ABN AMRO Clearing Chicago is the latest institution to be fined for improper handling of pre-released American Depositary Receipts (ADRs) by its securities lending desk.
ADRs allow US investors to access shares foreign companies without having to make purchases in the foreign markets, while also allowing foreign companies to get increased exposure to US markets.
The US branch of the securities services provider agreed to pay $586,000 to settle charges by the US Securities and Exchange Commission (SEC) that it failed to supervise its securities lending desk personnel in relation to ADR transactions with brokers from January 2013 until approximately December 2015.
ABM AMRO’s settlement marks the SEC’s 15th enforcement action against a bank or broker arising from abusive ADR pre-release practices, which accounts for $432 million worth of fines. ABM AMRO’s fine is a relatively small amount compared to the several million-dollar fines handed to BMO Capital Markets and Jefferies, among others, to settle similar charges.
The SEC’s investigations have revealed that misconduct by numerous industry participants had the effect of introducing ‘phantom’ ADRs into the marketplace.
This means that at times of high demand for ADRs, or when supply from traditional lending sources was limited, a number of brokers sought pre-released ADRs from intermediary brokers, who obtained them from depositary banks.
According to the SEC, many of the brokers seeking the ADRs could not show that they owned the underlying foreign shares to support a pre-release, and so they used intermediaries, which, in turn, obtained pre-released ADRs under false pretences, including by providing false certifications.
The SEC's campaign against ADR mishandling between 2011 and 2015 began in earnest in 2017 with an investigation into ITG, a broker that had to pay $24.4 million for violating federal securities laws related to ADRs.
“The practices uncovered in these actions presented significant risks to the integrity of the ADR market,” said Stephanie Avakian, co-director of the division of enforcement. “US investors who purchase ADRs are entitled to the same protections as investors in any other securities available in US markets.”
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