1.5 ADRs & Foreign Securities
American Depositary Receipts allow US investors to buy shares of foreign companies on US exchanges (NYSE/NASDAQ) without dealing with foreign exchange conversions or overseas brokerages.
Key FINRA Exam Takeaways
- ADRs (American Depositary Receipts) facilitate US trading of foreign shares in US dollars.
- Issued by domestic US commercial banks that hold the foreign shares in custodian vaults abroad.
- Dividends are declared in foreign currency but paid to ADR holders in US dollars (subject to currency risk).
- Foreign governments may withhold taxes on dividends, but investors can claim a US foreign tax credit.
- ADRs do NOT eliminate currency exchange rate risk.
Mechanics and Custody
A US depository bank buys shares of a foreign company in its home market, deposits them in an overseas custodian branch, and issues receipts (ADRs) representing those shares in the US market. ADRs trade in US dollars and settle on standard US T+1 cycles.
Currency Risk and Tax Treatment
Although denominated in USD, ADRs carry currency risk. If the foreign currency depreciates against the USD, the dividend converted into USD will be smaller, and the ADR price will decline even if the foreign stock price stayed flat in local currency.
An investor purchases American Depositary Receipts (ADRs) of a French telecommunications company. Which of the following risks does this investor face?