BNY Mellon will pay a $54 million settlement to the US Securities and Exchange Commission (SEC) over claims of improper handling of ‘pre-released’ American Depositary Receipts (ADR).
The settlement is the latest for a depositary bank over improper handling of pre-released ADRs, following Citi and Deutsche Bank which agreed to pay $38.7 million and $75 million settlement respectively to the SEC.
ADRs, which allow US investors to trade in foreign stocks, require a matching number of foreign shares to be held at a custody or depositary bank, but can be ‘pre-released’ if a broker or customer owns the underlying stock.
The SEC found that BNY Mellon had improperly provided ADRs to brokers in thousands of pre-released transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.
According to the regulator, the practice resulted in BNY Mellon inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices such as inappropriate short selling and dividend arbitrage.
“BNY Mellon is the seventh bank or broker being held accountable for improper practices that allowed banks and brokerage firms to profit handsomely while market participants were unaware of how the market was being abused,” said Sanjay Wadhwa, senior associate director of the SEC’s New York regional office.
Without admitting or denying the SEC’s findings, BNY Mellon agreed to disgorge more than $29.3 million in alleged ill-gotten gains plus pay $4.2 million in prejudgment interest and a $20.5 million penalty for total monetary relief of more than $54 million.