Brokers Charged With Improper Handling of ADRs

The Securities and Exchange Commission (SEC) announced that broker Cantor Fitzgerald & Co. will pay more than $647,000 and broker BMO Capital Markets Corporation will pay over $3.9 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

Neither firm admitted or denied the SEC’s findings.

ADRs—U.S. securities that represent foreign shares of a foreign company—require a corresponding number of foreign shares to be held in custody at a depository bank. The SEC explains that the practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving the ADRs have an agreement with a depository 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 orders, 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. The SEC found that both brokers improperly obtained pre-released ADRs indirectly from other broker/dealers, and as to Cantor Fitzgerald, it found that the firm also improperly obtained pre-released ADRs directly from depository banks.

The SEC’s order says both brokers failed reasonably to supervise their securities lending desk personnel.