ADR Practice Questions for the SIE

Answer: The foreign issuer participates in establishing the program with a depositary bank, and the ADR is eligible to list on the NYSE or Nasdaq

A sponsored ADR is created with the foreign issuer's cooperation through a formal agreement with a U.S. depositary bank — that issuer involvement is what makes the ADR eligible to list on the NYSE or Nasdaq. Unsponsored ADRs, set up by a bank without the issuer's participation, generally trade only over the counter (option B has it backwards). Option C is the most heavily tested ADR trap: although dividends are converted and paid to holders in U.S. dollars, they are declared in the foreign currency, so a weakening foreign currency shrinks the dollar payout — the investor keeps the currency risk. Option D fails because ADR holders typically do not receive preemptive rights on new share issues. ADRs are receipts for foreign shares held by a custodian, designed to make it easy for U.S. investors to own foreign companies in dollar-denominated form.

The Trap: Reversing the sponsored/unsponsored listing distinction; believing dollar-paid dividends remove currency risk

• Because dividends are converted into and paid in U.S. dollars, holders are insulated from currency risk: The classic ADR misconception: "paid in dollars, so no currency risk." Dividends are declared in the foreign currency and converted; the investor still bears the exchange-rate risk in both dividends and share value.
• Holders receive the same preemptive rights as shareholders in the issuer's home market: Misconception about ADR ownership rights. ADR holders typically do not receive preemptive rights; the depositary generally sells any rights and distributes the cash.
• The ADR may trade only in the over-the-counter market: Inversion of the sponsored/unsponsored distinction — it is UNSPONSORED ADRs, created without issuer involvement, that are limited to OTC trading.

Verified against: SEC Investor Bulletin: American Depositary Receipts (Investor.gov) — sponsored vs. unsponsored ADR program structure and NYSE/Nasdaq listing eligibility

Answer: Smaller in dollar terms, because the yen dividend converts into fewer dollars after the depreciation

ADR dividends are declared by the foreign issuer in its home currency; the depositary bank then converts them and pays holders in U.S. dollars. The conversion step is exactly where currency risk lives: when the yen weakens against the dollar, the identical yen dividend converts into fewer dollars, so the ADR holder's payment shrinks — and the dollar value of the underlying shares comes under the same pressure. Options A and D express the most heavily tested ADR trap in different costumes: receiving payment in dollars does not mean the amount is fixed in dollars, and the depositary bank is a converter and custodian, not a currency insurer. Option C reverses the direction — a weakening foreign currency hurts the U.S. investor; it is a STRENGTHENING foreign currency that increases the dollar value of foreign-source payments.

The Trap: Believing dollar-denominated payment removes currency risk, or reversing which direction of FX movement hurts the holder

• Unchanged, because the depositary bank absorbs currency fluctuations for ADR holders: Misconception about the custodian's role. The depositary bank converts and passes through payments; it does not insure or hedge holders against exchange-rate moves.
• Unchanged, because ADR dividends are fixed in U.S. dollars when the program is created: The core ADR misconception — "paid in dollars, so fixed in dollars." The dividend is DECLARED in yen and merely converted to dollars at the current exchange rate; nothing about it is fixed in dollars.
• Larger in dollar terms, because a weaker yen increases the amount received on conversion: Direction inversion. A WEAKER foreign currency hurts the U.S. holder: each yen is worth fewer dollars, so the converted payment falls, not rises.

Verified against: SEC Investor Bulletin: American Depositary Receipts (Investor.gov) — foreign-currency dividend conversion risk borne by ADR holders

Answer: The NYSE-listed ADR is sponsored — created with the foreign issuer's cooperation — which allows it to meet exchange listing requirements; unsponsored ADRs trade only OTC

The sponsored/unsponsored distinction determines where an ADR can trade. A sponsored ADR is established jointly by the foreign issuer and a U.S. depositary bank; because the issuer participates and satisfies U.S. reporting standards, the ADR can meet NYSE or Nasdaq listing requirements. An unsponsored ADR is created by a depositary bank on its own, without the issuer's involvement, and trades only over-the-counter. Option A states the relationship backward. Option C misstates dividend mechanics — an ADR's dividends are declared in the foreign currency but converted and paid to the holder in U.S. dollars, for listed and OTC ADRs alike. Option D repeats the most common ADR myth: receiving dollars does not remove currency risk, because a weakening foreign currency still shrinks the dollar value of both dividends and the underlying shares.

