An investor in the United States wants exposure to a company whose ordinary shares are listed only in Tokyo, without opening a Japanese brokerage account, holding yen, or settling under Japanese market rules. Buying an American Depositary Receipt achieves this because:

the foreign company's ordinary shares are transferred onto a United States exchange, where they settle under domestic clearing rules

a United States depositary bank handles the foreign custody and currency conversion, leaving the investor only domestic market infrastructure

the investor's domestic broker opens an account in the issuer's home market and trades the ordinary shares there as agent

the foreign custodian sells the ordinary shares into the local market and remits only cash, so no foreign security is held

The first American Depositary Receipt was created in 1927 by which institution, and for which company?

Citibank, for the Swiss food manufacturer Nestle

Bank of New York Mellon, for the Japanese carmaker Toyota

JPMorgan Chase, for the British oil producer BP

Which three institutions dominate the American Depositary Receipt market?

Bank of America, Morgan Stanley, and Northern Trust Company

State Street Corporation, Goldman Sachs, and Wells Fargo Bank

Charles Schwab, Fidelity Investments, and the Depository Trust Company

A Global Depositary Receipt listed on the London Stock Exchange and an American Depositary Receipt are created over the same foreign issuer's ordinary shares. How do the two instruments differ?

The Global Depositary Receipt gives its holder direct registered title to the ordinary shares, which the American Depositary Receipt does not

The Global Depositary Receipt is denominated in the issuer's home currency, while the American Depositary Receipt is denominated in dollars

The Global Depositary Receipt is issued without any custodian holding the ordinary shares in the issuer's home market

They share one structure and differ in listing venue, governing regulatory framework, investor base and currency of denomination

In the creation of an American Depositary Receipt, what happens immediately after the broker purchases the underlying ordinary shares?

The broker delivers the shares to the depositary bank's appointed foreign custodian

The broker registers the shares with the Securities and Exchange Commission

The depositary bank converts the share value into dollars at the prevailing rate

The foreign company notifies its home exchange that the shares have been removed

The ordinary shares underlying an American Depositary Receipt rise ten percent in their home market, and the exchange rate between the home currency and the dollar does not move. The dollar price of the receipt will rise by:

Ten percent divided by the number of ordinary shares each receipt represents

Ten percent multiplied by the number of ordinary shares each receipt represents

Ten percent, since the ratio is fixed and leaves the proportion unchanged

Less than ten percent, because the depositary's conversion spread absorbs part of the gain

A Japanese company's ordinary shares trade at roughly ten thousand yen and its program uses a one-to-one-hundred ratio. The resulting receipt price would be approximately:

One hundred to one hundred fifty dollars

Six hundred to seven hundred dollars

If the issuer's home currency strengthens against the dollar while the local share price is unchanged, the receipt price will:

Fall, because more foreign currency is required per dollar

Remain unchanged, because the receipt is denominated in dollars

Fall, because the depositary widens its currency conversion spread

How is the depositary service fee usually collected from holders?

Billed annually to the holder's brokerage account

Added to the purchase price at the time of the trade

Charged to the foreign company under the deposit agreement

When a foreign company pays a dividend, the correct sequence handled by the depositary structure is:

Convert to dollars, distribute to holders, then deduct foreign withholding tax

Receive local currency, deduct foreign withholding tax, then convert to dollars

Deduct the depositary fee, convert to dollars, then apply foreign withholding tax

Receive local currency, convert to dollars, then remit tax to the home government

Foreign tax has been withheld at source on the dividend paid to a United States holder of American Depositary Receipts. The relief available to that holder under United States tax law operates by:

reducing the tax the holder owes in the United States by the foreign tax already paid, within limits

reducing the cost basis of the receipts by the foreign tax withheld, which defers the benefit until sale

entitling the holder to reclaim the withheld tax directly from the issuer's home government by filing a claim there

obliging the depositary to gross the dividend up to its full pre-withholding amount before distributing it to holders

In a sponsored Level One program, which party makes a registration filing with the SEC, and what is required of the other?

