American Depositary Receipts (ADRs) – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
📝 American Depositary Receipts (ADRs) – Series 7 Exam Guide
📍 Posted on https://finra-exam-mastery.com
American Depositary Receipts (ADRs) are a key concept tested on the Series 7 Exam, especially in the sections covering equity securities, international investing, and risks associated with foreign investments. Understanding ADRs is essential for any future registered representative advising clients on global exposure.
🌍 What Are ADRs?
American Depositary Receipts (ADRs) are negotiable U.S. certificates that represent ownership in a foreign company’s shares, but are traded in U.S. markets, in U.S. dollars.
- Issued by U.S. banks (usually a large custodian bank)
- Each ADR represents one or more shares (or a fraction) of a foreign stock
- Traded on U.S. exchanges (e.g., NYSE, NASDAQ) or OTC
💼 Why Investors Use ADRs
- Gain exposure to international companies without foreign currency conversions
- Easier to buy, sell, and settle than foreign stock directly
- Receive dividends in U.S. dollars
- Can provide portfolio diversification
🧠 Key Features to Know for the Exam
| Feature | ADR Explanation |
|---|---|
| Currency Risk | Dividends are in USD, but conversion risk still exists |
| Voting Rights | Sometimes granted, depending on the ADR structure |
| Sponsored vs. Unsponsored | Sponsored = company involved; Unsponsored = bank-created |
| Level I, II, III ADRs | Reflect registration and listing status (Level III = fully listed on exchanges) |
| Dividends | Paid in U.S. dollars, after bank converts them from foreign currency |
📉 Risks of ADRs
- Political risk (unstable foreign governments)
- Currency exchange risk
- Accounting and disclosure differences (foreign standards vs. GAAP)
- Liquidity risk (especially with unsponsored or OTC ADRs)
📝 Series 7 Exam Question Example
Question:
Which of the following statements is true about American Depositary Receipts (ADRs)?
A. They eliminate all foreign currency risk for U.S. investors
B. Dividends are paid in local foreign currency
C. They are used to facilitate U.S. trading of foreign stocks
D. They are issued directly by the foreign corporation
✅ Correct Answer: C
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✅ Full breakdowns of equity and international securities
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