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(Reuters) - The U.S. Securities and Exchange Commission is investigating whether big banks have been mishandling securities in the American Depositary Receipt (ADR) market, the Wall Street Journal reported on Monday.
The SEC has sent subpoenas to four banks over the issue - Bank of New York Mellon Corp (BK.N), Citigroup Inc (C.N), Deutsche Bank AG (DBKGn.DE) (DB.N) and JPMorgan Chase & Co (JPM.N), the Journal reported, citing people close to the matter. (on.wsj.com/2eFTBJ4)
The probe, which is looking at whether the banks have broken controls designed to prevent market abuse and tax fraud, will not necessarily result in enforcement action, the report said.
A major focus of the SEC inquiry is the "pre-release" of ADRs, where banks issue depositary receipts to investors without first having the underlying shares in their custody, the Journal reported.
That means the shares could be sold short without actually having them - a practice known as "naked short selling", which is illegal.
ADRs represent shares of foreign companies that are held in custody by U.S. banks. Trading in ADRs rather than the underlying shares reduces administration and trading costs, both for companies and for investors.
Deutsche Bank and Citigroup declined to comment on the report, while the other two banks did not immediately respond to requests for comment.
Reporting by Nikhil Subba in Bengaluru; Editing by Sai Sachin Ravikumar