A broker-dealer agreed to settle SEC charges for improper practices relating to securities lending transactions involving pre-released American Depositary Receipts ("ADRs").
According to the SEC's Order, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill") improperly borrowed pre-released ADRs from brokers who had borrowed the shares from ADR depositaries but did not own the necessary foreign shares to support the ADRs. The Order found that Merrill should have known that those brokers did not own the necessary shares. The SEC stated that the practices led to an inflation of the total number of a foreign issuer's tradeable securities. Further, the SEC said that Merrill's supervisory policies were not designed to sufficiently prevent violations in regard to borrowing pre-released ADRs.
To settle the charges, Merrill agreed to disgorge $4.4 million, pay prejudgment interest of roughly $700,000 and pay a civil money penalty of approximately $2.9 million. Merrill settled the action on a neither admit nor deny basis.
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