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Regulation and Compliance > Federal Regulation > SEC

Cantor Fitzgerald, BMO Capital Hit by SEC for Improper Handling of ADRs

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Cantor Fitzgerald & Co. and BMO Capital Markets Corp. have become the latest broker-dealers to be hit by the Securities and Exchange Commission over improper handling of “pre-released” American Depositary Receipts, or ADRs.

The SEC said Friday that Cantor Fitzgerald & Co. will pay more than $647,000 and BMO Capital Markets will pay over $3.9 million to settle charges that they obtained pre-released ADRs when they should have known that the pre-release transactions were not backed by foreign shares.

Including Cantor and BMO, the SEC has levied actions against 13 financial institutions in its ongoing investigation into abusive ADR pre-release practices, which, thus far, has included monetary settlements exceeding $427 million.

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

The SEC orders find that both Cantor and BMO 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 continues to hold accountable parties that abused the ADR markets over an extended period of time,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office, in a statement. “U.S. investors who invest in foreign companies through ADRs have a right to expect that market professionals aren’t gaming the system.”

Without admitting or denying the SEC’s findings, Cantor Fitzgerald agreed to pay over $359,000 in disgorgement of ill-gotten gains, over $88,000 in prejudgment interest, and a $200,000 penalty, totaling more than $647,000.

The SEC’s order finds that BMO Capital 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.

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