American Depositary Receipt Rules

American Depositary Receipts were created in 1927 by JP Morgan to allow US investors to buy shares in British retailer Selfridges without navigating foreign settlement systems. Today, hundreds of foreign companies from dozens of countries trade in the US through ADR programs, with the total market capitalization of listed ADRs running into the trillions of dollars. ADRs trade on NYSE, Nasdaq, or OTC markets and settle through DTC like ordinary US securities, providing US investors with familiar mechanics, dollar-denominated pricing, and US brokerage account access.

The regulatory framework for ADRs involves both the SEC and the depositary bank. Level I ADRs trade only on the OTC market and do not require full SEC registration — the foreign issuer files a Form F-6 to register the depositary shares themselves but files only a Form 12g3-2(b) exemption for the underlying shares, providing home-country documents in English translation rather than full US GAAP financial statements or complete SEC disclosure. Level II and Level III ADRs require registration of the underlying shares on Form 20-F or Form 40-F (for Canadian issuers), subjecting the foreign issuer to ongoing SEC reporting obligations. Level III ADRs involve a concurrent public offering in the United States.

Form F-6, filed by the depositary bank rather than the issuer, registers the depositary shares issued under the deposit agreement. The deposit agreement governs the relationship between the depositary bank, the registered ADR holders, and the foreign issuer, covering dividend distribution, voting rights, information disclosure, fees charged by the depositary, and procedures for exchange of ADRs back into underlying ordinary shares. Depositary banks charge ADR holders a custody fee typically ranging from one to three cents per share annually, deducted from dividend payments.

The SEC has addressed the regulatory status of sponsored versus unsponsored ADRs. Sponsored ADRs are created with the participation and cooperation of the foreign issuer, which enters into a deposit agreement with a single depositary bank. Unsponsored ADRs are created by depositary banks without the issuer's formal involvement, often resulting in multiple competing ADR programs for the same foreign stock — a situation the SEC addressed through a 2008 rule amendment under Exchange Act Rule 12g3-2(b) that expanded the exemption for unsponsored ADRs to accommodate the growing market.

Taxation of ADR dividends follows the same rules as ordinary foreign dividends for US tax purposes: dividends are reported on Form 1099-DIV and are generally eligible for the qualified dividend rate if the ADR is sponsored and the underlying company is in a country with a qualifying treaty or is a corporation eligible for the lower rate. The depositary bank withholds foreign taxes at the applicable treaty rate and reports them in Box 7 of the 1099-DIV, allowing holders to claim a foreign tax credit on Form 1116.