October 17, 2003
Mr. Jonathan G. Katz
Re: Additional Form F-6 Eligibility Requirement Related to the Listed Status of Deposited Securities Underlying American Depositary Receipts
Dear Mr. Katz:
This letter is in response to the request by the Securities and Exchange Commission (the "Commission") for comment in connection with the proposed amendment to Form F-6 under the Securities Act of 1933 (the "Securities Act"). We are writing in our capacity as outside counsel since 1984 for one of the depositary banks engaged in the business of establishing and administering ADR facilities.
We disagree with the Commission's proposal to amend Form F-6 to abolish the right to use Form F-6 to register unsponsored American depositary receipts ("ADRs") if the foreign issuer lists the deposited securities on a registered national securities exchange or automated inter-dealer quotation system.
Unsponsored ADRs are instruments uniquely investor driven, in that they exist - if at all - only because they are created by deposits of ordinary shares by, and corresponding issuance of ADRs to, investors. Under these circumstances, where the instrument literally owes its existence to investors, we think that the burden of the Commission acting under the Securities Act in seeking to abolish the instrument should be to show that it is harmful either to investors or to the securities markets in which they seek to trade the instrument. The Release fails to carry such a burden.
The Release sets forth three "concerns" that the Commission would have if unsponsored ADRs traded over-the-counter representing listed ordinary shares. These concerns relate to (1) investor confusion between the ADRs and the underlying ordinary shares, (2) investor "disadvantage" arising from the lower level of voting rights and shareholder communications of unsponsored ADRs versus ordinary shares, and (3) invidious discrimination against foreign issuers over U.S. issuers relating to such issuers' control of the form in which their securities trade in the U.S. markets. We note that these concerns relate to effects which are hypothetical, not actual, since there are presently no unsponsored ADRs (that we are aware of) that trade simultaneously with listed ordinary shares in the U.S.
1. Investor Confusion. We do not understand the Release to be expressing concerns as to any confusion relating to unsponsored ADRs themselves. Unsponsored ADRs are probably older than the Securities Act itself and thus presumably well known to investors. They are a very simple instrument to understand, particularly in this era of acronym investment products such as ABSs (asset backed securities), MBSs (mortgage-backed securities), CDOs (collateralized debt obligations), UITs (unit investment trusts) and CMOs (collateralized mortgage obligations) - to name just a few - competing for investor understanding.
Rather, we understand that that Commission is predicting that ordinary shares trading on an exchange might be confused with unsponsored ADRs representing such shares trading in the pink sheets. As previously discussed with the staff of the Office of International Corporate Finance, we believe the concerns expressed in the Release as to investor confusion are unfounded for the following reasons.
(a) Different Code. The code assigned to ordinary shares of an issuer domiciled outside the U.S. and Canada is a CINS (CUSIP International Number System) number. The unsponsored ADR, being deemed a security domiciled in the U.S., would be assigned a CUSIP number. When an unsponsored ADR trades side-by-side with a listed ordinary share, the securities would be coded differently, thus at least preventing electronic confusion at The Depository Trust Company or other electronic clearing and settlement systems between the two securities.
(b) Different Trading Symbol. The NASD assigns trading symbols to securities trading in the pink sheets. Such symbols consist of five letters ending in "Y" - the "Y" designating the security as an ADR. The fact that the ADR and the ordinary share have different trading symbols should ameliorate investor confusion as between the two securities.
(c) ADR Ratio. The unsponsored ADR can be constructed so that it represents a fraction or a multiple of one ordinary share, thus ensuring that the price of the ADR would substantially differ from that of the listed ordinary shares. This would also tend to reduce investor confusion.
If it is deemed necessary for there to be an amendment to Form F-6 at all, Form F-6 could be amended to require that there be a fractional or multiple ratio described above in cases of unsponsored ADRs trading side-by-side with listed ordinary shares. The systems in place would automatically provide different CUSIP/CINS numbers and different trading symbols. We believe the cumulative effect of these differences would virtually ensure that investors would not confuse a listed ordinary share with an unlisted unsponsored ADR representing that share.