The foreign company registers the receipts, and the depositary files annual reports on the company's behalf

Both parties register, the depositary covering the receipts and the foreign company covering its ordinary shares

The foreign company registers its ordinary shares, and the depositary files nothing because it is not an issuer

The depositary registers the receipts, and the foreign company files nothing and makes no annual report

Form 20-F is the foreign private issuer equivalent of which United States filing?

The annual proxy statement on Schedule 14A

Securities Act registration for a Level Three offering is made on which forms?

Form 20-F for listings and Form 6-K for interim updates

Form F-1 for public offerings and Form F-3 for shelf registration

Form F-6 for offerings and Form 20-F for shelf registration

Form S-1 for public offerings and Form S-3 for shelf registration

An unsponsored facility and a sponsored Level One program exist over the same foreign issuer's ordinary shares. Where may the receipts of each trade?

The unsponsored receipts over-the-counter, and the Level One receipts on a national securities exchange

Only on the over-the-counter markets, in both cases

Both on a national securities exchange, since each rests on a registration made with the SEC

The unsponsored receipts on any market that will admit them, and the Level One receipts over-the-counter alone

A depositary bank has established an unsponsored facility over a foreign company's shares, and the company now calls a shareholder vote at home. What obligation does it have to put the voting materials before the receipt holders in the United States?

It is required to send the materials to the depositary bank, which bears the cost of circulating them to the holders

Its duty to send the materials arises only where its own home jurisdiction compels circulation to holders abroad

It may not let the home meeting proceed until the materials have been published in the United States

It is under no duty to transmit the materials, so the depositary may have nothing to pass on to the holders

How many depositary banks may operate a sponsored Level One facility, compared with an unsponsored facility over the same foreign issuer's shares?

One bank in each case, because the SEC will register only one facility for any foreign issuer

Several banks in each case, because no depositary may be given exclusivity over a foreign issuer's shares

One bank, exclusively responsible, for Level One; several may each create unsponsored receipts

One bank for the unsponsored facility, while several may compete to operate the Level One program

A Level Two program permits which of the following?

Exchange listing, but not the raising of new capital

The raising of new capital, but not exchange listing

Both exchange listing and the raising of new capital

Neither exchange listing nor the raising of new capital

Which feature is available exclusively at Level Three?

The right of receipt holders to vote the underlying ordinary shares directly at the foreign company's meetings

Relief from the ongoing periodic reporting that applies once a program has been registered

A reduction in the foreign withholding tax applied to dividends on the underlying shares

Two foreign private issuers each present Form 20-F financial statements prepared under their own home country accounting standards. One filing meets the requirement and the other does not. What distinguishes them?

The satisfactory filing was audited by a firm registered with the Public Company Accounting Oversight Board

The satisfactory filing carries a quantified reconciliation of those statements to United States GAAP

The satisfactory filing restates the figures in United States dollars at the year-end exchange rate

The satisfactory filing was certified by the issuer's home country securities regulator before submission

A depositary gives the thirty days' notice typically required before terminating a sponsored program. A holder who neither sells the receipts nor otherwise acts on the notice must be prepared to:

receive a cash payment from the foreign company equal to the last quoted price of the receipts

have the receipts exchanged automatically for receipts issued by a successor depositary bank

continue holding the receipts, which remain outstanding until the foreign company redeems them

take delivery of the underlying ordinary shares, which requires an account abroad to hold them

A client notes that a receipt trades, settles, and pays dividends in dollars, and concludes there is no currency exposure. The correct response is that:

The exposure is removed once the home currency is hedged by the depositary

The conclusion holds for sponsored programs but not for unsponsored ones

The dollar value still moves with the exchange rate against the home currency

Currency exposure applies to dividends received but not to the receipt price

A Japanese issuer declares an unchanged dividend of one hundred yen per share while the yen weakens against the dollar. Holders will receive:

