FINRA Rule 11520

FINRA Rule 11520(a): The General Authentication Requirement

FINRA Rule 11520(a) establishes the foundational principle governing mutilated securities generally — a mutilated security shall not be a good delivery until appropriately authenticated by the trustee, registrar, transfer agent, or issuer.

This provision establishes a default disqualification with a defined cure. The default position is that a mutilated security — a certificate that has been physically damaged in some way, whether through tearing, staining, partial destruction, or other physical impairment that affects the certificate's condition — does not satisfy the good delivery standard examined in this dictionary's FINRA Rule 11510 entry in connection with temporary certificates. A receiving party tendered a mutilated security certificate would be entitled to reject that tender as not constituting good delivery.

The cure for this default disqualification is authentication — until appropriately authenticated by the trustee, registrar, transfer agent, or issuer, a mutilated security is not good delivery, but the until formulation establishes that authentication by one of these four enumerated parties removes the disqualification. Once one of these parties — each occupying a position of institutional responsibility with respect to the security's issuance, registration, or transfer — has appropriately authenticated the mutilated security, confirming that despite its physical condition the certificate remains a genuine and valid instrument representing the ownership interest it purports to represent, the mutilated security becomes capable of constituting good delivery notwithstanding its physical condition.

The four enumerated authenticating parties — trustee, registrar, transfer agent, or issuer — represent the range of institutional actors who, depending on the specific security and its administrative arrangements, occupy the kind of authoritative position from which a determination that a mutilated certificate remains genuine and valid could appropriately be made. A trustee, in the bond context, holds a fiduciary role with respect to the bondholders and the trust indenture governing the bonds. A registrar maintains the official register of security holders. A transfer agent handles the mechanics of ownership transfer on the issuer's behalf. And the issuer itself, as the entity that originally issued the security, holds the most direct possible authority to confirm a certificate's authenticity.

FINRA Rule 11520(b): The Specific Case of Mutilated or Erroneously Canceled Bond Coupons

FINRA Rule 11520(b) addresses a more specific category than paragraph (a)'s general mutilated-security rule — bonds bearing a coupon that has been mutilated as to the bond number or signature, or that has been canceled in error.

To understand paragraph (b), it helps to recall the structure of traditional coupon bonds discussed in this dictionary's earlier entry on FINRA Rule 11362 — coupon bonds are bearer instruments with physical interest coupons attached, each coupon representing the right to a specific interest payment, with coupons typically detached and presented for payment as each becomes due, and with each coupon bearing identifying information including the bond number (identifying which specific bond the coupon belongs to) and a signature (authenticating the coupon as genuine).

Paragraph (b) addresses two distinct ways a coupon might present a problem: the coupon has been mutilated as to the bond number or signature — meaning the physical damage to the coupon specifically affects the bond number or signature information that identifies and authenticates the coupon, as distinguished from mutilation affecting some other, less critical portion of the coupon; or the coupon has been canceled in error — meaning the coupon bears a cancellation mark (the kind of mark that would normally indicate the coupon has already been presented and paid) but that cancellation was made by mistake, with the coupon not actually having been paid.

For bonds presenting either of these two coupon-level problems, paragraph (b) establishes that delivery shall not be good delivery unless an appropriate endorsement — in the form required by the Committee — has been placed on the reverse of the coupon, with that endorsement provided by an official authorized under paragraph (c). This endorsement requirement functions analogously to paragraph (a)'s authentication requirement, but operates specifically at the level of the individual coupon rather than the security certificate as a whole — rather than authenticating the entire bond certificate, the endorsement specifically addresses and cures the identified problem with the specific coupon, confirming (in the bond-number-or-signature-mutilation case) that the coupon genuinely belongs to and is properly authenticated as part of the bond it is attached to, or (in the erroneous-cancellation case) that the cancellation mark on the coupon does not reflect an actual prior payment and the coupon remains payable.