Finally, it is interesting to note that compelling evidence exists in the U.S. market at the present time indicating that investors are in fact not at all confused between trading ADRs versus the ordinary shares they represent. As stated in the Release, the vast majority of foreign issuers - when listing their ordinary shares in the U.S. - do so by listing the sponsored ADR representing such shares. Such listed ADRs, however, are invariably shown in ticker searches (see, eg, Yahoo Finance) as trading side-by-side with their corresponding ordinary shares in the pink sheets (over the counter), albeit with very sporatic trade dates and no up to date pricing. This is the exact mirror image of the situation that would be expected to develop for listed foreign ordinary shares trading side-by-side with corresponding unsponsored ADRs. Since no confusion (that we are aware of) arises out of the current picture seen by investors in the case of listed ADRs, it is reasonable to expect that there would be no confusion as to the reverse situation as well.
2. Investor Rights. It is certainly true that typical unsponsored ADR programs do not generally pass through to ADR holders voting rights and shareholder communications. As stated in the Release, "unsponsored ADR holders who neither receive shareholder communications nor enjoy voting rights are unable to participate in corporate actions or make fully informed investment decisions on equal footing with holders of ordinary shares." The Release then concludes that the proposed amendment -which bans unsponsored ADRs representing listed ordinary shares - should benefit U.S. investors "by ensuring that U.S. investors in equity securities of the same foreign issuer enjoy a similar level of shareholder rights."
The conclusion is, of course, a classic non sequitur. If investors considered it necessary to obtain such rights, they would of course invest in the listed ordinary share and not the unsponsored ADR. If they did not, they might choose to invest in the unsponsored ADR. It would be their choice.
The concerns expressed in the Release as to investor rights seem to assume that investors would be confused as to the difference between the terms of unsponsored ADRs and ordinary shares. Given the lack of any evidence of such confusion, we suggest that such concerns are at best premature.
We also point out that U.S. investors may rationally prefer not to participate in corporate governance (and many U.S. investors in fact prefer not to), and that Exchange Act reporting foreign issuers of course are required to make available to the public all material shareholder communications through the EDGAR system.
3. Discrimination Against Foreign Issuers. The Release expresses the concern that, "permitting a depositary to establish unsponsored ADRs without issuer participation, may disadvantage foreign issuers as compared to domestic companies. The Commission is of the view that a foreign company seeking full access to U.S. capital markets by listing ... should be able to retain a degree of control over the form in which its securities are traded comparable to that of a domestic issuer."
The Release cites no "disadvantange" incurred by a foreign issuer in such circumstances other than the sheer fact that the foreign issuer is not a party to (and therefore does not control) the unsponsored ADR facility and, of course, ETFs, UITs, etc. are just some of the illustrations of the fact that no issuer (foreign or U.S.) can control what happens in the marketplace for its securities once issued. After all, unsponsored ADRs cost the issuer nothing. The Release expresses concern as to the "detrimental segmentation" and "potential imbalance" in the U.S. market for the foreign issuer's ordinary shares, but we do not believe that any actual harm to the foreign issuer is involved. It is not clear how the reverse situation which now obtains - where the ADR is listed and the ordinary share trades in the pink sheets - would not by now have at least given rise to warnings of such harm.
The Release concedes that "direct listing" is more costly to foreign issuers than listing sponsored ADRs. It then suggests that given the higher cost, the issuer should be permitted to retain the benefit it correspondingly receives. Yet there is no such benefit described, except a reference to corporate governance without explaining the nature of the benefit to the issuer.
The primary focus of the Securities Act is full disclosure and the protection of investors. It seems to us that, as praise worthy as the Commission's concerns for foreign issuers undoubtedly are, where as here the Commission proposes in effect to outlaw a venerable U.S. instrument for the trading of foreign securities, its burden under the statute is to show disadvantages to U.S. investors rather than foreign issuers. The Commission should not deprive investors in the U.S. market of a choice of the form of instrument through which they seek to invest merely to please foreign issuers.
In summation we believe that the amendment to Form F-6 proposed in the Release is unnecessary. If any amendment is made, it should only require that in the case of unsponsored ADRs representing listed ordinary shares, the ADR to ordinary share ratio must be a fraction or a multiple of such shares.
We have one other suggestion. Forms F-6 registering unsponsored ADRs are invariably filed under Rule 466 under the Securities Act, and thus bypass the normal review process at the Office of International Corporate Finance. If the Commission remains concerned about how unsponsored ADRs representing listed ordinary shares are structured in particular cases, it might consider - instead of abolishing such ADRs - excluding Forms F-6 registering such ADRs from the provisions of Rule 466.
Thank you for affording us the opportunity to comment on this matter. If you have any questions concerning our comments, or wish to discuss them, please do not hesitate to contact the undersigned at (212) 238-3010.