Brokers Cantor Fitzgerald and BMO Capital Markets will combine to pay more than $4.5 million to settle charges of improper handling of “pre-released” American Depositary Receipts, the Securities and Exchange Commission announced.

BMO Capital Markets will pay north of $3.9 million; Cantor Fitzgerald will pay more than $647,000.

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 depositary bank. 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 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 the pre-release transactions were not backed by foreign shares. The SEC orders find both brokers improperly obtained pre-released ADRs indirectly from other broker-dealers, and the order as to Cantor Fitzgerald finds that the firm also improperly obtained pre-released ADRs directly from depositary banks.

The SEC’s order against Cantor Fitzgerald finds the firm violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel. Without admitting or denying the SEC’s findings, Cantor Fitzgerald agreed to pay more than $359,000 in disgorgement of ill-gotten gains; over $88,000 in prejudgment interest; and a $200,000 penalty, totaling more than $647,000.

With respect to BMO Capital, the SEC’s order finds it failed reasonably to supervise its securities lending desk personnel. Without admitting or denying the SEC’s findings, BMO Capital agreed to pay over $2.2 million in disgorgement of ill-gotten gains; over $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.

With these actions, the SEC has charged 13 financial institutions in its ongoing investigation into abusive ADR pre-release practices, which, thus far, has included monetary settlements exceeding $427 million.

 

Jaclyn Jaeger is a freelance contributor to Compliance Week after working for the company for 15 years. She writes on a wide variety of topics, including ethics and compliance, risk management, legal, enforcement, technology, and more.

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