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Regulation and Compliance > Federal Regulation > SEC

SEC Slams Banca IMI Securities With $35M Fine Over ADRs

By Melanie Waddell

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The Securities and Exchange Commission said Friday that New York-based brokerage firm Banca IMI Securities Corp. (BISC), an indirect, wholly owned U.S. subsidiary of Italian bank Intesa Sanpaolo SpA, has agreed to pay more than $35 million to settle charges that it violated federal securities laws when it requested the issuance of and received American Depositary Receipts without possessing the underlying foreign shares.

The SEC’s order found that BISC obtained pre-released ADRs and lent them to counterparties without satisfying the proper requirements. 

“BISC’s improper handling of ADRs, which lasted from at least January 2011 to August 2015, made it possible for such ADRs to be used for inappropriate short selling or inappropriate profiting around dividend record dates,” the order states.  

In certain countries, the order continues, “demand for ADR borrowing increased around dividend record dates so that certain tax-advantaged borrowers could, through a series of transactions, collect dividends without any tax withholding. Pre-released ADRs that were improperly issued were used to satisfy that demand.”

ADRs are U.S. securities that represent foreign shares of a foreign company. 

In January, broker ITG settled charges for similar misconduct, and then faced additional charges in June involving the improper handling of ADRs. The SEC order found supervisory failures by Anthony Portelli, a former managing director and head of operations at broker-dealer ITG Inc. Portelli supervised ITG’s securities lending operations and was responsible for the firm’s compliance with “pre-release agreements” for ADR transactions.

“U.S. investors who invest in foreign companies through ADRs have a right to expect market professionals to create new ADRs only when they are backed by foreign shares so that the new ADRs are not used to game the system,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “As our order finds, BISC’s actions left the ADR markets ripe for potential abuse.”

Without admitting or denying the SEC’s findings, BISC agreed to be censured and pay more than $18 million in disgorgement plus more than $2.3 million in interest and a $15 million penalty. The SEC’s order acknowledges BISC’s cooperation in the investigation and its remedial actions.

— Check out CFPB Seeks $183M From Lender Over Corinthian College Loan Scheme on ThinkAdvisor.

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