Which statement correctly describes a restrictive indorsement on a negotiable instrument?

Which statement correctly describes a restrictive indorsement on a negotiable instrument?

• A. It broadens the indorsee's transfer rights.
• B. It guarantees payment.
• C. It restricts the indorsee's transfer rights.
• D. It cancels the instrument.

Answer: (C)

Restrictive indorsements place a limit on what the indorsee can do with a negotiable instrument after it is endorsed. They are used to control how the instrument is negotiated further and who can actually transfer it. The best description is that it restricts the indorsee's transfer rights. For example, an endorsement that says “Pay to XYZ Bank for deposit only” lets XYZ Bank deposit the instrument into its account but prevents XYZ Bank from transferring it to someone else. It does not guarantee payment—that obligation lies with the maker or the instrument’s acceptor, and the endorsement itself doesn’t create that guarantee. It also doesn’t cancel the instrument; a restrictive indorsement simply narrows how the instrument can be transferred.

Restrictive indorsements place a limit on what the indorsee can do with a negotiable instrument after it is endorsed. They are used to control how the instrument is negotiated further and who can actually transfer it. The best description is that it restricts the indorsee's transfer rights. For example, an endorsement that says “Pay to XYZ Bank for deposit only” lets XYZ Bank deposit the instrument into its account but prevents XYZ Bank from transferring it to someone else. It does not guarantee payment—that obligation lies with the maker or the instrument’s acceptor, and the endorsement itself doesn’t create that guarantee. It also doesn’t cancel the instrument; a restrictive indorsement simply narrows how the instrument can be transferred.