Pub. 7 2012-2013 Issue 1

May/June 2012 17 Extraordinary Service for Extraordinary Members. actual authority to sign a particular document is much more difficult. It requires the bank officer to completely under- stand the document being signed and requires the officer to obtain and retain documentation proving the person has authority to sign. A bank may be able to document a signer’s status as a corporate officer or trustee. It is much harder to document whether a person has authority to sign a particular document. In many cases, it would be impossible for a bank officer to determine if a person had actual authority to sign a particular document. This is a completely new liability that a bank creates for itself by signing a contract. It is not a li- ability created by law. Some brokers are apparently asking their customers to get a Signature Validation Stamp on brokerage account open- ing agreements. If the bank uses the Signature Validation Stamp, the bank is agreeing to be financially responsible to the broker for any loss if the person signing the brokerage account opening document did not have actual authority to sign that document. There is no maximum to the bank’s potential liability. If the person signing was a corporate officer whowas open- ing an account in the name of a corporation, the officer might have exceeded his authority when opening the account. The officer may have authority to open an account for the benefit of the corporation, but would be exceeding his authority when he signed a document opening an account which he plans to use to funnel corporate money for his own benefit. The bank has agreed to indemnify the broker for whatever loss the broker incurs in reliance on the signature on that account opening document if the signer did not have authority to sign that document. Potentially, the bank could be liable for every dollar that went through the brokerage account for years. If the person signing is John Smith, but he is opening the account by impersonating a different John Smith, he does not have authority to sign that account opening document. By using the Signature Validation Stamp on the document, the bank has agreed to be liable to the broker, possibly for every dollar which goes through the account. Indemnity Agreements should always be viewed skepti- cally and should only be signed after much thought about their ramifications. This particular Indemnity Agreement is creating, by contract, a significant, possibly huge, new liability for banks. For security-type documents where a signature guarantee is required, a bank can determine the value of the security and usemore cautionwhen large dollars are involved. For non-security documents upon which the new Signature   Banks Should Not Participate! — continued on page 18