What Is an ADR Fee and Why Do I Have to Pay It?
Learn about the ADR fee, a common charge associated with international investments. Understand its role and how it's applied to your holdings.
American Depositary Receipts (ADRs) provide a pathway for U.S. investors to own shares of foreign companies without the complexities of direct international trading. These financial instruments are certificates issued by a U.S. depositary bank, representing shares in a non-U.S. company. As investors engage with these global opportunities, they may encounter various charges, with the ADR fee being a common one.
What is an ADR Fee?
An American Depositary Receipt (ADR) is a certificate issued by a U.S. depositary bank that represents a specified number of shares in a foreign company. These certificates trade on U.S. stock exchanges, allowing domestic investors to access international equities in U.S. dollars. The underlying shares are held in custody by the depositary bank or its custodian in the foreign company’s home country.
An ADR fee, also known as a custody fee or depositary services fee, is a charge levied by the depositary bank. This fee compensates the bank for the various services it provides in managing the ADR program. It is distinct from typical brokerage commissions or trading fees that investors pay to execute a trade. This charge covers the costs associated with the administration and maintenance of the ADRs.
The Purpose Behind ADR Fees
ADR fees are charged to cover the operational expenses and services provided by the depositary banks. These banks undertake a range of administrative and custodial responsibilities that facilitate the trading of foreign securities in U.S. markets. Their services include holding the underlying non-U.S. shares in custody and managing the process of dividend payments.
Depositary banks are responsible for converting dividends received in foreign currencies into U.S. dollars before distributing them to ADR holders. They also handle record-keeping, ensuring accurate ownership details and transaction histories. These fees also support the depositary bank’s efforts in regulatory compliance and other administrative tasks necessary to maintain the ADR program.
How ADR Fees are Assessed and Collected
ADR fees are assessed in various ways, often ranging from $0.01 to $0.05 per share. This charge can be a fixed amount per share, a percentage of any dividend paid, or sometimes a flat annual fee. The specific amount and method of assessment are determined by the depositary bank.
Fees are charged annually, semi-annually, or at the time of dividend payments. Investors see these fees deducted directly from any dividends they receive. If an ADR does not pay a dividend, or if the fee exceeds the dividend amount, the charge may appear as a separate line item on the investor’s brokerage statement. The Depository Trust Company (DTC) collects these fees from brokerage firms, which then pass the charges on to individual investors.
Understanding ADR Fee Disclosures
Depositary banks and brokerage firms are required to disclose information about ADR fees. This transparency allows investors to identify and understand the costs associated with holding these foreign securities. A primary source for this information is the ADR prospectus, which provides detailed terms of the deposit agreement.
Investors can also find disclosures on the websites of the depositary banks and through the U.S. Securities and Exchange Commission’s (SEC) EDGAR database by searching for the ADR’s Form F-6 registration statement or the foreign company’s Form 20-F annual report. Additionally, brokerage account statements and trade confirmations list these fees, sometimes labeled as “ADR Pass-Thru Charge” or “ADR Custody Fee.” Reviewing these documents helps investors stay informed about the periodic charges applied to their ADR holdings.