The in the form required by the Committee language ties this endorsement to the UPC Committee's interpretive and standard-setting authority under FINRA Rule 11110 — the Committee, rather than paragraph (b) itself, establishes the specific form the endorsement must take, consistent with the broader pattern this dictionary has observed of standardized forms and procedures throughout the Uniform Practice Code, paralleling the Standard Forms of FINRA Rule 11130's Supplementary Material .01 and the Uniform Comparison and Uniform Delivery Ticket Forms of FINRA Rules 11210 and 11360, the specifications for the latter two being contained in the Banking and Securities Industry Committee's 1971 "Four Uniform Forms" report.

FINRA Rule 11520(c): Who May Provide the Paragraph (b) Endorsement

FINRA Rule 11520(c) specifies the persons authorized to provide the endorsement paragraph (b) requires — the endorsement shall be signed on behalf of the obligor by an officer thereof or, under authorization from the obligor, on behalf of the corporate trustee or paying agent by a duly authorized officer thereof or other person authorized to sign on behalf thereof.

This provision establishes two pathways for the endorsement's authorization. The first pathway is direct — signature on behalf of the obligor by an officer thereof. The obligor is the entity obligated to make payment on the bond — typically the issuer itself — and an officer of that obligor signing the endorsement directly provides the most immediate possible authorization, analogous to paragraph (a)'s inclusion of the issuer among the parties who may authenticate a generally mutilated security.

The second pathway is delegated — under authorization from the obligor, on behalf of the corporate trustee or paying agent by a duly authorized officer thereof or other person authorized to sign on behalf thereof. This pathway recognizes that, in practice, the obligor itself may not be the party most directly handling coupon-related matters on a day-to-day basis — the corporate trustee (administering the bond issue under the trust indenture) or the paying agent (handling the actual disbursement of interest payments against presented coupons) may be better positioned to evaluate and endorse a specific coupon's bond-number, signature, or cancellation issue. Paragraph (c) accommodates this practical reality by allowing the corporate trustee or paying agent to provide the endorsement, but only under authorization from the obligor — the obligor's authorization is the foundational source of authority in both pathways, with the second pathway simply allowing that authority to be exercised through the corporate trustee or paying agent's duly authorized officers or other authorized persons rather than requiring the obligor's own officers to personally sign every such endorsement.

The Relationship Between Paragraphs (a) and (b): General Authentication and Specific Endorsement

FINRA Rule 11520's two-tiered structure — paragraph (a)'s general authentication requirement for mutilated securities, and paragraph (b)'s specific endorsement requirement for the bond-coupon scenarios it addresses — raises the question of how these two provisions relate to each other, particularly for a bond whose mutilation affects both the certificate generally and a coupon specifically in the manner paragraph (b) describes.

While the rule's text does not explicitly address this interaction, the most coherent reading is that paragraphs (a) and (b) address different aspects of a bond's overall condition that could each independently affect good delivery. A bond certificate itself could be mutilated in a way that triggers paragraph (a)'s general authentication requirement — for example, physical damage to the certificate's main body, apart from any coupon. Separately, and potentially independently, a coupon attached to that same bond could present the bond-number-or-signature mutilation or erroneous-cancellation problems that trigger paragraph (b)'s specific endorsement requirement. A bond presenting both kinds of problems simultaneously would presumably need to satisfy both paragraph (a)'s authentication requirement for the certificate generally and paragraph (b)'s endorsement requirement for the specific coupon, in order to constitute good delivery.

This reading is consistent with the specific versus general relationship that recurs throughout the Uniform Practice Code's structure — much as FINRA Rule 11150's flat-trading framework for bonds operates alongside, rather than in place of, the general delivery framework of FINRA Rule 11320, paragraph (b)'s coupon-specific endorsement requirement operates alongside, rather than in place of, paragraph (a)'s certificate-general authentication requirement, with each addressing its own specific dimension of a bond's overall condition for good delivery purposes.

The 1970 Amendment and the Coupon Bond Era

FINRA Rule 11520's amendment history — an amendment effective September 1, 1970, followed by the December 15, 2010 Consolidated Rulebook transfer through SR-FINRA-2010-030, with no amendments since — places this rule's substantive framework within the same general era as FINRA Rule 11120's March 1, 1970 amendment examined earlier in this dictionary's coverage, and shortly after FINRA Rules 11110, 11361, and 11362's 1968 amendments.

