United States: SEC Continues To Bring Actions Against ADR Lenders For Use Of Uncovered Pre-Released ADRs

In what appears to be an industry-wide sweep involving American Depositary Receipts ("ADRs"), over the last few years the SEC has brought enforcement actions against 13 financial institutions – including depositary banks and brokers that borrow and lend "pre-released" ADRs. On August 16, 2019, the SEC announced the latest of these actions against two brokers – Cantor Fitzgerald & Co. ("Cantor") and BMO Capital Markets Corporation ("BMO") – for charges related to the improper borrowing and lending of "pre-released" ADRs without obtaining or locating the foreign shares purportedly underlying those ADRs. 1 The SEC's cases have targeted conduct going back as far as seven years from the date of the announced settlements, and resulted in monetary settlements in excess of $427 million.2 While these actions may be on the wane given the apparent contraction of the pre-release market, the SEC's actions signal that it is willing to bring cases to police conduct it views as having a negative effect on markets generally, even in the absence of readily-identifiable victims.


ADRs are securities that represent an ownership interest in a specified number of foreign shares and that can be traded on U.S. stock exchanges or over the counter. ADRs allow foreign issuers to more easily access U.S. markets and U.S. market participants to more easily access foreign securities. Typically, a depositary and a foreign issuer enter into a depositary agreement under which the depositary will issue ADRs to a market participant that delivers the corresponding number of foreign shares to the depositary's foreign custodian. The delivery of the foreign shares to the custodian removes those shares from the market such that the total number of outstanding shares, in the form of ADRs or actual shares, remains constant.

However, many depositary agreements allow for the "pre-release" of ADRs before the foreign shares are delivered to the custodian. Such situations are governed by an agreement between a broker and a depositary ("Pre-Release Agreements"). Pre-Release Agreements typically have required the broker receiving the pre-released ADRs from the depositary ("Pre-Release Broker" in the SEC's parlance) to represent that it, or the customer on whose behalf the Pre-Release Broker is acting, beneficially owns the foreign shares underlying the ADRs while the pre-release transaction is outstanding. Historically, the pre-release of ADRs was used to resolve settlement timing discrepancies between markets. Many depositary agreements seek to preclude pre-release transactions over dividend record dates. In agreements in which Pre-Released ADRs are permitted to be outstanding over a dividend record date, the Pre-Release Broker is required to ensure that the relevant dividends are passed on to the depositary (and in some cases is explicitly required to represent that an appropriate amount of non-U.S. dividend withholding taxes are being paid).

The SEC's Sweep Against Pre-release Abuses

Since 2017, the SEC has brought 13 actions against the four U.S. depositary banks that issue ADRs (JP Morgan Chase Bank, Citibank, Bank of New York Mellon, and Deutsche Bank), four Pre-Release Brokers (Banca IMI Securities Corp., Wedbush Securities Inc., Industrial and Commercial Bank of China Financial Services LLC, and ITG Inc.), and a number of downstream brokers that borrowed and lent Pre-Released ADRs pursuant to master securities loan agreements ("MSLAs"). Generally in these cases, the SEC has alleged that a depositary issued Pre-Released ADRs to a Pre-Release Broker, who in turn on-lent the ADRs to other brokers, who on-lent them to an end user customer or other brokers in the market and so on. The SEC has found that, as a result, the ADRs entered the securities market without the requisite corresponding foreign shares being deposited with the custodian or held by anyone in the chain of transactions.

The SEC's orders found that the depositary banks provided ADRs to brokers in pre-release transactions when neither the broker nor its customers held the underlying foreign shares. With respect to the Pre-Release Brokers, the SEC found that they acted as conduits and should have known that neither they nor their customers owned the requisite underlying foreign shares. Finally, with respect to the downstream brokers – including BMO and Cantor Fitzgerald – the SEC found that the MSLAs did not contain any provisions requiring the broker or their customer to hold the underlying foreign shares as required under the Pre-Release Agreement and that "securities lending personnel should have known that they were potentially receiving pre-released ADRs and that the Pre-Release Brokers would not be complying with the Pre-Release Obligations."3 The monetary penalties have ranged from under $1 million to as high as $135 million.

To see the full article click here


1 See Cantor Fitzgerald and BMO Capital Charged for Improper Handling of ADRs, SEC Press Release, August 16, 2019, https://www.sec.gov/news/press-release/2019-155 ("Cantor and BMO Press Release").

2 Id.

3 See In the Matter of BMO Capital Markets, SEC Release No. 86693 at 5, August 16, 2019, https://www.sec.gov/litigation/admin/2019/34-86693.pdf ("BMO Settlement").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions