Industrial and Commercial Bank of China Affiliate to Pay More Than $42 Million for Improper Handling of ADRs

The Securities and Exchange Commission today announced that Industrial and Commercial Bank of China Financial Services LLC (ICBCFS), a wholly-owned subsidiary of Industrial and Commercial Bank of China Limited, will pay more than $42 million to settle charges for improper handling of “pre-released” American Depositary Receipts (ADRs).  The settlement marks the largest recovery against a broker in the SEC’s ongoing investigation of ADR practices, which thus far has resulted in settlements with 10 financial institutions exceeding $414 million.

ADRs – U.S. 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 ADRs represent. 

The SEC’s order finds that ICBCFS improperly obtained pre-released ADRs from depositary banks when ICBCFS should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.  This inflated the total number of a foreign issuer’s tradeable securities and resulted in abusive practices such as inappropriate short selling and dividend arbitrage.  In certain countries, demand for ADR borrowing increased around dividend record dates, so that certain tax-advantaged borrowers could – through a series of transactions – collect dividends without any corresponding tax withholding.  Pre-released ADRs that were improperly obtained by

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