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ADRs: fees, filings and cancellation

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An ADR saves you a foreign brokerage account, not foreign homework. It carries depositary fees, its own SEC form, and disclosure set mostly by the company’s home country.

The ruleADR holders pay depositary fees, commonly netted from dividends or passed through brokers; Form F-6 covers the deposit, not the company; Level 2 and 3 companies file Form 20-F; ADRs can be surrendered for the shares; beyond Form 20-F, disclosure follows home-country rules.

What the depositary charges, and what the filings show

A depositary bank holds the foreign shares and runs the ADR program, and it charges holders for that work. The usual charge is a custody fee, which the bank commonly subtracts from the gross dividend, so holders receive a net dividend. When an ADR pays no dividends, DTC charges the fee to banks and brokers, who pass it on to their customers. Banks may charge other fees too, for example for foreign currency exchange.

Keep reading: 2 more paragraphs (about 1 min)

ADRs are registered with the SEC on Form F-6, but that form covers only the deposit arrangement: the deposit agreement, the form of receipt and legal opinions. It contains no information about the foreign company. For a Level 1 program, no company information is on EDGAR; the issuer’s website is the place to look. Companies with Level 2 or Level 3 programs also file annual reports on Form 20-F.

ADRs and the shares behind them stay linked. A depositary creates ADRs when foreign shares are delivered to it, and holders may surrender ADRs to receive the foreign shares; brokers active in foreign markets usually do this. Beyond Form 20-F, foreign companies generally disclose what their home country requires, which may be less extensive or less comparable, so the SEC tells investors to research the company and its country’s political, economic and social conditions.

Exam terms (5)
Depositary bank
The US bank that holds the foreign shares and issues and services the ADRs.
Custody fee
The depositary’s charge to ADR holders, commonly netted from dividends.
Form F-6
The SEC registration for ADRs; it covers the deposit terms, not the company.
Form 20-F
The annual report a foreign company files for a Level 2 or Level 3 program.
Surrender
Returning ADRs to the depositary in exchange for the underlying foreign shares.

The life of an ADR

  1. Deposit

    Foreign shares go to the bank

  2. Issue

    Bank issues dollar ADRs

  3. Hold

    Custody fee netted from dividends

  4. Surrender

    ADRs returned for the shares

The receipt and the share stay linked from start to finish.

Try it: Write the three places you would look before buying a Level 2 ADR: one for the depositary’s fees, one for the company’s annual results, and one for conditions in its home country. Then say which of those a Level 1 program does not have on EDGAR, and where you would look instead.

Check yourself

Try a question, then read the explanation to review the rule.

Opening your study record…

Worked example

Rhiannon Achterkamp holds 1,000 ADRs in a sponsored Level 2 program. The company declares a dividend equal to $0.80 per ADR, and the depositary’s custody fee is $0.03 per ADR.

  1. The bank subtracts the fee from the gross dividend: $0.80 − $0.03 = $0.77 per ADR.
  2. She receives $0.77 × 1,000 = $770, the net dividend.
  3. She finds the fee schedule in the program’s Form F-6 and the company’s annual results in its Form 20-F, both on EDGAR.
  4. If she ever wants the ordinary shares instead, her broker can surrender the ADRs to the depositary for them.

Same rule, new context

Opening your study record…

The closest contrast

Form F-6: the receipt.

Form 20-F: the company.

This decides where-to-look questions. Fees and deposit terms are in the Form F-6; the foreign company’s annual results are in its Form 20-F, which only Level 2 and Level 3 programs require.

Summary

  • Depositary banks charge ADR holders a custody fee, commonly netted from dividends; with no dividend, it comes through DTC and the broker.
  • Banks may charge other fees, such as for currency exchange.
  • Form F-6 covers the deposit terms only; Level 2 and 3 companies file Form 20-F; Level 1 company information is on the issuer’s website.
  • ADRs can be surrendered for the foreign shares; beyond Form 20-F, disclosure follows home-country rules, so research the country too.

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