policy
related to redemptions following an address change.
5 The fund or transfer agent can use the state bar number to validate the lawyer and his/her associated firm.

MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES 5

 »» Comparing the request to the account records may protect the account from fraud. For example,
if the account was established via a new account application, the application should have
been accompanied by appointment of executor paperwork. Transfer agents could review the
documentation to confirm the name of the executor and existence of the estate, as well as to
compare the signature of the executor to the new request received.

»» Making a courtesy callout to the executor of the estate confirming the request will provide
additional protection.

Note: If the estate account was established via a written transfer request, the guarantor that provided
the MSG on the transfer paperwork should have reviewed the appointment of executor paperwork
provided when the account was opened.

»» For redemptions from a trust account when the trustees are on file:

»» If the redemption request is made by phone, phone security verification protocols will provide
greater comfort that an authorized trustee is making the request.

»» If the request is submitted in writing from an attorney in good standing with a state bar
association, the use of the attorney’s letterhead and state bar number should help protect the
account from fraud.6

»» Making the check payable to the trust account with trustee(s) name(s) provides a safeguard that
the redemption proceeds are being paid to the trust and not a third party. In the case of fraud, the
transfer agent can pursue an affidavit of forgery against the bank should the check be endorsed by
another party or deposited into a bank account registered to someone other than who the check is
made payable to.

»» Sending the check to the address of record provides a safeguard that the redemption proceeds are
being sent to a known address and are not being sent to an address unrelated to the trust.

»» Comparing the request to existing trust paperwork should help protect the account from fraud.
If the account was established via a new account application, it may have been accompanied by
the trust document. If so, the transfer agents could review the trust documentation to confirm
the name of the trustee(s) and existence of the trust, as well as to compare the signature of the
trustee(s) to the new request received.

»» Making a courtesy callout to the trustee confirming the request will provide additional protection.

Note: If the trust account was established via a written transfer request, the guarantor that
provided the MSG on the transfer paperwork should have reviewed the trust paperwork provided
to open the account.

6 The fund or transfer agent can use the state bar number to validate the lawyer and his/her associated firm.

6 MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES

Requirements Based on Dollar Threshold
The above are examples of activities a fund or transfer agent may undertake in lieu of obtaining an MSG
in connection with redemptions in order to mitigate the risks associated with fraudulent redemptions.
Another approach followed by some funds is to eliminate the requirement for an MSG on all transactions
under a specified dollar threshold. This approach is an alternative to imposing an MSG requirement based
on the nature of the transaction such as those discussed above. When considering an appropriate approach
to requiring MSGs, funds and transfer agents may want to consider their level of risk tolerance and any
available mitigating controls that might obviate the need for an MSG.

Alternatives for High-Risk Transactions

Though there are risks associated with all transactions, certain types (e.g., redemption to an alternative
payee, large dollar transactions) may be more problematic if not managed properly.

A fund or transfer agent can use various alternatives to mitigate the risks associated with these high-risk
transactions when a shareholder is unable to obtain an MSG for them. These alternatives do not provide a
surety bond, but would offset certain risks. For example:

»» A notary public7 would be able to confirm that the individual signing the document was, in fact, the
shareholder.

»» A transfer agent currently following the paperless legals8 model could request the necessary legal
documents.

»» Broker-distributed funds could confirm the legitimacy of the request with the broker of record.

»» The transfer agent could contact the shareholder by phone to confirm the request. Other alternatives
might include:

»» Using voice authentication to verify the customer

»» Having the shareholder perform an electronic verification using out-of-wallet type questions

»» Using PIN/text verification sent to the shareholder’s cell phone of record as a form of verification

»» Comparing signatures from previously received paperwork to verify they match

Funds and transfer agents may also want to consider assessing requirements around what can and cannot
be done for a shareholder in a given scenario. For example, they could push certain types of transactions to
the web, because website controls require positive verification information known only to the shareholder.

7 A notary public is a public officer whose function is to notarize documents by administering oaths and attestations and witnessing
the signature of the person(s) personally appearing before him or her.
8 Under a paperless legals program, specific paper documents are not required to accompany financial instructions provided to the
transfer agent as long as a valid MSG is provided by an eligible guarantor.

MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES 7

Though each of the examples above may provide meaningful verification on its own, using a combination
of different controls may further mitigate the risks associated with transactions and increase a fund’s or
transfer agent’s comfort level with the verification process.