A smaller dollar dividend than in the prior period

A larger dollar dividend than in the prior period

The same dollar dividend, since the declared payout is unchanged

The same dollar dividend, adjusted only for the depositary fee

A client compares a Level One unsponsored receipt with a listed domestic stock of similar market capitalisation. Relative to the domestic stock, the receipt is likely to have:

Tighter bid-ask spreads and greater price transparency

Wider bid-ask spreads and less price transparency

Identical liquidity, since both represent equity ownership

Greater liquidity, because two markets quote the shares

A client worries that the issuer's government may nationalise industry or restrict capital flows. This concern is best described as:

Information risk, which arises where home country disclosure is less complete or less timely

Liquidity risk, which arises where a holder cannot sell at or near the quoted price

Program termination risk, which arises where the deposit agreement is brought to an end

Political and country risk, which attaches to government action in the issuer's home market

An American Depositary Receipt lets U.S. investors buy foreign shares in dollars on U.S. exchanges.

What Is an American Depositary Receipt? ADR Levels, the ADR Ratio, and Currency Risk

An American Depositary Receipt is a negotiable certificate issued by a United States depositary bank that represents ownership of a specified number of shares in a foreign company — traded on American stock exchanges or over-the-counter markets in United States dollars.

Settled through United States clearing systems, and paying dividends in United States dollars after currency conversion — providing American investors with access to foreign equity markets without the need to navigate foreign exchanges, foreign currencies, foreign settlement systems, or foreign regulatory frameworks.

First created in 1927 by J.P. Morgan for the British retailer Selfridges, which was listed on the New York Curb Exchange — the precursor to the American Stock Exchange — American Depositary Receipts have grown into the primary mechanism through which tens of millions of American investors access the equity of companies as geographically and structurally diverse as Taiwan Semiconductor Manufacturing Company, Nestlé, Alibaba, BP, Toyota, and Samsung.

The regulatory framework governing American Depositary Receipts spans the Securities Act of 1933, the Securities Exchange Act of 1934, SEC Form F-6, Form 20-F, SEC Rule 12g3-2(b), and a comprehensive body of disclosure and investor protection obligations that vary significantly across the three levels of sponsored program.

This entry examines the precise mechanics of how American Depositary Receipts are created, the distinction between sponsored and unsponsored programs, the three levels of sponsored programs and their regulatory requirements, the ADR ratio and its relationship to pricing, currency risk and dividend withholding tax, the role of the depositary bank, the specific risks that distinguish American Depositary Receipts from domestic equity investments, and the examination-critical distinctions that appear throughout the SIE, Series 7, and Series 65 curricula.

Definition and Overview

An American Depositary Receipt is a certificate issued by a United States depositary bank that represents ownership of foreign ordinary shares held in custody by that bank or its appointed agent in the company's home country.

The depositary receipt itself trades on United States markets as if it were a domestic stock — quoted in dollars, settled in the standard United States T-plus-one settlement cycle, and accessible through any domestic brokerage account — while the underlying foreign shares are held abroad by the custodian on behalf of the depositary.

The fundamental purpose of the American Depositary Receipt is to remove the practical barriers that historically prevented American investors from accessing foreign equity markets. Before their introduction, an investor wishing to purchase shares of a foreign company would need to open a foreign brokerage account, transact in a foreign currency, navigate foreign settlement systems and local securities laws, arrange for currency conversion of any dividends received, and in many cases obtain and read financial statements prepared under foreign accounting standards in a foreign language.

The American Depositary Receipt structure eliminates all of these friction points by interposing a United States depositary bank that handles all of the cross-border mechanics while the investor interacts only with the familiar domestic market infrastructure.

The Mechanics of Creation

American Depositary Receipts are created through a defined process involving a broker, a foreign custodian, and a United States depositary bank.

A broker purchases the underlying ordinary shares of the foreign company on its home stock exchange — paying in the local currency and completing settlement under local market rules.

The broker then delivers those shares to the depositary bank's appointed custodian in the foreign country.

The foreign custodian holds the ordinary shares on behalf of the depositary and notifies the depositary that the shares have been received.

