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SEC Hits BNY Mellon for $54M Over Improper ADR Handling

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The Securities and Exchange Commission has announced a penalty of more than $54 million against Bank of New York Mellon, which it will pay to settle charges of improper handling of “pre-released” American depositary receipts.

ADRs, which are U.S. securities representing foreign shares of a foreign company, must have a corresponding number of foreign shares to be held in custody at a depositary bank. Under the practice of “prerelease,” ADRs may be issued without the deposit of foreign shares, as long as brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the requisite number of foreign shares.

However, according to the SEC, BNY Mellon improperly provided ADRs to brokers in thousands of prerelease transactions without either the broker or its customers having the required foreign shares. Doing so inflated the total number of a foreign issuer’s tradeable securities, and that brought about abusive practices such as inappropriate short selling and dividend arbitrage.

“BNY Mellon voluntarily ceased engaging in prerelease ADR activity over two years ago, and cooperated extensively with the SEC to resolve this matter,” a bank spokesperson said.

BNY Mellon agreed, without admitting or denying the SEC’s findings, to disgorge more than $29.3 million in alleged ill-gotten gains. In addition, it will pay $4.2 million in prejudgment interest and a $20.5 million penalty, totaling more than $54 million altogether. The SEC’s order acknowledges BNY Mellon’s cooperation in both the investigation and remedial acts.

This is the seventh action against a bank or broker and third action against a depositary bank arising from the agency’s ongoing investigation into abusive ADR prerelease practices.

“Our ongoing industry-wide investigation into Wall Street misconduct marches on,” Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, said in a statement.

Wadhwa added, “BNY Mellon is the seventh bank or broker being held accountable for improper practices that allowed banks and brokerage firms to profit handsomely while market participants were unaware of how the market was being abused.”

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