US broker-dealer fined for ADR violations 30 August 2017Washington DC Reporter: Drew Nicol
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A second broker-dealer has been fined by the US Securities and Exchange Commission (SEC) for securities lending violations relating to the facilitation of naked short selling.
The SEC found that Banca IMI Securities (BISC), the US subsidiary of Italian bank Intesa Sanpaolo, violated American Depository receipt (ADR) pre-release lending rules and failed to "reasonably to supervise its securities lending desk personnel".
BISC accepted a $35 million fine without admitting or denying the SEC’s findings.
The charge relates to SEC's finding that BISC violated federal securities laws when it requested the issuance of and received ADRs without possessing the underlying foreign shares.
The broker-dealer obtained pre-released ADRs and lent them to counterparties without satisfying the proper requirements between from at least January 2011 to August 2015, which made it possible for these securities to be used for inappropriate short selling or inappropriate profiting around dividend record dates.
The SEC acknowledged BISC’s cooperation in the investigation and its remedial actions.
“US investors who invest in foreign companies through ADRs have a right to expect market professionals to create new ADRs only when they are backed by foreign shares so that the new ADRs are not used to game the system,” said Sanjay Wadhwa, senior associate director of the SEC’s New York regional office.
“As our order finds, BISC’s actions left the ADR markets ripe for potential abuse.”
In January, international broker ITG was fined more than $24.4 million for similar securities lending violations relating improper handling of ADRs. It did not admit or deny the SEC’s charges.
ITG engaged in ‘pre-release’ ADRs without owning the foreign shares or taking the necessary steps to ensure they were custodied by the counterparty on whose behalf they were being obtained between 2011 and 2014.
According to the SEC, many of the obtained ADRs were ultimately used for short selling and dividend arbitrage, even though they may not have been backed by foreign shares.
A former ITG securities lending senior trader was banned from the market in June for improper handling of ADRs.
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