The Trap: Sponsored vs. unsponsored ADR reversal; USD payment mistaken for absence of currency risk

• The OTC-traded ADR pays its dividends in the foreign currency, which disqualifies it from exchange listing: Misconception: ADR dividend mechanics — ADR dividends are declared in the foreign currency but PAID to holders in U.S. dollars regardless of where the ADR trades; dividend currency is not what separates listed from OTC ADRs.
• The NYSE-listed ADR has eliminated currency risk, which is a listing requirement: Misconception: 'trades in USD on a U.S. exchange = no currency risk' — every ADR holder bears currency risk because the underlying dividends and share values originate in a foreign currency; no listing standard removes it.
• The OTC-traded ADR is the sponsored one, because its issuer chose to keep it off the exchange: Misconception: sponsored/unsponsored reversal — it is the SPONSORED ADR (created with the issuer's cooperation) that can qualify for exchange listing; unsponsored ADRs, created by depositary banks without issuer involvement, are limited to OTC trading.

Verified against: dividends paid in USD but currency risk remains); taxonomy 2.1.1

Answer: The investor typically receives no preemptive rights; where the rights can be sold, the depositary bank generally sells them and distributes the cash proceeds to ADR holders

One of the standard trade-offs of ADR ownership is the general absence of preemptive rights: when the foreign issuer conducts a rights offering at home, the ADR holder typically cannot subscribe. The value is usually not forfeited, however — where the rights are salable, the depositary bank generally sells them and remits the cash proceeds to ADR holders. Option A overstates what an ADR conveys; holders receive dividends (in U.S. dollars) and economic exposure, but typically not preemptive rights. Option B turns a right into an obligation — no one exercises rights for an investor's account without instruction. Option D swings to the opposite extreme: an ADR does represent beneficial ownership of the deposited foreign shares, so home-market dilution is very much the ADR holder's concern. Remember the ADR profile as a package: U.S.-dollar trading and dividends, retained currency risk, and typically no preemptive rights.

The Trap: Believing ADR holders receive full home-market shareholder rights (or, oppositely, no ownership interest at all)

• The investor may exercise the rights in the same manner as shareholders in Norway, because ADR holders receive all shareholder entitlements: Misconception: assuming ADR holders enjoy rights identical to home-market shareholders — ADR holders typically do NOT receive preemptive rights, one of the standard trade-offs of holding the depositary receipt rather than the ordinary shares.
• The offering has no effect on the value of the ADRs, because ADR holders own no interest in the underlying shares: Misconception: 'an ADR is just a receipt, not ownership' — an ADR represents beneficial ownership of foreign shares held by a custodian, so a dilutive offering in the home market does affect the value of what the ADR holder owns.
• The depositary bank must exercise the rights on the investor's behalf and charge the subscription price to the investor: Misconception: converting an option into an obligation — rights are never automatically exercised for the holder's account; no depositary may commit an investor's money to a subscription without instruction.

Verified against: receipt for foreign shares held by custodian bank); taxonomy 2.1.1

Answer: They generally trade only in the over-the-counter market

An ADR (American Depositary Receipt) is a negotiable receipt for foreign shares held by a custodian, allowing U.S. investors to trade a foreign stock in U.S. dollars. The sponsored/unsponsored split turns on issuer involvement: a sponsored ADR is established with the foreign company's cooperation and can meet the standards to list on the NYSE or Nasdaq; an unsponsored ADR is created by a depositary bank on its own, without the issuer, and therefore generally trades only over the counter. Choices A and C reverse the two categories. Choice D reflects a broader ADR trap: ADR holders typically do not receive preemptive rights, and voting privileges are limited. Knowing which type can be exchange-listed is the fact test writers reach for here.

