The Securities and Exchange Commission (SEC) said that Banca IMI Securities (BISC), an indirect, wholly-owned US subsidiary of Italian bank Intesa Sanpaolo SpA, has agreed to pay more than $35 million to settle charges that it had issued and received American Depository Receipts (ADRs) without possessing the underlying foreign shares.
BISC did not confirm or deny the charges but has agreed to pay the fine.
ADRs are basically securities that represent shares of a foreign country. They are used by companies to raise funds from investors in that country’s exchanges. But there must be a corresponding number of foreign shares held in custody at a depository bank.
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There are some ‘pre-release arrangements’ by which it is possible for brokers like BISC to obtain ADRs without the corresponding foreign shares, but it is the responsibility of the broker to take the appropriate steps to ensure that the customers own these shares. It is here that BISC did not satisfy the proper requirements, as it obtained pre-released ADRs and lent them to counter parties without checking on this requirement.
Such improper handling of ADRs would have made it possible for them to be misused for inappropriate short selling and inappropriate profiting around dividend record dates as customers could just buy the ADRs along, without owning the shares, and make a quick turnaround on those.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, said: “U.S. investors who invest in foreign companies through ADRs have a right to expect market professionals to create new ADRs only when they are backed by foreign shares so that the new ADRs are not used to game the system.”
This inappropriate handling of ADRs happened between January 2011 and August 2015 though the SEC did acknowledge the full cooperation of BISC in the investigation.
The SEC’s continuing investigation is being conducted by William Martin, Andrew Dean, Elzbieta Wraga, and Adam Grace of the New York office. It is supervised by Mr. Wadhwa.