U.S. SEC fines Merrill Lynch 8 million USD for improper handling of ADRs

WASHINGTON, March 22 (Xinhua) -- The U.S. SECurities and Exchange Commission (SEC) announced on Friday that Merrill Lynch, a top tier broker, agreed to pay more than 8 million U.S. dollars to settle charges over its mishandling of American Depositary Receipts, or ADRs.

ADRs are U.S. SECurities that represent foreign shares of a foreign company. Such SECurities require a corresponding number of foreign shares to be held in custody at a depositary bank, according to SEC.

SEC, the national SECurities regulator, noted that a practice called "pre-release" allows ADRs to be issued without the deposit of foreign shares under certain pre-conditions according to federal laws.

Such pre-conditions include brokers receiving ADRs "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 ADR represents," said SEC.

However, SEC found that Merrill Lynch improperly borrowed pre-released ADRs from other brokers who did not own the foreign shares needed to support those ADRs.

These practices resulted in inflating the total number of a foreign issuer's tradeable SECurities, which resulted in "abusive practices like inappropriate short selling and dividend arbitrage," according to SEC.

The SEC found that Merrill Lynch's policies, procedures, and supervision "failed to prevent and detect SECurities laws violations concerning borrowing pre-released ADRs from these middlemen."

According to SEC, Merrill Lynch agreed to pay a total of more than 8 million dollars as a monetary relief, without admitting or denying SEC's findings.

The SEC said this was its ninth enforcement action against a bank or broker resulting from its ongoing investigation into abusive ADR re-release practices, which has resulted in monetary settlement exceeding 370 million dollars.

"We are continuing to hold accountable financial institutions that engaged in abusive ADR practices," said Sanjay Wadhwa, senior associate director of SEC's New York regional office.

"Our action conveys the message that an entity like Merrill may not avoid liability by using another broker to obtain fraudulently issued ADRs on its behalf," Wadhwa added.