A medallion signature guarantee is a verification by a financial institution indicating that the identity of someone transferring securities or account holdings was confirmed at the time of the transfer. By affixing a guarantee, the bank accepts financial liability for the transaction and limits the liability of the transfer agent. Many financial institutions offer these types of guarantees and for certain types of transactions, they are required. Guarantees provide security for both buyers and sellers in addition to the financial institutions, brokers, and agents they work with.
In order to provide a guarantee, a financial institution has to be a member of a medallion signature guarantee program. There are several such programs and many provide listings of their members for the convenience of people looking for financial institutions that can provide guarantees. Institutions usually only offer the service to their members, although some will provide it to non-members for a fee. There may be a waiting period for new members, with the bank withholding certain services until someone is an established member in good standing.
In a medallion signature guarantee, the person who owns the securities or accounts and wishes to transfer them fills out paperwork and provides verification of identity. One reason banks prefer to work with their own customers when making guarantees is that they have information about their customers on file, along with an established relationship that will make it easier for the bank to verify the person's identity. Once paperwork is filled out, a bank officer can affix a medallion signature guarantee to the documentation on the securities or accounts, indicating that the person initiating the transfer is the rightful owner.
In the event that there is a problem with the transfer, such as identity theft, resulting in a fraudulent transfer, the bank accepts liability for the transaction and would be required to make good on the transaction. For this reason, banks are very careful when they process a medallion signature guarantee. They may use several different means of verifying identity and they confirm that the paperwork is filled out accurately and completely, with no falsifications.
The medallion signature guarantee itself is a special seal that is usually designed to be difficult to forge or falsify. It may include hidden security features that can be verified by a transfer agent or another financial institution. The bank officer who signs the seal is also responsible for creating and maintaining the documentation associated with the guarantee so that if a dispute does occur, a responsible party can be identified and located.