Brokerage firm BMO Capital Markets Corp. has settled with U.S. securities regulators over allegations that it breached securities rules in its handling of American Depositary Receipts (ADRs).
BMO Capital, the bank’s New York-based brokerage subsidiary, agreed Friday to pay more than $3.9 million (all figures in U.S. dollars) in a settlement with the U.S. Securities and Exchange Commission (SEC). The payment was comprised of $2.2 million in disgorgement, a $1.2 million penalty and over $546,000 in pre-judgment interest.
The firm settled the SEC’s allegations without admitting or denying them. It also co-operated with the regulator’s investigation.
According to the SEC, BMO obtained pre-release ADRs that were not properly backed by foreign shares. It also found that the firm failed to reasonably supervise its securities lending desk personnel.
ADRs are U.S. securities that represent foreign shares and require the same amount of foreign shares to be held in custody. Firms can acquire pre-release ADRs as long as they have an agreement with a depositary bank and the broker, or its customer, owns the required foreign shares.
In this case, the SEC’s order finds the firm improperly obtained pre-released ADRs indirectly from other broker-dealers.
The regulator settled similar allegations against brokerage firm Cantor Fitzgerald & Co., which is paying $647,000 to settle the case without admitting or denying the charges.
In total, the SEC has now charged 13 firms for engaging in abusive ADR pre-release practices, generating settlements of more than $427 million.
“The SEC continues to hold accountable parties that abused the ADR markets over an extended period of time,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York office, in a statement.
“U.S. investors who invest in foreign companies through ADRs have a right to expect that market professionals aren’t gaming the system,” he added.