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by Mike Caswell

The U.S. Securities and Exchange Commission has imposed $3.96-million in sanctions on BMO Capital Markets Corp. for violations with respect to ADRs, or American Depositary Receipts. (All figures are in U.S. dollars.) The SEC says that BMO was one of several firms that abused practices surrounding what are known as "pre-release" ADRs. The penalties stem from BMO's failure to properly supervise its securities lending desk personnel.

The sanctions for BMO are contained in an administrative order that the SEC released on Friday, Aug. 16, alongside a similar order for another firm, Cantor Fitzgerald & Co. The case centres around the use of ADRs, instruments that trade on U.S. exchanges but represent ownership of a foreign stock. The instruments allow U.S. investors easy access to shares that would otherwise be difficult to obtain.

One of the requirements for ADRs is, of course, that there be a corresponding number of shares held in custody. Typically, when ADRs are issued, a specified number of shares are delivered to a custodian. Brokers are also permitted to use pre-released ADRs, or those without underlying shares on deposit, but only if there is an agreement in place that evidences ownership of the foreign shares. These pre-released ADRs exist to address delivery delays that occur in some transactions.

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