FINRA Rule 11520(b) and (c)'s detailed treatment of bond coupons — addressing bond-number-or-signature mutilation and erroneous cancellation, with a specific endorsement mechanism involving the obligor, corporate trustee, and paying agent — reflects an era in which coupon bonds, with their physical detachable interest coupons, represented a significant and operationally relevant category of security within the Uniform Practice Code's delivery framework, consistent with this dictionary's earlier discussion of FINRA Rule 11362(a)'s coupon bond denomination framework. The continued presence of this detailed coupon-specific framework through the 2010 Consolidated Rulebook transfer, with no amendment since 1970 other than that transfer, confirms that — much as this dictionary observed regarding FINRA Rule 11410's draft-attached delivery mechanism — the Uniform Practice Code retains operative provisions addressing categories of securities and instruments that may represent a diminishing share of modern market activity, but that remain part of the Code's framework for whatever transactions continue to involve them.

Connection to FINRA Rules 11110, 11130, 11150, 11210, 11362, 11510, and 11530

FINRA Rule 11520 connects to FINRA Rule 11110 — both through the good delivery framing that paragraph (a) shares with FINRA Rule 11510's temporary certificate rule, and through paragraph (b)'s in the form required by the Committee language, which ties the coupon endorsement form to the UPC Committee's standard-setting authority. It connects to FINRA Rule 11130's Supplementary Material .01 Standard Forms and FINRA Rule 11210's Uniform Comparison Form as parallel instances of standardized forms prescribed by the Code, of which paragraph (b)'s required endorsement form, whose form is required by the Committee, represents another example. It connects to FINRA Rule 11150's flat-trading framework and FINRA Rule 11320's general delivery framework as an example of the specific-versus-general relationship that this dictionary's analysis suggests governs the interaction between FINRA Rule 11520(a)'s general authentication requirement and paragraph (b)'s coupon-specific endorsement requirement. It connects directly to FINRA Rule 11362(a) — whose coupon bond denomination framework describes the same category of bearer instrument with detachable coupons that FINRA Rule 11520(b) and (c) address from the mutilation and erroneous-cancellation perspective. It connects to FINRA Rule 11510 as the immediately preceding rule within the FINRA Rule 11500 subsection, both establishing good delivery rules for categories of certificates presenting departures from the standard delivery scenario — temporary certificates under FINRA Rule 11510, mutilated securities and coupons under FINRA Rule 11520. And it connects to FINRA Rule 11530 — the next rule in the FINRA Rule 11500 subsection, addressing securities called for redemption or deemed worthless, which this dictionary anticipates may present a further good-delivery framework for yet another category of certificate-level circumstance.

A Bond Bearing More Than One Defective Coupon

FINRA Rule 11520(b) is framed coupon by coupon. It applies to the delivery of a bond "which bears a coupon" mutilated as to the bond number or signature, or "a coupon which has been canceled in error", and the cure is an appropriate endorsement placed "on the reverse of the coupon". The endorsement belongs to the coupon that has the defect, not to the bond as a whole.

A bond can carry more than one coupon with a paragraph (b) defect. Suppose a bond carries twelve unmatured coupons, and two of them had their bond numbers smeared by water damage. Each of those two coupons is a coupon mutilated as to the bond number, so each needs its own appropriate endorsement on its own reverse. An endorsement on the reverse of the first coupon does nothing for the second. Until both are endorsed, delivery of the bond is not good delivery. The ten coupons whose bond numbers and signatures are intact need no endorsement.

What the Endorsement Establishes for a Mutilated Bond Number or Signature

Each coupon on a traditional coupon bond carries the bond number, which identifies the specific bond the coupon belongs to, and a signature, which authenticates the coupon as genuine. FINRA Rule 11610(a) requires a coupon bond to have securely attached, in the correct place, proper coupons "of the same serial number as the bond". When a coupon's bond number is mutilated, nothing left on the coupon shows that it belongs to the bond it is attached to.

The paragraph (b) endorsement fills that gap. For a coupon mutilated as to the bond number or signature, the endorsement confirms that the coupon genuinely belongs to, and is properly authenticated as part of, the bond it is attached to. That is a different confirmation from the one for a coupon canceled in error, where the endorsement confirms that the cancellation mark does not reflect an actual prior payment. The endorsement is signed on behalf of the obligor by an officer, or, under authorization from the obligor, on behalf of the corporate trustee or paying agent.

