Good Delivery Requirements
Now that you understand when trades settle, the next question is: what must the seller actually deliver? Good delivery means the security is in proper form for transfer of ownership. If a certificate doesn't meet good delivery requirements, the receiving party can reject it.
What Constitutes Good Delivery
- The delivering party must provide securities that meet all requirements for the receiving party to accept them without objection
- The seller must have certificates in possession (or book-entry equivalent) to make delivery
- Selling without possession triggers locate and borrow requirements under Regulation SHO
Stock Certificate Requirements
| Requirement | Rule |
|---|---|
| Denominations | Must be in: multiples of 100 shares, exact divisors of 100 (1, 2, 4, 5, 10, 20, 25, 50, 100), or combinations that add up to 100 shares |
| Endorsement | Must be signed by the registered owner(s) exactly as name(s) appear on the certificate |
| Joint ownership | Certificates in two or more names require ALL registered owners to sign |
| Stock power | A separate document (assignment separate from certificate) used in lieu of endorsing the back of the certificate |
| Deceased owner | Certificate registered to a deceased person is NOT good delivery without proper legal documentation |
Denomination Examples
For a trade of 300 shares, good delivery includes:
- Three 100-share certificates
- Six 50-share certificates
- One 200-share certificate and one 100-share certificate
- Fifteen 20-share certificates
Not good delivery: A 150-share certificate and a 150-share certificate (150 is not a multiple of 100, a divisor of 100, or a unit that can combine to make 100)
Exam Tip: Gotchas
- A 150-share certificate is NOT good delivery. 150 is not a multiple of 100 and not a divisor of 100. The exam loves testing odd denominations.
Endorsement Details
- Signature must match the registered name exactly (Financial Industry Regulatory Authority (FINRA) Rule 11550)
- If the name differs (e.g., maiden name vs. married name), additional documentation is required (legal name change, court order)
- A stock power may be used instead of endorsing the certificate itself; preferred for security reasons (sent separately from the certificate)
- A Medallion signature guarantee is typically required for transfers
Bond Certificate Requirements
| Requirement | Rule |
|---|---|
| Registered bonds | Delivered in multiples of $1,000 par value, up to a maximum denomination of $100,000 |
| Bearer (coupon) bonds | Must be in $1,000 or $5,000 denominations only; all unpaid coupons must be attached |
| Bond power | Separate document for assignment, analogous to stock power |
| Mutilated certificates | Not good delivery - must be validated by the transfer agent or issuer before acceptance |
Bearer Bond Details
- Bearer bonds have no registered owner; whoever physically holds the certificate owns it
- All unpaid coupons must be attached for the bond to be good delivery
- Missing coupons mean the bond is NOT good delivery
- Bearer bonds are rare for new issues (eliminated for tax-reporting purposes)
Exam Tip: Gotchas
- Bearer bonds must have ALL unpaid coupons attached to be good delivery. Missing even one coupon means the bond fails good delivery.
Mutilated Certificates
- A certificate is mutilated if it is damaged, altered, or missing information that makes authentication difficult
- Mutilated certificates are not good delivery
- Must be validated or replaced by the transfer agent before they can be delivered
Exam Tip: Gotchas
- Certificates registered in the name of a deceased person are NOT good delivery. The exam may describe a scenario where a widow tries to deliver her late husband's stock certificates. Those certificates are not good delivery until proper legal documents (letters testamentary or court order) transfer ownership.
- If a certificate is registered to two people, BOTH must sign. Missing one signature means the certificate is not good delivery.