On Sponsored and OTC ADR’s

In the accounts I attempt to offer a mix of US stocks and foreign stocks, under the theory that most of the world’s economy is outside the USA and for beneficiaries with a long time horizon, it is important to go where the growth of the future will reside.  In addition, this gives us some upside (and downside) if the US dollar rises or declines because foreign currencies do not always move consistently with our dollar.

Generally I have offered as stock selections ADR’s sponsored on one of the major US exchanges, either NYSE or NASDAQ.  These sponsored ADR’s must conform with US accounting rules (called GAAP) and other requirements, such as Sarbanes Oxley, which add additional auditing and compliance costs and supposedly provide offsetting assurances that the financial statements are correct and free from some sorts of defects.

From the perspective of the issuer, the foreign company listing in the USA, this provides additional avenues to reach potential stock holders outside of their local market.  ADR’s are easy for US citizens to purchase because they trade just like US stocks and do not cost extra to purchase, and don’t have any “direct” currency risk because it is always quoted in US dollars (although there is implied currency risk since as the host country’s currency moves against the US dollar, this affects the price).

However, not all firms find it worthwhile to issue ADR’s to reach US stockholders, and many do not want to pay the additional costs to comply with US accounting and regulatory rules.  Thus you cannot purchase many popular stocks, such as BMW, via an ADR that is traded on a major US exchange (NYSE or NASDAQ), because it does not exist.

Another alternative is to buy an “unsponsored” ADR, meaning one that trades on the over-the-counter (or OTC) market, which is also called the “pink sheets”.  OTC stocks can be seen because they have different ticker symbols, usually ending with a “Y”.  The OTC markets have traditionally had a bad reputation because they don’t have the same listing requirements as NASDAQ or NYSE and have been areas of “penny stock scams” and the like for years.

There is nothing inherently wrong with being in the OTC markets, however, and recently one of our ADR’s, Siemens, de-listed from the “sponsored” markets and became an OTC or pink sheet stock.  It received a new ticker symbol SIEGY.  The old stock symbol ticker was SI.  The volume transitioned over seamlessly.  This article, from the Siemens company website, describes the delisting process rationale and how it impacts US stockholders.

1) What is the impact of the delisting of Siemens ADRs from the New York Stock
Exchange (NYSE) on ADR holders?
Until May 15, 2014, Siemens American Depositary Receipt (ADR) facility was a so called
“sponsored Level II ADR program” which meant that Siemens ADRs were traded on the NYSE and
that Siemens was subject to periodic reporting obligations with the U.S. Securities and Exchange
Commission (SEC). Since May 16, 2014, i.e., after delisting from the NYSE, Siemens ADRs are no
longer traded on the NYSE or any other stock exchange in the U.S. This does not mean, however,
that Siemens ADR facility was closed down. To the contrary: Siemens converted its “sponsored
Level II ADR program” into a so-called “sponsored Level I ADR program”. This means that investors
are still able to purchase, sell and trade ADRs, although trading is no longer on-exchange, but solely
off-exchange (over-the-counter).
On May 16, 2014, Siemens filed a Form 15F to deregister its securities with the SEC. As a result,
Siemens reporting obligations were suspended with immediate effect (e.g., Siemens will no longer
be required to submit reports on Form 6-K or annual reports on Form 20-F to the SEC) Siemens
expects that its reporting obligations with the SEC will finally terminate in mid-August. Irrespective of
the delisting, high standards of transparency in financial reporting and first class corporate
governance will continue to be top priority at Siemens.
2) What was the reason for delisting from the New York Stock Exchange (NYSE)?
The goal of the delisting and planned deregistration was to address the change in the behavior of
our investors. The trading of Siemens shares is nowadays conducted predominantly in Germany
and via electronic trading platforms or over-the-counter. Trading volume of Siemens shares in the
USA was low, amounting to significantly less than 5% of its global trading volume in the year 2013.
As a consequence processes of financial reporting are simplified and efficiency is improved.

Thus from Siemens’ perspective, it cost extra money to do US based accounting reports but there was only 5% of its trading volume in the US.  Since the German accounting rules are likely as useful to investors as the US accounting rules, there is little additional risk in a stock such as Siemens moving to the OTC market from the “sponsored” ADR market.

This doesn’t mean that OTC markets aren’t riskier or less regulated than Sponsored markets (like NYSE and NASDAQ) – they are and the instruments that trade there are generally riskier, as well.  In the case of Siemens, however, it likely makes little to no difference.

Depending on your brokerage firm, however, OTC stocks can cost more to buy than listed stocks.  You need to look at the fine print in your statement.  It may involve extra charges or a higher cost / trade.  I am not planning on buying “new” non-sponsored ADR’s as of now but I am interested in seeing how this ADR trades on the OTC markets and what sort of extra fees (if any) that I might encounter when selling it.

Another option is to buy directly in foreign markets.  For instance, my brokerage firm probably would allow me to buy BMW in Euros on the German exchange.  To do this my statement would become more complicated because I would have currency gains and losses and instruments quoted in multiple currencies, the US dollar and Euro (and then this would get more complicated as I added currencies of other countries, such as the British Pound, the Australian Dollar, etc…).  For now I am not doing this but I will watch it and as the costs get further reduced at some point this will be a likely option.

I always learn a great deal by going through brokerage statements and details and noticed the ticker symbol changing on Siemens and then investigating “why”.  I also learned a lot about currency withholding on foreign ADR’s.  I can also see the explicit fees that my brokerage accounting is assessing.  This information has made me a better and more informed investor and I hope to pass these insights on to the beneficiaries of these trust funds.


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