Broker-dealer Jefferies will pay $4 million to settle charges for the improper handling of “pre-released” American Depositary Receipts (ADRs), the Securities and Exchange Commission announced.

ADRs are U.S. 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 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. 

The SEC order finds Jefferies improperly borrowed pre-released ADRs from other brokers when Jefferies should have known those brokers did not own the foreign shares needed to support those ADRs. The order against Jefferies also finds it failed reasonably to supervise its securities lending desk personnel concerning borrowing pre-released ADRs from these brokers.

This is the SEC’s 14th enforcement action against a bank or broker resulting from its widespread investigation into abusive ADR pre-release practices, which has, thus far, resulted in monetary settlements exceeding $431 million.

Without admitting or denying the SEC’s findings, Jefferies agreed to disgorge more than $2.2 million in ill-gotten gains and pay over $468,000 in prejudgment interest and a $1.25 million penalty for total monetary relief of nearly $4 million.

Jaclyn Jaeger is an editor with Compliance Week and has written on a wide variety of topics, including ethics and compliance, risk management, legal, enforcement, technology, and more.

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