SEC fines Cantor Fitzgerald and BMO for ADR lending violations
19 August 2019 Washington
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Financial services provider Cantor Fitzgerald and broker BMO Capital have been fined by the US Securities and Exchange Commission (SEC) for failing to reasonably supervise their securities lending desk personnel.
Cantor Fitzgerald will pay more than $647,000, while BMO Capital Markets Corporation faces a fine of more than $3.9 million to settle charges of improper handling of ‘pre-released’ American Depositary Receipts (ADRs).
ADRs are negotiable instruments that represent an ownership interest in a specified number of foreign securities that have been secured with a depositary. They can be traded on a stock exchange or over-the-counter.
The practice of pre-release allows the US securities to be issued without the deposit of foreign shares, provided brokers receiving the ADRs have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent.
According to the SEC's investigation, both Cantor Fitzgerald and BMO Capital obtained pre-released ADRs when they should have known that the pre-release transactions were not backed by foreign shares.
For Cantor Fitzgerald, the SEC’s order relates to lending activities between January and April 2013, where Cantor Fitzgerald obtained pre-released ADRs directly from a single depositary pursuant to a pre-release agreement.
The SEC found that, contrary to certain provisions in the pre-release agreement and the deposit agreements, Cantor Fitzgerald’s securities lending desk regularly obtained pre-released ADRs from the depositary and loaned them out without taking reasonable steps to determine whether the requisite number of ordinary shares was owned and custodied by Cantor Fitzgerald or its borrowers.
In addition, from at least July 2012 until May 2014, Cantor Fitzgerald received pre-released
ADRs from other brokers but did not take reasonable steps to assure itself that they were backed by ordinary shares.
Moreover, the SEC stated in its report that Cantor Fitzgerald also failed to establish and implement effective policies and procedures to reasonably address whether its associated persons on the securities lending desk were engaging in transactions in which pre-released ADRs were appropriately obtained.
As a result, the SEC found Cantor Fitzgerald to have violated Section 17(a)(3) of the Securities Act of 1933, which the commission says may rest on a finding of simple negligence and does not imply that the defendant knowingly committed the offense.
Without admitting or denying the SEC's findings, Cantor Fitzgerald agreed to pay over $359,000 in disgorgement of ill-gotten gains, over $88,000 in prejudgment interest, and a $200,000 penalty, totaling more than $647,000.
For BMO, the SEC found that from at least January 2012 until approximately December 2014, BMO received pre-released ADRs from brokers that had been issued by depositaries where the brokers had not complied with their obligations under the pre-release agreements.
The SEC said that BMO also did not take reasonable steps to satisfy itself that the brokers had complied with the relevant obligations.
Also without admitting or denying the SEC's findings, BMO has agreed to pay more than $2.2 million in disgorgement of ill-gotten gains, more than $546,000 in prejudgment interest, and a $1.2 million penalty, totaling more than $3.9 million.
The SEC's orders acknowledge each firm's cooperation in the investigation.
Cantor Fitzgerald and BMO Capital did not immediately respond to requests for comment.
Sanjay Wadhwa, senior associate director for enforcement in the SEC's New York Regional Office, who oversaw the investigation said: "US investors who invest in foreign companies through ADRs have a right to expect that market professionals aren't gaming the system."
With this latest investigation, SEC has charged 13 financial institutions in relation to abusive ADR pre-release practices, which, thus far, has included monetary settlements exceeding $427 million.
Cantor Fitzgerald will pay more than $647,000, while BMO Capital Markets Corporation faces a fine of more than $3.9 million to settle charges of improper handling of ‘pre-released’ American Depositary Receipts (ADRs).
ADRs are negotiable instruments that represent an ownership interest in a specified number of foreign securities that have been secured with a depositary. They can be traded on a stock exchange or over-the-counter.
The practice of pre-release allows the US securities to be issued without the deposit of foreign shares, provided brokers receiving the ADRs have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent.
According to the SEC's investigation, both Cantor Fitzgerald and BMO Capital obtained pre-released ADRs when they should have known that the pre-release transactions were not backed by foreign shares.
For Cantor Fitzgerald, the SEC’s order relates to lending activities between January and April 2013, where Cantor Fitzgerald obtained pre-released ADRs directly from a single depositary pursuant to a pre-release agreement.
The SEC found that, contrary to certain provisions in the pre-release agreement and the deposit agreements, Cantor Fitzgerald’s securities lending desk regularly obtained pre-released ADRs from the depositary and loaned them out without taking reasonable steps to determine whether the requisite number of ordinary shares was owned and custodied by Cantor Fitzgerald or its borrowers.
In addition, from at least July 2012 until May 2014, Cantor Fitzgerald received pre-released
ADRs from other brokers but did not take reasonable steps to assure itself that they were backed by ordinary shares.
Moreover, the SEC stated in its report that Cantor Fitzgerald also failed to establish and implement effective policies and procedures to reasonably address whether its associated persons on the securities lending desk were engaging in transactions in which pre-released ADRs were appropriately obtained.
As a result, the SEC found Cantor Fitzgerald to have violated Section 17(a)(3) of the Securities Act of 1933, which the commission says may rest on a finding of simple negligence and does not imply that the defendant knowingly committed the offense.
Without admitting or denying the SEC's findings, Cantor Fitzgerald agreed to pay over $359,000 in disgorgement of ill-gotten gains, over $88,000 in prejudgment interest, and a $200,000 penalty, totaling more than $647,000.
For BMO, the SEC found that from at least January 2012 until approximately December 2014, BMO received pre-released ADRs from brokers that had been issued by depositaries where the brokers had not complied with their obligations under the pre-release agreements.
The SEC said that BMO also did not take reasonable steps to satisfy itself that the brokers had complied with the relevant obligations.
Also without admitting or denying the SEC's findings, BMO has agreed to pay more than $2.2 million in disgorgement of ill-gotten gains, more than $546,000 in prejudgment interest, and a $1.2 million penalty, totaling more than $3.9 million.
The SEC's orders acknowledge each firm's cooperation in the investigation.
Cantor Fitzgerald and BMO Capital did not immediately respond to requests for comment.
Sanjay Wadhwa, senior associate director for enforcement in the SEC's New York Regional Office, who oversaw the investigation said: "US investors who invest in foreign companies through ADRs have a right to expect that market professionals aren't gaming the system."
With this latest investigation, SEC has charged 13 financial institutions in relation to abusive ADR pre-release practices, which, thus far, has included monetary settlements exceeding $427 million.
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