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SEC charges Cantor Fitzgerald, BMO Capital Markets over improper ADR practices


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SEC charges Cantor Fitzgerald, BMO Capital Markets over improper ADR practices

Wall Street's top regulator has charged Cantor Fitzgerald & Co. and BMO Capital Markets Corp. with improperly handling pre-released American Depositary Receipts, or ADRs, marking the latest enforcement actions in a yearslong SEC investigation.

On Aug. 16, the SEC said that the two companies agreed to settle the charges without admitting or denying the regulator's findings. Cantor agreed to pay more than $647,000, and BMO agreed to pay more than $3.9 million.

The regulator had claimed that both companies obtained pre-released ADRs, which are U.S. securities that represent shares in a foreign-listed company, "when they should have known that the pre-release transactions were not backed by foreign shares." According to the SEC, both brokers obtained the pre-released ADRs indirectly from other broker/dealers and Cantor also obtained pre-released ADRs directly from depositary banks.

ADRs usually require a depositary bank to hold a corresponding number of foreign shares in custody. But the practice of pre-releasing allows for ADRs to be issued without any foreign shares deposited, so long as the broker that will receive the securities has an agreement with a depositary bank or its customer already owns a corresponding number of foreign shares.

The SEC has been examining abusive ADR practices for several years.

With the Cantor and BMO actions, the regulator has charged 13 financial institutions, leading to more than $427 million in settlements, the SEC said Aug. 16.