There’s a rumble going on among some US institutions that American depositary receipt investment isn’t all it was originally cracked up to be. Sure, it means you can invest a whole lot more easily in non-US securities. But, when it comes down to voting proxies on your ADR holdings, institutions are finding that they’re not quite as American as they originally thought.
No surprises there, respond the depositary banks and other interested parties. And you haven’t been spun a line, either. Depositary receipts are still foreign securities, we’re just trying to make them accessible to a wider group. We never made any promises over ease of voting.
But it’s not just the smaller, often overlooked, institutions which are raising the difficulty of voting on depositary receipts. You certainly wouldn’t count Fidelity among the minnows. ‘We’ve found difficulties on voting depositary receipt holdings because of the number of hands materials have to pass through before they reach us,’ notes James Griffin, a Fidelity Investments spokesperson. He adds that, in some cases, there are translation issues. Other times, there’s a need for a sub-custodian bank to actually physically attend meetings – which in foreign markets can further frustrate the voting process.
Stanley Dubiel, director of global research at Bethesda, Maryland-based Institutional Shareholder Services, confirms that a number of US institutional clients have raised the DR voting issue. ‘The trouble is many issuers get the materials to the US holders too late for them to act,’ he adds.
And now the SEC has its eyes on the problem. The Commission has been hearing about the problem for ‘a year or two,’ says a spokesman in the corporation finance division. ‘We do have a concern that a number of US institutions are running into practical difficulties voting on ADRs.’
Punctuality, please
So what’s all the fuss about? Basically, US institutions are peeved that they often don’t get meeting materials for their ADR holdings at an early enough juncture to allow them to analyze the issues concerned and then vote on them. Whereas US companies are obliged to send out materials far in advance to institutions to allow them time to consider the issues before voting, US laws obviously can’t be applied to foreign issuers. Nor, therefore, can they be applied to depositary receipts. And so, US institutions often get their ADR materials late.
The process is further complicated by the system. In many cases, ADR materials will go through a long list of parties before they actually reach the beneficial holder or investing institution. These may include the custodian, depositary bank, banks, brokers and intermediary distributors (such as Automatic Data Processing, or ADP). JP Morgan, one of the depositary banks, admits in its own literature for clients that ‘while the proxy process works effectively overall, it has inherent delays since there can be many parties involved.’
Understandably, the noise on the issue has become louder in the last couple of years as more and more US institutions dive into the ADR market. In addition, voting on foreign stocks is being pushed for and recommended by more and more trustees. And the whole issue is likely to become a focus of even more attention in the future, too, since American institutions remain relatively overweight in US stocks and are looking to redress the balance. ADRs will doubtless benefit from that trend, but you can bet it won’t be done without a struggle on the voting issue.
Lack of understanding
Barton Hill, vice president of global proxy services at ADP, is convinced that he knows where the real problem lies. ‘Many US institutional investors just don’t understand what ADRs really are,’ he says. ‘They are simply foreign securities which have become slightly Americanized. And you can’t readily Americanize foreign securities. ADRs take on the characteristics of the underlying shares because that’s what they are. There’s a big caveat emptor – buyer beware – here.’
He points out that some US institutions are surprised when they discover that not all ADRs carry voting rights. They seem shocked, he adds, when they find out that foreign companies listed on the New York Stock Exchange don’t necessarily comply with all US regulations.
And using the depositary banks as a scapegoat in this instance – when what they’ve actually done is create a mechanism which makes it easier for US institutions to invest abroad – is just laying the blame at the wrong door. It’s not as simple as that.
‘A lot of people want to blame the depositary banks,’ says Hill. ‘But it’s a competitive business and they’re just out there doing whatever it takes to get that business. I would almost support them on this because they’re just chasing DR business. As a processor, we’re in the same position as a DR bank. If we receive the materials we process them.’
By implication, if the materials aren’t there ADP and the DR banks can’t forward them to the relevant parties. The solution here, says Hill, lies in the local market. It lies with trying to persuade foreign issuers to release their materials earlier.
Same tack
Perhaps not surprisingly, that’s a tack taken up by the depositary banks themselves. They suggest that the ADR product is simply getting blamed for the issuing companies abiding by local rules. Indeed, it’s hard to see the fault with that argument since some ADR issuers do make the effort to get materials to their US holders on time. And those issuers may well gain in loyalty and greater US investor understanding as a result.
Joe Dooley,vice president of depositary receipts at JP Morgan, confirms that he and his colleagues recommend to issuers that they provide materials six to eight weeks before a meeting in order to get it out to all parties. ‘Unfortunately,’ Dooley adds, ‘home market practice usually dictates the timing and the process. We won’t refuse any institution which calls up and requests material as long as we have that material. The thing I don’t have control over are the intermediaries.’
Andrew Levine at the Bank of New York is of a similar opinion to his competitor. ‘We talk about the problem with our issuing clients all the time,’ he says. ‘My view is that it doesn’t have anything to do with depositary receipts. Institutions can hold ordinary shares and still have exactly the same sort of problems.’ He adds that some US institutions have got used to the good life and get puzzled when they don’t receive materials from foreign markets in the same timeframe as they do for domestic investments.
Easing the process
‘US investors are going to have to become more accommodating or sophisticated – depending on how you look at it,’ says Levine. ‘At the same time, non-US companies are going to have to start thinking about better understanding and appreciating the US system.’ The two sides, he suggests, will move toward each other in the long run. But it may take time and in the interim BoNY will do whatever it can to ease the process.
Dooley suggests a short-term solution, too, for the institutions. He points out that if an institution is aware of a meeting date it can try and get the agenda direct from the company or another source outside of the process. It can then call the company for further clarification on any issues arising and then vote through the system before the material even reaches them if it sees fit. Ideal, no. Effective, yes. In the longer term, Dooley adds, the process is likely to get a whole lot less cumbersome as telephone and internet voting take off.
In the meantime, should those involved keep their eyes on the SEC for a future ruling? The SEC spokesman is reluctant to commit to anything and points out that much of the problem may lie outside the SEC’s remit in foreign markets. ‘It’s hard to insist on US-style proxy rules when we don’t have the jurisdiction,’ he says. ‘Our primary concern is that US investors aren’t treated worse than non-US investors. The problem may lie with foreign issuers but we’re right in the middle of the work at the moment. The most likely outcome is that we act as an agent to get people to focus on the issues without writing rules or issuing edicts. But there might also be some areas where we can strengthen the requirements.’
Watch this space.
