Quick Answer
Proper securities delivery requires acceptable securities and valid transfer documentation. Covered depository-eligible transactions require book-entry settlement. A reporting institution with a substantial basis to believe criminal activity was involved in theft or loss must report it to the SEC or its designee and the registered transfer agent.
Once a position is known and verified, the next question is whether it can move to the receiving party in a form that permits acceptance and transfer.
What Makes a Certificate Good Delivery?
| Certificate type | Ownership and transfer characteristic |
|---|---|
| Registered certificate | Shows the registered owner's name. Good delivery requires a proper assignment or endorsement, a power of substitution when required, a technically correct signature that matches the certificate, and a guarantee acceptable to the transfer agent or registrar. |
| Bearer certificate | Is payable to the holder, so possession supports transferability. |
- Good delivery: Delivery of a security in a form that permits the receiving party to accept and transfer it without defect.
- Transfer agent: The issuer's agent that records changes in registered ownership and processes certificate transfers.
- Stock power: A separate assignment document used to transfer ownership of stock.
- Bond power: A separate assignment document used to transfer ownership of a bond.
- A registered security must have a proper assignment or endorsement for good delivery. It also needs a power of substitution when required, a technically correct signature that matches the certificate, and a guarantee acceptable to the transfer agent or registrar.
How Are Certificates Validated, Tracked, and Reported?
- Validation of a certificate: Reviewing a certificate and its transfer documentation for authenticity and proper transferability before processing delivery or transfer.
- Securities blotter: A chronological record of securities transactions and deliveries used to track movement of securities.
- Lost certificate: A certificate reported missing, requiring handling that protects against transfer or negotiation of the missing instrument.
- When a reporting institution has a substantial basis to believe that criminal activity was involved in a certificate theft or loss, it reports to the SEC or its designee and the registered transfer agent.
- For a noncriminal missing or lost certificate, a reporting institution reports to the SEC or its designee and the registered transfer agent.
- A reporting institution reports a counterfeit certificate.
- A reporting institution makes required certificate inquiries.
Exam Tip: Gotchas
- Criminal and noncriminal losses report to the same places. Both go to the SEC or its designee and to the registered transfer agent. The certificate's status is what separates the two, not who receives the report.
How Do Direct Registration and Depository Processing Differ?
- Direct Registration System (DRS): A system permitting securities to be registered directly in the investor's name on the issuer's books in book-entry form.
- Deposit/Withdrawal at Custodian (DWAC): A process for electronically depositing securities into, or withdrawing securities from, a participant's account through the issuer's transfer agent.
- Depository-eligible securities: Securities from an issue eligible for deposit that are also eligible for book-entry transfer for the transaction at settlement.
- A member must use a securities depository for book-entry settlement of a depository-eligible transaction with another member, an exchange member, or a member of a registered securities association.
- A member cannot complete a delivery-versus-payment or receipt-versus-payment transaction in a depository-eligible security with a customer unless it settles by book entry through a securities depository.
| Process | What it does |
|---|---|
| DRS | Records the investor as the direct registered owner on the issuer's books. |
| DWAC | Electronically deposits securities into, or withdraws them from, a participant's account through the transfer agent. |
Exam Tip: Gotchas
- DRS establishes direct registered ownership. DWAC does not. DWAC is the electronic deposit or withdrawal process through the transfer agent.
- Arrival alone does not create good delivery. The receiving party must be able to accept and transfer the security without defect.
Think of it this way: A registered certificate is like a named ticket that needs the right assignment to change hands. DRS puts the investor's name directly on the issuer's electronic list. DWAC is the electronic loading dock that moves a position into or out of a participant's account.
What Should You Check on Exam Day?
- Confirm the assignment or endorsement, any required power of substitution, the signature, the guarantee, and good-delivery status.
- Complete required certificate inquiries.
- Use the securities blotter to track transaction and delivery movement.
- Distinguish direct registered ownership through DRS from electronic movement through DWAC.