BACK in October, we broke the story about the flood of new unsponsored American Depositary Receipts (ADRs) being created without company consent by US banks that are exploiting new Securities and Exchange Commission (SEC) rules designed to make the US markets more attractive to foreign companies.
At the time of our initial post, almost 500 unsponsored ADR filings had been made by three of the four big depositary banks. That number has now almost doubled to around 1,000 filings, led by The Bank of New York Mellon, Deutsche Bank Trust and Citibank.
The lone holdout among the ADR banks has been JP Morgan, which has taken the high road by refusing to participate in the free-for-all that has resulted from the SEC’s curious decision not to require depositary banks to obtain consent from companies before establishing unsponsored ADR programs.
In a white paper released today (embedded below), JP Morgan says “the implementation of numerous unsponsored ADR programs without, in many instances, the consent or knowledge of an issuer is neither collaborative nor transparent.”
And, without naming them, it lambastes competitor depositary banks saying they “have unilaterally opened unsponsored ADR programs” despite the fact that ADRs are “not appropriate for all issuers.”
Investor relations concerns
There are a number of investor relations problems that flow from the actions of the other depositary banks.
One is the a risk that companies may be forced to register with the SEC and be subjected to its onerous reporting requirements — including Sarbanes Oxley provisions — if the new ADRs attract heavy interest from US investors or companies fail to meet the website posting and translation requirements of the rules.
However, while the regulatory threat is real, more serious are the immediate investor relations and reputation risks for foreign companies.
In most cases, foreign companies are finding themselves with securities that carry their name but which are failing to attract meaningful interest from US investors. This can create the impression that the companies are not attractive investment targets.
JP Morgan alludes to this problem in its backgrounder when it says “the potential to attract U.S. investors is one of several factors to consider before initiating an ADR program.”
Consequently, IR departments of foreign companies that find themselves subjected to unsponsored ADRs may have little choice but to seek ways to support liquidity in the securities to offset potential negative investor perceptions.
Indeed, in the current issue of Online IR Trends Quarterly we argue that companies should try to make the most of a bad situation by reaching out to US investors through a variety of online tactics. At minimum, they should make it clear that they have no involvement with the US unsponsored ADRs.
However, most companies currently are acting as if the unsponsored ADRs don’t exist, which is not a realistic strategy and probably will do more harm to a company than good.