SEC Hits ABN AMRO

CFTC Hits Fund With $10 Million Charge
February 5, 2020
HHS-OCR is watching
February 19, 2020

SEC charges ABN AMRO Clearing Chicago with improper handling of ADRs

The Securities and Exchange Commission (SEC) hit ABN AMRO Clearing Chicago LLC for more than $586,000 to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

ABN AMRO did not distribute ADRs appropriately

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 the broker receiving them has an agreement with a depositary bank, and the receiving broker or its customer owns a number of foreign shares that corresponds to the number of shares the ADRs represent.

The SEC’s order finds that ABN AMRO improperly borrowed pre-released ADRs from other brokers when it should have known that those brokers did not own the foreign shares needed to support those ADRs. The order against ABN AMRO also finds that it failed reasonably to supervise its securities lending desk personnel concerning the borrowing of pre-released ADRs from these brokers.

Without admitting or denying the SEC’s findings, ABN AMRO agreed to return more than $326,000 of ill-gotten gains and pay a $179,353 penalty plus $80,970 in prejudgment interest.

Is the SEC cracking down on ADRs?

Apparently. The ABN AMRO case is the SEC’s 15th enforcement action against a bank or broker arising from its investigation into abusive ADR pre-release practices. In addition, the SEC charged four individuals for their roles in the improper handling of pre-released ADRs.  Monetary remedies ordered across all of these cases exceed $432 million.

“The practices uncovered in these actions presented significant risks to the integrity of the ADR market,” says Stephanie Avakian, Co-Director of the Division of Enforcement. “U.S. investors who purchase ADRs are entitled to the same protections as investors in any other securities available in U.S. markets.”

Phantom ADRs?

The SEC’s investigations revealed that misconduct by numerous industry participants had the effect of introducing “phantom” ADRs into the marketplace. At times of high demand for ADRs, or when supply from traditional lending sources was limited, a number of brokers sought pre-released ADRs from intermediary brokers, who obtained them from depositary banks. 

Many of the brokers seeking the ADRs could not represent that they owned the underlying foreign shares to support a pre-release, and so they used intermediaries, which, in turn, obtained pre-released ADRs under false pretenses, including by providing false certifications.

The depositary banks that issued the pre-released ADRs and the brokers who took custody of them should have known that under the circumstances, it was highly unlikely that anyone in the chain of transactions actually owned the requisite underlying foreign shares. The pre-released ADRs that were not backed by ordinary shares were often inappropriately used for trading strategies such as dividend arbitrage or short selling, which could not have otherwise occurred.

Pre-release policies were an accommodation

According to SEC Chairman Jay Clayton, “The pre-release process was designed to accommodate international settlement complexities. It clearly prohibited the uncovered creation of new ADRs.  The blatant misconduct identified in these 15 actions (see graphic) had real effects on market pricing.”

And, where was compliance?

Unclear, although ABN AMRO CC did cooperate with the staff’s investigation. This included providing an initial factual narrative and by entering into tolling agreements with the Commission. But that was after the SEC began its investigation.

Pre-emptive oversight was missing. And, that’s where Patrina could have helped. For more than 25 years, Patrina has been helping uniquely committed compliance professionals like you to stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and compliant records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.  

Request A Demo
We will contact you shortly to arrange your demonstration.
We respect your privacy. Your information is safe and will never be shared.
Don't miss out. Subscribe today.
×
×
WordPress Popup Plugin