A Coupon Canceled in Error Need Not Be Damaged

The two coupon defects in FINRA Rule 11520(b) are different in kind. Mutilation as to the bond number or signature is physical damage to particular information on the coupon. Cancellation in error is not damage at all. It is a cancellation mark, of the kind that normally shows a coupon has been presented and paid, placed on a coupon by mistake when the coupon had not in fact been paid.

A coupon can therefore be in perfect physical condition and still bring paragraph (b) into play. Suppose a paying agent's clerk stamps "PAID" on the wrong coupon of a bond, one that has not yet been presented. The coupon is clean and legible, with its bond number and signature intact. It is nonetheless a coupon canceled in error. A bond bearing it is not good delivery unless an appropriate endorsement, in the form required by the Committee, has been placed on the reverse of that coupon by an official authorized under paragraph (c).

Worked Scenario: FINRA Rule 11520(b) and the Coupon Requirements of FINRA Rule 11610

FINRA Rule 11520(b) sets a good delivery condition for a bond that bears a defective coupon. FINRA Rule 11610 sets other good delivery requirements for coupon bonds, including which coupons must be attached. The two rules meet whenever a seller considers what to do about a defective coupon.

The defective coupon is the one falling due. A member sells a bond dealt in "and interest" for delivery on the interest payment date. The coupon payable on that date is mutilated as to its signature. FINRA Rule 11610(f)(1) requires a bond dealt in "and interest", for delivery on or after the date on which interest is due and payable, to be delivered without the coupon payable on that date. The bond as delivered no longer bears the mutilated coupon, so paragraph (b) asks for no endorsement for that coupon. If instead the mutilated coupon were a later one, not yet due, it would stay attached. The bond would then bear it, and the endorsement would be needed.

The seller cuts off a defective coupon that is not yet due. A different seller, faced with an unmatured coupon mutilated as to its bond number, detaches it rather than obtain an endorsement. That does not produce a good delivery. FINRA Rule 11610(a) requires a coupon bond to have proper coupons securely attached in the correct place. The bond is now missing a coupon, and FINRA Rule 11610(a) makes acceptance of cash or check in place of missing coupons the purchaser's option, not the seller's. Under the opening sentence of FINRA Rule 11610, the seller is also liable for any expense incurred as a result of failing to meet that requirement. Removing the coupon exchanges one delivery defect for another.

The bond is in default. A third bond is one on which interest is in default. One of its unpaid coupons was canceled in error. FINRA Rule 11610(c) requires a bond on which interest is in default to carry all unpaid coupons, so the seller must deliver that coupon with the bond. Because the bond then bears a coupon canceled in error, FINRA Rule 11520(b) requires the appropriate endorsement on that coupon's reverse before the delivery is good delivery. The two requirements together leave the seller one route to good delivery: deliver the coupon, endorsed.

When a Mutilated Tender Is Rejected: Exposure to Buy-In

A mutilated security that has not been authenticated is not a good delivery, so a receiving member may reject it. Rejecting the tender does not end the contract. The seller has still not delivered what the contract calls for. The contract therefore remains uncompleted until the seller tenders a good delivery, for example the same certificate once one of the trustee, registrar, transfer agent or issuer has appropriately authenticated it.

The seller's exposure while the contract is uncompleted comes from FINRA Rule 11810(a). A securities contract that has not been completed by the seller according to its terms may be closed by the buyer, in accordance with that Rule, not sooner than the third business day following the date delivery was due. Suppose a member sells 300 shares of a corporation's common stock to another member, for delivery on a Tuesday, in a contract that is not subject to the buy-in requirements of an exchange or registered clearing agency. The seller tenders a torn certificate that no one has authenticated, and the buyer rejects it. If the seller still has not made a good delivery, the buyer may begin FINRA Rule 11810's buy-in procedure, starting with the written notice FINRA Rule 11810(b) requires, and may close the contract no sooner than the third business day after that Tuesday. The time needed to obtain authentication is time in which the contract remains uncompleted.