Nonfinancial Transactions
It is strongly recommended that transfer agents refrain from requesting MSGs on nonfinancial
transactions, such as those involving account maintenance activities (e.g., address changes, changes to a
shareholder’s bank information) that are beyond the UCC’s intended use of MSGs. Requesting an MSG
in connection with maintenance or similar transactions for which the MSG was not designed likely does
not provide coverage under the MSG for such transactions and a claim would not be honored. Examples of
nonfinancial transactions where a transfer agent should not request an MSG include:

»» Change of address

»» Addition or change of shareholder banking information

»» Removal of a stop transfer

»» Adding, removing, or changing a named power of attorney (POA)

»» Adding, removing, or changing a third-party bank

»» Adding, removing, or changing a trustee, conservator, or guardian

»» Adding, removing, or changing signers for checkwriting privileges

»» Adding, removing, or changing a beneficiary

Alternative Authentication Practices

In lieu of requiring an MSG on a nonfinancial transaction, fund complexes may consider the following
alternatives to gain comfort that the request is coming from an authorized person.

»» For a change of address consider requiring:

»» a written request signed by the shareholder,

»» a written, notarized request signed by shareholder,

»» a request submitted by the shareholder through the fund’s secure website,9 or

»» a request submitted by the shareholder through the call center.10

9 A unique username and password is required for the shareholder to sign into the website and request the change.
10 The call center representative would be responsible for completing a verification of the shareholder’s identity and authority based
upon the fund’s shareholder verification policies and procedures.

8 MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES

 »» For a request to add or change the shareholder’s banking information consider requiring:

»» proof of the shareholder’s ownership of the bank account (e.g., voided check/deposit slip, letter
from bank on bank letterhead, copy of bank account statement), or

»» the shareholder to submit the request through fund’s secure website.

»» To remove a stop transfer11 consider:

»» requiring the shareholder to provide a written, notarized request signed by shareholder or other
documentation as appropriate.

»» To add, remove, or change a named power of attorney (POA) consider requiring:

»» the new POA to provide an original or true copy of the POA agreement, signed and dated within
a specified period of time of the request, along with a certification from the shareholder that the
POA is in full force and effect, or

»» a signed and notarized affidavit of validity of POA.

»» To add, remove, or change a transfer on death (TOD) beneficiary consider requiring:

»» a written request signed by the shareholder,

»» a written, notarized request signed by shareholder,

»» the shareholder to submit the request through the fund’s secure website, or

»» requiring the shareholder to submit the request through the call center.

»» To add, remove, or change a third-party bank on the account, consider requiring:

»» proof of bank account ownership along with a written request signed by the shareholder and the
bank account owner. Consider also requiring that both signatures be notarized or accompanied by
a Signature Verification Program (SVP)12 stamp, or

»» the shareholder to submit the request through fund’s secure website.

»» To add, remove, or change a trustee, conservator, or guardian consider requiring the following:

»» For a trustee:

»» A notarized self-certification of trust as outlined in the Uniform Trust Code

»» Excerpts of the trust agreement that govern successor trustees and that are certified by court or
attorney that drafted the trust agreement.

11 Transfer agents may want to consider the reason (e.g., court order, pending divorce, disputed ownership) the stop transfer was placed
on the account when evaluating requirements to remove the restriction.
12 The SVP is a signature authentication program administered by Kemark Financial Services, Inc. More information can be found at
www.stai.org/signature_validation.php.

MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES 9

 »» For a conservator or guardian:

»» A court-certified copy of the appointment that is dated within a specified period of time

»» To add, remove, or change authorized signers for check-writing privileges consider enhancing account
maintenance procedures to:

»» Require the review and updating of persons authorized to write checks on the account whenever
other changes are being made to authorized parties on or owners of the account (e.g., trustees,
authorized signers). This approach recognizes that persons with check-writing privileges on an
account generally match the account’s owners, authorized traders, or POAs listed on the account.
Consider also requiring a SVP or notary in lieu of an MSG.

Online Processing as a Secure Alternative

Improvements in technology and enhancements in authentication methods, including multifactor
authentication techniques, have vastly improved the security of processing transactions via funds’ websites.
With this improved security and authentication, increasing “straight through” processing via fund websites
has been a focus of, and priority within, the mutual fund industry. As shareholders continue to have
difficulty obtaining MSGs, funds and transfer agents may want to consider increasing the types and scope
of transactions they make available to their shareholders via their website.

To further enhance security, funds and transfer agents may want to consider using a multifactor
authentication process that layers independent authentication factors. For example, requiring the
submission of a username and password and responses to one or more challenge questions.

To ensure maximum protection of shareholder information, funds and transfer agents should also evaluate
their processes and procedures related to resetting a shareholder’s username and password.

An additional security control that funds and transfer agents may want to consider implementing is to
send an email and/or text to the shareholder each time the shareholder updates account information
(including an email address or mobile phone number) or inputs account transactions. Such notification
would be immediate and alert the shareholder that a change has been made to the account or a
transaction has occurred.

