Merrill Lynch receives $8 million fine over ADRs
25 March 2019 Washington
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The Securities and Exchange Commission (SEC) has fined Merrill Lynch, Pierce, Fenner & Smith Incorporated over $8 million to settle charges of improper handling of “pre-released” American depositary receipts (ADRs).
It was found that Merrill Lynch improperly borrowed pre-released ADRs from other brokers.
Merrill Lynch should have known that those brokers—middlemen who obtained pre-released ADRs from depositaries—did not own the foreign shares needed to support those ADRs, the commission revealed.
According to the SEC, such practices resulted in inflating the total number of a foreign issuer’s tradeable securities.
Consequently, this led to abusive practices such as inappropriate short selling and dividend arbitrage that should not have been occurring.
The order against Merrill Lynch found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlemen.
ADRs are US securities that represent foreign shares of a foreign company, and they require a corresponding number of foreign shares to be held in custody at a depositary bank, the SEC noted.
The SEC cited: “The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that correspond to the number of shares the ADR represents.”
Without admitting or denying the SEC’s findings, Merrill Lynch agreed to pay more than $4.4 million in disgorgement of ill-gotten gains plus over $724,000 in prejudgment interest and a $2.89 million penalty for total monetary relief of over $8 million.
Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, commented: “We are continuing to hold accountable financial institutions that engaged in abusive ADR practices.”
Wadha added: “Our action conveys the message that an entity like Merrill may not avoid liability by using another broker to obtain fraudulently issued ADRs on its behalf.”
It was found that Merrill Lynch improperly borrowed pre-released ADRs from other brokers.
Merrill Lynch should have known that those brokers—middlemen who obtained pre-released ADRs from depositaries—did not own the foreign shares needed to support those ADRs, the commission revealed.
According to the SEC, such practices resulted in inflating the total number of a foreign issuer’s tradeable securities.
Consequently, this led to abusive practices such as inappropriate short selling and dividend arbitrage that should not have been occurring.
The order against Merrill Lynch found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlemen.
ADRs are US securities that represent foreign shares of a foreign company, and they require a corresponding number of foreign shares to be held in custody at a depositary bank, the SEC noted.
The SEC cited: “The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that correspond to the number of shares the ADR represents.”
Without admitting or denying the SEC’s findings, Merrill Lynch agreed to pay more than $4.4 million in disgorgement of ill-gotten gains plus over $724,000 in prejudgment interest and a $2.89 million penalty for total monetary relief of over $8 million.
Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, commented: “We are continuing to hold accountable financial institutions that engaged in abusive ADR practices.”
Wadha added: “Our action conveys the message that an entity like Merrill may not avoid liability by using another broker to obtain fraudulently issued ADRs on its behalf.”
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