The Securities and Exchange Commission said Friday Merrill Lynch will pay over $8 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs). This brings the total settlements of abusive ADR pre-release practices to $370 million.
From at least June 2012 to November 2014, the SEC says, Merrill improperly borrowed pre-released ADRs from other parties when it “should have known that those … middlemen who obtained pre-released ADRs from depositaries … did not own the foreign shares needed to support those ADRs.”
These practices led to the inflating of the total number of a foreign issuer’s tradable securities, “which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring,” according to the regulator.
“The order against Merrill Lynch found that its policies, procedures and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlemen.”
ADRs — U.S. securities that represent foreign shares of a foreign company — require a corresponding number of foreign shares to be held at a depositary bank. In a “pre-release,” ADRs can be issued without the deposit of foreign shares, if the parties receiving them have an agreement with a depositary bank and they or their clients own the same number of corresponding shares.
Merrill, which voluntarily stopped trading pre-release ADRs more than four years ago, agreed to pay more than $4.4 million in disgorgement of gains, over $724,000 in prejudgment interest and a $2.9 million penalty. It neither admitted nor denied the findings.
This news — which mainly affects institutional investors — comes about four months after JPMorgan Chase Bank agreed to pay $135 million to settle similar charges. Deutsche Bank paid $75 million, BNY Mellon $54 million, and Citigroup $38 million.
“We are continuing to hold accountable financial institutions that engaged in abusive ADR practices,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, in a statement.