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2.4 ADRs

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Securities Industry Essentials SIE

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1 Introduction

About the SIE Exam How to Use This Course

2 Chapter 1: Knowledge of Capital Markets

1.1 Regulatory Bodies 1.2 State Regulation 1.3 Market Participants 1.4 Types of Markets 1.5 The Exchanges 1.6 OTC Markets 1.7 Economic Policies 1.8 Interest Rates 1.9 Business Cycles 1.10 International Economics

3 Chapter 2: Understanding Products and Their Risks

2.1 Common Stock Basics 2.2 Corporate Actions 2.3 Preferred Stock 2.4 ADRs 2.5 Bond Basics 2.6 Yields 2.7 U.S. Treasury Securities 2.8 Corporate Bonds 2.9 Municipal Bonds 2.10 Money Market Instruments 2.11 Options Basics 2.12 Hedging Strategies 2.13 Mutual Funds 101 2.14 Mutual Fund Fees 2.15 ETFs 2.16 UITs & REITs 2.17 DPPs 2.18 Systematic Risk 2.19 Non-Systematic Risk 2.20 Mitigation Strategies

4 Chapter 3: Trading, Customer Accounts and Prohibited Activities

3.1 Order Types 3.2 Trade Settlement 3.3 Quoting 3.4 Account Types 3.5 Account Registration 3.6 Retirement Plans 3.7 Education Savings 3.8 AML Rules 3.9 Market Manipulation 3.10 Insider Trading 3.11 Customer Protection

5 Chapter 4: Overview of Regulatory Framework

4.1 Registration 4.2 Continuing Education 4.3 Employee Conduct 4.4 Correspondence

2.4 ADRs

Key Takeaways Explain This Topic AI

ADRs are certificates issued by U.S. depositary banks representing foreign company shares, trading in U.S. dollars on U.S. exchanges

Three sponsored ADR levels exist: Level I (OTC only), Level II (NYSE/NASDAQ, full SEC reporting), Level III (can raise new capital)

ADR ratios adjust foreign share prices for U.S. markets (e.g., 1:10 means one ADR equals 10 foreign shares)

Dividends are converted to U.S. dollars after deducting fees and foreign withholding taxes

ADR investors face currency risk because underlying shares are valued in foreign currency, despite trading in dollars

Last updated: October 2026

American Depositary Receipts (ADRs)

Investing internationally can be complex—different currencies, foreign exchanges, varying regulations, and time zone challenges. American Depositary Receipts (ADRs) solve these problems by allowing U.S. investors to buy foreign stocks as easily as domestic ones. For the SIE exam, you need to understand how ADRs work and their unique characteristics.

What Is an ADR?

An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. depositary bank representing shares of a foreign company. ADRs trade on U.S. exchanges in U.S. dollars, just like domestic stocks.

  • How ADRs Work
  • A foreign company wants its shares available to U.S. investors
  • A U.S. depositary bank purchases shares of the foreign company
  • The bank holds these shares in a foreign custodian bank
  • The depositary bank issues ADRs representing these underlying shares
  • ADRs trade on U.S. markets (NYSE, NASDAQ, or OTC)
  • ADR Structure
  • Component Description
  • Underlying shares Foreign company stock held by custodian
  • Depositary bank U.S. bank that issues the ADRs (e.g., Bank of New York Mellon, JPMorgan)
  • Custodian bank Foreign bank holding the actual shares
  • ADR ratio Number of foreign shares represented by one ADR
  • Why ADRs Exist

ADRs benefit both investors and foreign companies:

  • Benefits for U.S. Investors
  • Trade in U.S. dollars - No currency conversion needed to buy
  • Trade on U.S. exchanges - Familiar trading hours and processes
  • Receive dividends in U.S. dollars - Bank handles conversion
  • U.S. regulatory oversight - SEC registration and disclosure requirements
  • Easier settlement - Standard T+1 settlement like domestic stocks
  • Benefits for Foreign Companies
  • Access U.S. capital markets - Reach American investors
  • Increased visibility - Presence on major U.S. exchanges
  • Diversified shareholder base - Broader investor pool
  • Enhanced prestige - Association with U.S. market standards
  • Types of ADRs