The United States depositary bank then issues American Depositary Receipts representing those underlying shares to the broker, which are delivered to the original investor or sold in the United States market.

The three major United States depositary banks that dominate the American Depositary Receipt market are Bank of New York Mellon, JPMorgan Chase, and Citibank.

Each maintains an extensive global network of custodians and correspondent relationships that enable them to hold foreign shares in local markets, receive local dividends, exercise or collect on corporate actions, and perform the currency conversion and communication functions that American Depositary Receipt holders depend upon.

The cancellation process operates in reverse. An investor wishing to exchange American Depositary Receipts for the underlying ordinary shares notifies the depositary, which instructs the foreign custodian to release the corresponding ordinary shares for delivery to the investor's foreign account. The American Depositary Receipts are then cancelled.

The ADR Ratio

The ADR ratio is the fixed relationship between the number of American Depositary Receipts and the number of underlying foreign ordinary shares they represent. The ratio may be expressed as one-to-one, where one American Depositary Receipt represents exactly one ordinary share, as many-to-one, where one American Depositary Receipt represents multiple ordinary shares, or as a fraction, where one American Depositary Receipt represents a fraction of an ordinary share.

The ratio is deliberately set to produce a convenient trading price in United States dollars — typically in the range of ten to one hundred dollars per American Depositary Receipt — regardless of the price of the underlying share in the foreign market. A Japanese company whose ordinary shares trade at approximately ten thousand yen each might establish an American Depositary Receipt ratio of one-to-one hundred, meaning each American Depositary Receipt represents one hundred underlying shares, producing an American Depositary Receipt price of roughly sixty-five to seventy dollars at a typical dollar-yen exchange rate. A Swiss company whose shares trade at several hundred Swiss francs each might use a one-to-five ratio, issuing one American Depositary Receipt for every five underlying shares, to produce a dollar price that falls within the conventional trading range.

The price of an American Depositary Receipt tracks the price of the underlying foreign share adjusted for the ratio and the prevailing exchange rate. If the underlying share in the home market rises in local currency terms, the American Depositary Receipt price in dollars will rise by the same proportion, all else equal. If the home currency appreciates against the dollar, the American Depositary Receipt price rises even without movement in the local share price, because the underlying asset is worth more dollars when the foreign currency is stronger. The interaction between the local share price and the exchange rate means that American Depositary Receipt holders are exposed to both the equity performance of the foreign company and the currency performance of the foreign country.

Unsponsored American Depositary Receipts

Unsponsored American Depositary Receipts are created by a depositary bank — or multiple depositary banks, since there is no exclusivity requirement — typically in response to market demand from American investors for exposure to a particular foreign company, without any formal agreement with or participation by the foreign company itself. The foreign company plays no role in establishing the facility, bears no costs associated with it, and is under no obligation to communicate with American Depositary Receipt holders or facilitate their exercise of shareholder rights.

An unsponsored American Depositary Receipt facility may be established only if the foreign company is either subject to the reporting requirements of the Securities Exchange Act of 1934 or is exempt from those requirements under SEC Rule 12g3-2(b). Rule 12g3-2(b) provides an exemption from Exchange Act registration for foreign private issuers that furnish to the SEC in English the information that they disclose in their home country — effectively making publicly available in the United States the same disclosure that home country investors receive, without requiring full SEC registration and reporting compliance.

Unsponsored American Depositary Receipts are quoted and traded only on the over-the-counter markets — they cannot be listed on national securities exchanges including the New York Stock Exchange or Nasdaq. They typically carry less investor protection than sponsored programs because the foreign company is not formally party to the depositary arrangement and may not forward shareholder communications, exercise notices, voting materials, or corporate action notices to the depositary for transmission to holders. Unsponsored American Depositary Receipt holders generally bear all costs of the facility and may not receive the voting rights and corporate communication benefits available under sponsored programs.

The Role of the Depositary Bank

The depositary bank occupies the central operational position in the American Depositary Receipt structure, serving simultaneously as issuer of the receipt certificates, custodian of the underlying shareholder relationship, currency converter, dividend distributor, and communications intermediary between the foreign company and American investors.