10 MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES

Added benefits of increasing shareholders’ ability to perform lower-risk transactions via the web are that
it can drive up use of the website and reduce manual processing and rejected transactions. Examples of
lower-risk transactions that might be facilitated online are the following:

Maintenance Access
»» Establishing or changing electronic mailing options

»» Establishing, modifying, and deleting automatic investment plans

»» Establishing, modifying, and deleting systematic withdrawal plans

»» Modifying dividend and capital gain options

»» Changing address information

»» Providing shareholders the ability to add banking information (names on bank account must be
names of registered owners)

»» Establishing, modifying, or deleting beneficiary designations

Transaction Access
»» Permitting redemptions that are sent to the shareholder’s address or bank of record (without a dollar
restriction or limit, with ability to flag if an address change has occurred within a specified period)

»» Permitting redemptions via Automated Clearing House (ACH) or federal funds wire transfers

»» Effecting exchanges between accounts

»» Establishing a new account

»» Permitting mobile check deposits

»» Permitting purchases via ACH or federal funds wire transfer

Inquiries
»» Enabling shareholders to review their account information

»» Providing shareholders access to tax forms and statements

MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES 11

Other Secure Alternatives
In addition to driving more transactions to a secure website for processing, funds and transfer agents may
consider other available technology, such as voice print,13 to improve the security of transactions processed
via the call center. Employing voice print technology within a call center may allow funds and transfer
agents to process higher dollar transactions via their call center in the absence of obtaining an MSG.

Administrative Considerations
As funds and transfer agents evaluate and consider changing MSG requirements and practices, there are a
number of administrative factors that should be reviewed, including:

»» any applicable insurance policies,

»» policies and procedures relating to transaction processing,

»» processing guides or resources, and

»» staff training.

Funds should also ensure the accuracy of any disclosure in the fund’s prospectus relating to MSGs and the
shareholder’s ability to establish an account or effect transactions electronically.

Insurance Policy
Mutual fund complexes generally have some form of insurance bond that provides coverage against losses
resulting from third-party fraud in connection with redemption requests and other specified account
transactions. Financial institution bonds (sometimes known as investment company blanket bonds) are
often used by fund complexes as a form of protection. These bonds may differ with respect to the scope of
their coverage and their terms and conditions.

As funds evaluate their policies and procedures relating to requiring and accepting MSGs, they should
consider their insurance bond and its related coverage.

Policies and Procedures

Funds and transfer agents may also want to consider thoroughly searching for any references to MSGs in
their desktop policies and procedures and related requirements to ensure they are current and accurate.
Processing procedures, which often contain multiple references to MSGs, can quickly become stale.
Therefore, funds and transfer agents may want to undertake a comprehensive review of their MSG-
related policies and procedures and update them where appropriate. Funds and transfer agents may also
want to consider whether alternative verification methods should be addressed within the policies and
procedures and, if so, whether the policies and procedures should describe the circumstances under
which they may be used.

13 A voice print is the identification of a person from the unique characteristics of his/her voice.

12 MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES

Forms and Website Disclosure
Funds and transfer agents should consider thoroughly reviewing all shareholder service forms
(e.g., transfer forms, distribution forms) to ensure any references to MSGs are updated and accurate
based on any changes to the fund’s and transfer agent’s policies and procedures. Similarly, funds and
transfer agents should consider reviewing all website disclosure and any electronic shareholder service
forms available via the website related to MSGs to ensure accuracy.

Resources and Training

Funds and transfer agents may consider thoroughly reviewing all training materials, processing
resources, and job aids for references to MSGs and related requirements to ensure they are current and
accurate. Additionally, they may consider whether training of processing and call center staff is necessary
to educate them about acceptable alternatives to MSGs based upon the fund’s policies and procedures.
As funds and transfer agents consider accepting full paper documentation in lieu of paperless legals,
it may be necessary to provide refresher training for processing staff to ensure they are knowledgeable
about the requirements and necessary documents that must be provided in lieu of an MSG.

Prospectus and Statement of Additional Information (SAI) Updates

Because prospectuses and SAIs often contain language related to MSG requirements, funds and
transfer agents may consider coordinating any changes to their policies and procedures related
to MSG requirements and acceptance with scheduled updates to the applicable disclosure in
fund prospectuses and SAIs. By doing so, funds may be able to reduce expenses associated with
supplementing a prospectus and/or SAI.

Conclusion
In response to the increasing difficulty shareholders are experiencing in satisfying existing
requirements regarding MSGs, funds and transfer agents may want to evaluate the need to have
shareholders obtain MSGs and consider whether, instead, there may be less onerous alternative
processes and procedures for authenticating shareholders and validating transaction requests. Such
alternatives may yield considerable benefits and efficiencies to funds, transfer agents, and shareholders.
To be meaningful, the fund’s or transfer agent’s evaluation should involve a risk-based assessment
that takes into account available alternatives, technology, and mitigating controls with an eye toward
improving the shareholder experience.

MEDALLION SIGNATURE GUARANTEE CONSIDERATIONS AND ALTERNATIVES 13

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