What is a Lost Instrument Bond?
Author: Jamie Collum
Lost instrument bonds have been around for many years and have primarily arisen due to the loss of either paper share certificates, bank drafts of cheques.
Lost instrument bonds are a type of surety bond that protect the issuer of the securities (i.e., stock issuer) in the case that duplicate instruments are issued. For example, let us say you owned 3,000 shares of Bell Canada and had them in your home office among other paperwork. By accident, those papers including the original share certificates are thrown into the garbage and cannot be found.
If Bell is going to issue replacement share certificates, they want to be protected in the case the originals are found and cashed (i.e., a fraud is perpetrated). A lost instrument bond provides this protection. The same rationale applies to lost certified cheques and lost bank drafts.
A strong surety broker can secure a lost instrument for you from a reputable, licensed surety company and depending on the size would require disclosures around the following:
1) Circumstances of Loss. Also known as an Affidavit of Loss.
2) The Financial Strength of the Individual Applying for the Bond.
3) Stop Transfer Letter from the Transfer Agent (if applicable)
What is a Transfer Agent?
What is a stop transfer letter you ask? Most publicly traded companies work with transfer agents that help in the management of the change in ownership of a company’s stock. This includes keeping a register of ownership. If a stock is lost then a transfer agent will put a stop transfer on the stock helping to prevent others from cashing the original share certificates.
The fact that a transfer agent is involved and can issue a stop transfer letter is one of the primary reasons why getting a lost instrument bond for a share certificate is often easier and cheaper than getting one for a certified cheque or bank draft where there isn’t an equivalent stop transfer process. Essentially meaning that perpetrating a fraud with a lost cheque or lost bank draft is much easier than with a lost share certificate.
In deciding to issue a lost instrument bond, the surety is looking at whether the circumstances of loss are reasonable, whether the applicant has a strong personal worth in relation to the value of the lost instrument and how close the instrument is to cash (i.e. how easy it for a fraud to be perpetrated).
Another item to note is that lost instrument bonds can be either one the following:
1) Fixed Penalty – the value of the bond is fixed to the price of the stock or bank draft at the time the bond is issued
2) Open Penalty – the value of the bond is open and fluctuates with the price of the stock over time.
As you can imagine, because the bonds are not cancellable and are often remain out there in perpetuity, the open penalty represents some additional risk for the surety.
Lastly, what does a lost instrument bond cost?
These have historically been secured though the transfer agents which can be very expensive. In some cases, the cost to the end consumer can reach 3-4% of the value of the lost instrument. Depending on the circumstances and class, FCA can secure these bonds for between 1-2.5% of the value of the lost instrument.
Please reach out to the team at FCA with any questions.