Who Pays the Freight on ADRs? March 29, 1999March 25, 2012 “How are the banks that sponsor the ADRs paid for their work? I’m assuming that they don’t sponsor the ADRs out of the goodness of their hearts.” — Hank Gillette Not surprisingly (and quite justifiably) the bankers are being paid. ADRs — American Depositary Receipts — are the easy way for Americans to buy shares in foreign companies. Instead of going to Brazil to buy the phone company, you buy a security here that represents ownership of those foreign shares. (Sometimes one ADR equals one share; often, one ADR equals more shares.) J.P. Morgan or some similarly august and trustworthy American bank will be the custodian of the actual shares that underlie the ADRs. ADRs trading on the NYSE and in other liquid markets are generally sponsored by the foreign company themselves. They pay the bank’s custodial fees out of their pocket, figuring that it’s worth it to be able more easily to raise capital from U.S. investors. My friend Less Antman tells me that there are also unsponsored ADRs that trade over-the-counter and are highly illiquid, allowing the custodial bank to act as market maker and to earn its money by taking large spreads between the bid and ask prices. “Of course,” notes Less (and I agree), “ADRs, like all stocks, should be bought as long-term investments, diminishing the shock of this one-time spread. And it’s still usually cheaper than buying directly in the country of origin, due to the higher brokerage costs.”