When the foreign company pays a dividend in its home currency, the depositary bank's foreign custodian receives the dividend in local currency, deducts any applicable foreign withholding tax required by the issuer's home country, and converts the remaining amount into United States dollars at the prevailing exchange rate. The depositary bank then distributes the dollar-denominated dividend to American Depositary Receipt holders, deducting its depositary service fee — typically one to three cents per American Depositary Receipt, which is usually subtracted directly from the dividend payment rather than charged separately.

In addition to dividend processing, the depositary bank receives and forwards corporate communications including annual reports, proxy materials, and notices of extraordinary corporate actions such as rights offerings, stock splits, and mergers. For sponsored programs, the depositary is contractually obligated to make reasonable efforts to forward these communications. For unsponsored programs, no such obligation exists.

Currency Risk — A Critical Concept

While American Depositary Receipts trade in dollars, settle in dollars, and pay dividends in dollars, they remain fundamentally exposed to foreign currency risk — a distinction that is frequently tested on securities licensing examinations and is among the most important concepts for investor communication.

The value of an American Depositary Receipt in dollars is at all times a function of both the value of the underlying shares in the home currency and the exchange rate between the home currency and the United States dollar. When the home currency weakens against the dollar, American Depositary Receipt prices fall in dollar terms even if the underlying share price in local currency is unchanged, because the underlying asset is worth fewer dollars when converted at the weaker exchange rate. When the home currency strengthens, American Depositary Receipt prices rise in dollar terms even without any change in the local share price.

The currency risk applies to dividends as well as price appreciation. A Japanese company that declares a dividend of one hundred yen per share will produce a smaller dollar dividend for American Depositary Receipt holders when the yen is weak against the dollar and a larger dollar dividend when the yen is strong, regardless of any change in the company's dividend policy. A registered representative explaining American Depositary Receipts to a client must make clear that the dollar-denominated presentation does not eliminate the currency exposure — it merely converts it into an implicit risk rather than a visible one.

Foreign Dividend Withholding Tax

Foreign governments typically impose withholding taxes on dividends paid to non-resident shareholders, deducting a specified percentage of the gross dividend before distribution. Withholding rates vary by country and are often reduced by tax treaties between the United States and the issuer's home country. Typical withholding rates range from fifteen percent for countries with favourable tax treaties with the United States — including Germany, the United Kingdom, and Japan — to thirty percent for countries without comprehensive tax treaty arrangements.

American investors who receive dividends from American Depositary Receipts and have had foreign taxes withheld may claim a foreign tax credit on their United States tax return, reducing their United States tax liability by the amount of foreign tax paid, subject to certain limitations. The depositary bank typically reports the gross dividend, the amount of foreign tax withheld, and the net dollar amount distributed to each holder on Form 1099-DIV, providing the information needed to claim the foreign tax credit. The interaction between foreign withholding tax and the foreign tax credit means that the effective after-tax cost of the withholding is reduced for most American investors, though not entirely eliminated.

Additional Risks of American Depositary Receipt Investment

Beyond currency risk and foreign dividend withholding tax, American Depositary Receipts carry several additional risk categories that distinguish them from equivalent domestic equity investments and require disclosure and explanation to clients.

Political and country risk encompasses the possibility that political instability, changes in government, shifts in regulatory policy, nationalisation of industry, or restrictions on capital flows in the issuer's home country could adversely affect the value of the underlying foreign shares or the ability of the depositary to convert dividends and repatriate capital to American investors. Countries with less established rule of law, higher corruption indices, or histories of expropriation carry higher political risk premiums that should be reflected in the price of American Depositary Receipts from those jurisdictions.

Information risk arises from the possibility that disclosure standards in the issuer's home country may be less comprehensive, less reliable, or less timely than the standards applicable to United States domestic issuers under the Securities Exchange Act and GAAP. Level One and unsponsored American Depositary Receipt holders in particular may receive less information about the underlying company than holders of Level Two and Level Three programs, where full Form 20-F disclosure applies.