FINRA Rule 11810 does not apply to every contract. Paragraph (a) excludes, among others, contracts subject to the buy-in requirements of a national securities exchange or registered clearing agency, transactions in securities exempted under Section 3(a)(12) of the Exchange Act, and transactions in municipal securities. A seller of a mutilated municipal coupon bond therefore faces no buy-in under FINRA Rule 11810, although the bond is still not good delivery without the endorsement FINRA Rule 11520(b) requires.

Rejecting a Mutilated Certificate at Presentation

FINRA Rule 11710(a) defines a "reclamation" as "a claim for the right to return or the right to demand the return of a security which has been previously accepted". It also provides that securities "presented for delivery on a transaction and which for a valid reason have been refused" are "deemed a rejection" for the purposes of FINRA Rules 11710 and 11720.

Suppose the receiving member's cashiering clerk sees at the delivery window that a stock certificate is torn through its centre and bears no authentication, and hands it back. The certificate was never accepted, and it was refused because FINRA Rule 11520(a) makes an unauthenticated mutilated security not a good delivery. What happened is a rejection. It is not a reclamation, because a reclamation presupposes a security that has been accepted.

Transfer Refused After a Mutilated Certificate Was Accepted

A mutilated certificate that was accepted without authentication may reveal its problem only later, when the receiving member presents it for transfer. FINRA Rule 11720(b) provides for "Reclamation, by reason of the fact that a specific certificate tendered in settlement of a contract has been presented for transfer and transfer thereof has been refused by the transfer agent", and it measures the period for that reclamation "after the settlement date of the contract".

Suppose a buyer accepts two certificates in settlement of a single contract. One of them is badly stained and unauthenticated. Months later the buyer presents both for transfer, and the transfer agent refuses to transfer the stained certificate. The reclamation right under FINRA Rule 11720(b) attaches to that specific certificate, the one whose transfer was refused. The clock for it started on the contract's settlement date, not on the day the transfer agent refused. Delay in presenting the certificate for transfer uses up the buyer's time. FINRA Rule 11720(d) adds that the running of the period does not foreclose "a member's rights to pursue its claim via other open avenues, including but not limited to the FINRA arbitration procedure".

Authentication Cures Mutilation Only

FINRA Rule 11520(a) removes one obstacle to good delivery, the certificate's physical condition. It does not turn every authenticated certificate into a good delivery. Other rules of the 11500 subsection, "Delivery of Securities with Restrictions", each set a condition of their own, and a certificate must pass every one that applies to it.

Take a certificate that is both mutilated and temporary. FINRA Rule 11510 provides: "A temporary certificate shall not be a good delivery when permanent certificates are available." Suppose the transfer agent authenticates the damaged temporary certificate, and permanent certificates for the issue are by then available. The authentication answers FINRA Rule 11520(a), but it does nothing about FINRA Rule 11510. The certificate is still not a good delivery, because it is a temporary certificate at a time when permanent certificates are available.

A Coupon Endorsement That Disqualifies Rather Than Cures

FINRA Rule 11520(b) treats a particular endorsement on a coupon as the cure for a coupon defect. The Uniform Practice Code also treats a different kind of coupon endorsement as a defect. FINRA Rule 11610(b) provides that a coupon bond "bearing an endorsement of a definite name of a person, firm, corporation, association, etc., in conjunction with words of condition, qualification, direction, or restriction, not properly pertaining thereto as a security, shall not be a good delivery unless sold specifically as an 'endorsed bond.' This shall also apply to bonds with coupons bearing such endorsements."

Suppose a bond is offered in an ordinary sale. One of its coupons has an intact bond number and signature and has never been canceled. On its reverse, however, it carries a note naming a particular firm with words directing that the coupon be paid only to that firm. Nothing in FINRA Rule 11520 applies to this coupon, because it is neither mutilated as to the bond number or signature nor canceled in error. No endorsement by an officer of the obligor, trustee or paying agent is called for. The bond is not a good delivery in that ordinary sale because of the named-party restrictive endorsement under FINRA Rule 11610(b). It could be a good delivery only in a sale made specifically as an "endorsed bond".

