To: CEO's of all FDIC members
SUBJECT: Notice of Fraudulent Securities Certificates and Reminder of Procedures Intended to Prevent Losses
Recent reports to the Securities and Exchange Commission (SEC) indicate that a number of domestic and European banks and broker-dealers (and their insurance companies) have suffered losses by accepting cancelled securities certificates as collateral for loans and for deposit in trust and custodial accounts. The certificates were worthless because they had already been cancelled on the books of the transfer agent. Although the FDIC is unaware of any FDIC-supervised banks that have suffered such loses, the agency is warning institutions about the fraudulent activity and reminding them about procedures that should help detect fraudulent securities certificates.
Banks can guard against this scam by inquiring about securities certificates before they are accepted for collateral of for trust accounts. The chief resource is the Securities information Center (SIC®), a private firm contracted by the SEC to operate a database of information on lost, stolen, counterfeit and recovered securities certificates.
Under SEC Rule 17f-1, every insured bank must be registered with the Securities Information Center (see page 9440 in Volume 3 of the FDIC's loose-leaf Rules and Regulation service). SIC® registrations may be either direct or indirect. A direct registrant may telephone the SIC® directly to inquire about certificates. An indirect registrant must route all inquiries through a designated direct registrant, usually a correspondent bank.
In general, SEC Rule 17f-1 requires an FDIC-insured bank that receives from a customer a certificate worth $10,000 or more to verify its validity through the SIC®. Banks complying with this rule should be able to protect themselves against significant losses from fraud. Rule 17f-1 also generally requires an insured bank to report to the SIC® lost, stolen, counterfeit or recovered securities certificates worth $10,000 or more for which the bank is owner, fiduciary or transfer agent.
An institution that is the transfer agent for its own securities is advised to ensure that securities certificates are properly and prominently cancelled. The same protections also need to be afforded to outside issues of stocks and bonds transferred by a trust department.
In addition, a bank that uses an outside certificate destruction or recycling service should be sure that the certificates actually are destroyed and should have verifying documentation. A bank taking this precaution usually requires a bank officer to be present to witness the destruction. Moreover, if an outside certificate storage service has been used, the bank should be satisfied that adequate controls are in place to prevent the loss or theft of the certificates.
A bank that suspects that a fraudulent securities certificate is being presented is encouraged to immediately report the information to the local office of the Federal Bureau of Investigation. For further information about rules and procedures for preventing losses, please contact John F. Harvey, trust review examiner, in the FDIC's Division of Supervision (202-898-6762), or the Division's Special Activities Section (202-898-6781).