Liquidity risk may be greater for American Depositary Receipts — particularly Level One and unsponsored programs traded over-the-counter — than for comparable domestic equities with similar market capitalisation, because the American Depositary Receipt market is typically smaller than the home market and the over-the-counter trading mechanism provides less price transparency and potentially wider bid-ask spreads than exchange-listed markets.

Depositary fees, while individually small, represent an ongoing cost of holding American Depositary Receipts that does not apply to domestic equity investments. These fees — typically one to three cents per American Depositary Receipt per year, usually deducted from dividend payments — reduce the effective dividend yield and over long holding periods represent a meaningful drag on total return.

Program termination risk is a feature specific to American Depositary Receipts — the foreign company or the depositary bank may terminate the American Depositary Receipt program under the terms of the deposit agreement, requiring holders to either convert their American Depositary Receipts into the underlying foreign ordinary shares or sell their receipts in the market before termination. Termination of a sponsored program often requires advance notice — typically at least thirty days — to allow holders to make alternative arrangements, but may be disruptive and could require holders to establish foreign accounts to receive and hold the underlying ordinary shares.

American Depositary Receipts Versus Global Depositary Receipts

American Depositary Receipts are the United States-specific form of a broader category of instruments called depositary receipts, through which foreign equity is made accessible in non-home markets. Global Depositary Receipts operate on the same structural principles but are typically listed on non-United States markets — most commonly the London Stock Exchange or Luxembourg Stock Exchange — and are denominated in dollars or euros rather than the home currency. Global Depositary Receipts allow foreign companies to raise capital from European and international institutional investors using a similar mechanism. The two instruments are economically equivalent in structure but differ in their listing venue, applicable regulatory framework, investor base, and currency of denomination.

Examination Relevance and Key Takeaways

American Depositary Receipts are tested on the SIE, Series 7, and Series 65 examinations in the context of foreign equity investment, international diversification, currency risk, SEC registration requirements, and the distinction between different levels of sponsored programs. Candidates must understand the mechanics of American Depositary Receipt creation and cancellation, the difference between sponsored and unsponsored programs, the three levels of sponsored programs and their respective regulatory requirements including Form F-6 for all programs, Form 20-F for Level Two and Three, and capital raising capability exclusively at Level Three, currency risk as a persistent characteristic of all American Depositary Receipts regardless of dollar denomination, and foreign dividend withholding tax as a cost that can partially be offset through the foreign tax credit.

The core points to retain are these: an American Depositary Receipt is a certificate issued by a United States depositary bank representing a fixed number of foreign ordinary shares held by a custodian in the issuer's home country, first created by J.P. Morgan in 1927 for British retailer Selfridges, and today administered primarily by Bank of New York Mellon, JPMorgan, and Citibank.

The ADR ratio — which may be one-to-one, many-to-one, or fractional — is set to produce a convenient dollar trading price and defines the relationship between the receipt price and the underlying share price converted at the prevailing exchange rate; unsponsored programs involve no formal agreement with the foreign company and trade only over-the-counter, while sponsored programs involve a deposit agreement and are available in three levels — Level One programs trade over-the-counter and require only Form F-6, Level Two programs list on national exchanges requiring Form F-6 and Form 20-F under the Exchange Act but raise no capital, and Level Three programs list on national exchanges, require Form F-6 and Form F-1 or F-3 under the Securities Act, and permit capital raising through public offerings; American Depositary Receipts trade and settle in dollars and pay dividends in dollars but remain subject to currency risk because their dollar value fluctuates with the exchange rate between the home currency and the dollar; foreign dividend withholding taxes reduce gross dividends received through American Depositary Receipts but can be partially offset through the foreign tax credit claimed on the United States tax return; and additional risks include political and country risk, information risk, liquidity risk especially for Level One and unsponsored programs, depositary service fees typically one to three cents per receipt per year deducted from dividends, and program termination risk.