A Called Bond That Has Been Authenticated

FINRA Rule 11530(a) provides that "a certificate of stock or a bond shall cease to be a good delivery upon publication of notice of call for redemption, except when an entire issue is called for redemption and except against transactions in 'called stock' or 'called bonds' dealt in specifically as such." Authentication under FINRA Rule 11520(a) and the call rule work on different things: one on the certificate's physical condition, the other on the security's called status.

Suppose a damaged bond certificate is appropriately authenticated by the trustee, and notice of a partial call covering that bond is then published. In an ordinary sale the certificate is not a good delivery, because it has been called and the authentication does not reach the call. The position changes in two cases the text sets out. If the entire issue has been called, the call no longer bars delivery, and the authenticated certificate stands on its authentication. If the parties dealt specifically in "called bonds", the called certificate is also deliverable against that trade, provided it has been authenticated.

Choosing the Registered Form Instead

FINRA Rule 11362(c) provides: "Unless otherwise specified at the time of execution, contracts in bonds that are issuable in either coupon or registered form, shall be settled by delivery of bonds in either form pursuant to the denominations in paragraphs (a) and (b) of this Rule, notwithstanding that there may be a charge for interchanging one form with the other."

That gives some sellers a practical way around a coupon problem. Suppose a seller holds coupon-form bonds of an issue that is issuable in either form, and one coupon is mutilated as to its signature. The contract specified nothing about form at execution. The seller may settle by delivering registered-form bonds of the issue in the proper denominations instead of seeking an endorsement under FINRA Rule 11520(b). A fully registered bond carries no coupon for paragraph (b) to reach. The seller may do this even though interchanging one form for the other may carry a charge. If the contract had specified coupon form at execution, that route would not be open.

Tendering Early Once Authentication Arrives

A seller that has just obtained authentication may want to deliver at once. FINRA Rule 11320(g) provides that "If in contracts executed pursuant to paragraphs (b), (d) and (h) of this Rule, the seller tenders delivery before the stated time, acceptance shall be at the election of the purchaser, and rejection of such delivery by the purchaser shall be without prejudice to his rights."

Suppose a regular-way sale is due to settle on the first business day after the trade. The seller's damaged certificate is authenticated by the transfer agent on the afternoon of the trade date, and the seller tenders it that evening. The authentication makes the certificate a good delivery, but it does not oblige the buyer to take delivery before the stated time. The buyer may accept the early tender or refuse it, and a refusal does not prejudice the buyer's rights under the contract. The seller then tenders the authenticated certificate when delivery is due.

Examination Relevance and Key Takeaways

FINRA Rule 11520 is tested on the Series 7 and Series 24 examinations as the good delivery framework for mutilated securities — establishing both a general authentication requirement for mutilated certificates and a specific endorsement requirement for bonds with mutilated or erroneously canceled coupons.

The key points to retain are these: FINRA Rule 11520(a) provides that a mutilated security shall not be a good delivery until appropriately authenticated by the trustee, registrar, transfer agent, or issuer — establishing a default disqualification cured by authentication from one of these four enumerated institutional actors; FINRA Rule 11520(b) provides that delivery of a bond bearing a coupon mutilated as to the bond number or signature, or bearing a coupon canceled in error, shall not be good delivery unless an appropriate endorsement in the form required by the Committee has been placed on the reverse of the coupon by an official authorized under paragraph (c) — a coupon-specific requirement operating alongside paragraph (a)'s certificate-general requirement; FINRA Rule 11520(c) specifies that the endorsement must be signed either directly by an officer of the obligor, or, under authorization from the obligor, by a duly authorized officer or other authorized person on behalf of the corporate trustee or paying agent — establishing both a direct and a delegated pathway for endorsement authority, with the obligor's authorization as the foundational source in both pathways; the rule's coupon-bond-specific provisions in paragraphs (b) and (c) reflect the coupon bond era discussed in connection with FINRA Rule 11362(a)'s denomination framework; and the rule was amended December 15, 2010 through SR-FINRA-2010-030, with a prior amendment effective September 1, 1970 — no amendments since — and one selected notice, 10-49.