ICB of China Financial Services faces ADR fine of more than $42 million
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ICB of China Financial Services faces ADR fine of more than $42 million 17 June 2019Washington Reporter: Maddie Saghir
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The Industrial and Commercial Bank of China Financial Services LLC (ICBCFS) will pay more than $42 million to settle charges for improper handling of “pre-released” American Depositary Receipts (ADRs).
The Securities and Exchange Commission’s (SEC) order found that ICBCFS improperly obtained pre-released ADRs from depositary banks.
According to the SEC, ICBCFS should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.
This inflated the total number of foreign issuer’s tradable securities and resulted in abusive practices such as inappropriate short selling and dividend arbitrage, the SEC noted.
In certain countries, demand for ADR borrowing increased around dividend record dates, so that certain tax-advantaged borrowers could—through a series of transactions—collect dividends without any corresponding tax withholding.
Pre-released ADRs that were improperly obtained by ICBCFS were used to satisfy that demand, the SEC revealed.
Meanwhile, the settlement marks the largest recovery against a broker in the SEC’s ongoing investigation of ADR practices.
So far the investigation has resulted in settlements with 10 financial institutions exceeding $414 million.
Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, commented: “With these charges, ICBCFS is being held accountable for its unlawful ADR practices.”
“By falsely representing that the firm or its customers owned the foreign shares to support pre-release transactions, ICBCFS often played the role of middleman between depositary banks and other market participants in the issuance of what amounted to phantom securities.”
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