ADRs are classified by their level of SEC registration and where they trade:

Sponsored vs. Unsponsored ADRs

  • Type Sponsored Unsponsored
  • Who creates it Foreign company works with depositary bank Depositary bank acts alone
  • SEC registration Yes, at various levels Minimal (OTC only)
  • Financial reporting Required (varies by level) Limited
  • Trading venue NYSE, NASDAQ, or OTC OTC only
  • Most common Yes Less common today
  • Levels of Sponsored ADRs
  • Level Trading Venue SEC Reporting Capital Raising Requirements
  • Level I OTC Minimal No Exempted from full SEC registration
  • Level II NYSE/NASDAQ Yes (Form 20-F) No Full SEC registration
  • Level III NYSE/NASDAQ Yes (Form 20-F) Yes Full registration + prospectus

Key Point: Only Level III ADRs can raise new capital in the U.S. through public offerings.

ADR Ratio

The ADR ratio specifies how many foreign shares each ADR represents. This ratio is set to price ADRs in a range appealing to U.S. investors.

Examples of ADR Ratios

  • Foreign Company ADR Ratio Meaning
  • 1:1 One ADR = 1 foreign share Prices are similar
  • 1:10 One ADR = 10 foreign shares Foreign shares are cheaper
  • 10:1 10 ADRs = 1 foreign share Foreign shares are more expensive

Example: A Japanese stock trades at ¥1,000 per share. To price the ADR around $30, the bank might set a 4:1 ratio (one ADR represents 4 shares).

Dividends and ADRs

When the foreign company pays a dividend:

  • Dividend paid in foreign currency to depositary bank
  • Bank converts to U.S. dollars
  • Bank deducts fees and any foreign withholding taxes
  • Net dividend distributed to ADR holders in U.S. dollars
  • Foreign Tax Considerations

Many countries withhold taxes on dividends paid to foreign investors. ADR holders may be subject to:

Foreign withholding tax - Deducted before U.S. dollar conversion

U.S. taxes - Dividends are also taxable in the U.S.

Foreign tax credit - U.S. investors may claim a credit for taxes paid to foreign governments

Important: The tax implications can be complex. ADR investors should be aware they may face double taxation without proper tax planning.

Risks Specific to ADRs

While ADRs simplify foreign investing, they carry unique risks:

Currency Risk

Although ADRs trade in dollars, the underlying shares are valued in foreign currency. Currency fluctuations affect ADR value:

  • If foreign currency strengthens vs. USD → ADR value increases
  • If foreign currency weakens vs. USD → ADR value decreases
  • Political Risk

Investing in foreign companies exposes investors to political instability, nationalization, or adverse policy changes in the foreign country.

Economic Risk

Foreign economic conditions—inflation, recession, monetary policy—directly affect the underlying company and ADR value.

Information Risk

Despite SEC requirements, information about foreign companies may be:

  • Less detailed than U.S. company disclosures
  • Based on different accounting standards
  • Less timely due to time zones and translation
  • Liquidity Risk

Some ADRs, especially Level I trading on OTC markets, may have lower trading volume than comparable U.S. stocks.

ADRs on the SIE Exam

Key points to remember:

  • ADRs trade in U.S. dollars on U.S. exchanges
  • ADRs are issued by U.S. depositary banks
  • Level I ADRs trade OTC only
  • Level III ADRs can raise new capital
  • ADR holders face currency risk even though they trade in dollars
  • Dividends are paid in U.S. dollars after conversion and tax withholding
  • Key Takeaways
  • ADRs let U.S. investors easily invest in foreign companies
  • Depositary banks hold foreign shares and issue ADRs representing them
  • Three levels of ADRs offer different trading venues and reporting requirements
  • ADR ratios adjust foreign share prices to appropriate U.S. trading ranges
  • Currency risk is the primary unique risk for ADR investors
  • Dividends are converted to U.S. dollars with potential foreign tax withholding