27 March 2019 at 14:59 BST

SEC makes it nine in a row with Merrill Lynch

Merrill Lynch ordered to pay over $8 million for improper handling of ADRs, as SEC puts spotlight on foreign investor compliance and abuse.


The Securities and Exchange Commission has ordered Merrill Lynch, Pierce, Fenner & Smith to pay over $8 million to settle charges of improper handling of ‘pre-released’ American Depositary Receipts (ADRs).

Getting the message

This is the SEC’s ninth enforcement action against a bank or broker resulting from its ongoing investigation into abusive ADR pre-release practices, which has thus far resulted in monetary settlements exceeding $370 million. Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, said ‘we are continuing to hold accountable financial institutions that engaged in abusive ADR practices. Our action conveys the message that an entity like Merrill may not avoid liability by using another broker to obtain fraudulently issued ADRs on its behalf.’ ADRs, US securities that represent foreign shares of a foreign company, 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 them 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 ADR represents.

Should have known

The SEC’s order found that Merrill Lynch improperly borrowed pre-released ADRs from other brokers when Merrill Lynch should have known that those brokers - middlemen who obtained pre-released ADRs from depositaries - did not own the foreign shares needed to support those ADRs.  Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.  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. Without admitting or denying the SEC’s findings, Merrill Lynch agreed to pay more than $4.4 million in disgorgement of ill-gotten gains plus over $724,000 in prejudgment interest and a $2.89 million penalty for total monetary relief of over $8 million. The SEC has recently accepted settlement offers from JPMorgan Chase Bank ($135 million), Bank of New York Mellon (over $54 million), Deutsche Bank (nearly $75 million) and Citibank (over $38 million).


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