The Trap: Reversing sponsored vs. unsponsored ADR trading venues (exchange-listed vs. OTC only)

• They are created with the foreign issuer's direct participation and financial support: Sponsored/unsponsored inversion: issuer participation is the defining feature of a SPONSORED ADR; unsponsored ADRs are created by a depositary bank without the issuer's involvement.
• They entitle holders to preemptive rights in the issuer's future stock offerings: ADR-privileges misconception: ADR holders — sponsored or unsponsored — typically do NOT receive preemptive rights.
• They may be listed on the NYSE or Nasdaq just like a domestic common stock: Exchange-listing misconception: only sponsored ADRs, where the issuer participates and meets listing standards, can list on the NYSE or Nasdaq.

Verified against: SIE Content Outline 2.1 Equity Securities

Answer: Fewer U.S. dollars than if the yen had held its value, because the yen-denominated dividend converts into less USD

ADR dividends are declared by the foreign issuer in its home currency; the depositary bank then converts them and pays ADR holders in U.S. dollars. Because that conversion happens at the prevailing exchange rate, the U.S. investor fully bears currency risk: if the yen weakens against the dollar, the same yen dividend converts into fewer dollars — and the dollar value of the underlying shares (and therefore the ADR) also tends to fall. Choice B is the most-tested ADR misconception — payment in USD is a mechanical convenience, not currency protection. Choice C reverses the direction of the effect; remember that a U.S. holder of a foreign asset is helped when the foreign currency strengthens and hurt when it weakens. Choice D gets the mechanics backward: the depositary converts and pays in dollars, which is precisely where the exchange-rate exposure shows up.

The Trap: Believing that because ADR dividends are paid in U.S. dollars, the investor has no currency risk

• More U.S. dollars, because a weaker yen increases the dollar value of yen-denominated payments: Direction inversion: a WEAKER foreign currency converts into FEWER dollars. It is a strengthening foreign currency that would benefit the U.S. holder.
• The dividend in yen, which the investor must exchange at a bank, because ADR dividends are paid in the foreign currency: Mechanics misconception: the depositary bank handles the conversion and pays ADR holders in U.S. dollars — but the conversion happening at the prevailing rate is exactly why currency risk remains.
• The dollar amount implied at declaration, because ADR dividends are fixed in U.S. dollars once declared: The classic ADR trap: 'dividends are paid in dollars, so there is no currency risk.' Payment in USD is a convenience of conversion — it does not lock in an exchange rate.

Verified against: SIE Content Outline 2.1/2.2

Answer: Do not receive the rights themselves; the depositary bank generally sells the rights and credits the cash proceeds to ADR holders

A key limitation of ADR ownership is that holders typically do not receive preemptive rights. When the foreign issuer conducts a rights offering, the depositary bank that holds the underlying ordinary shares generally sells the rights it receives and credits the cash proceeds to ADR holders — compensating them for the value of the rights without letting them subscribe. Choice A states the misconception directly: ADR investors do not stand in the same position as ordinary shareholders for new-issue privileges. Choice B overstates ADR voting power, which is limited and routed through the depositary. Choice C ignores dilution — new shares sold below market dilute anyone who cannot participate, which is exactly why the depositary monetizes the rights. Representatives fielding this question should describe the cash-in-lieu treatment, not promise subscription privileges the ADR does not carry.

The Trap: Assuming ADR holders receive preemptive rights like ordinary shareholders

• Receive subscription rights and may buy the new shares below market, exactly like ordinary shareholders: ADR-privileges misconception: ADR holders generally do NOT receive preemptive rights — that is one of the defining differences between holding an ADR and holding the ordinary shares directly.
• Must vote to approve the offering before it can affect the ADR program: Voting misconception: ADR holders' voting privileges are limited and exercised, if at all, through the depositary; they have no approval role in the issuer's capital raise.
• Are unaffected, because a rights offering has no economic impact on holders who do not participate: Dilution blindness: a rights offering issues new shares below market, which dilutes non-participants — that economic effect reaches ADR holders through the underlying shares.

Verified against: FINRA SIE Content Outline §2.1 Equity Securities (ADRs); SEC Investor Bulletin: American Depositary Receipts (investor.gov)

Answer: be smaller in dollar terms than it was worth when declared

ADR dividends are declared by the foreign issuer in its home currency and converted to U.S. dollars by the depositary bank before payment. The investor therefore bears currency risk: a fixed number of yen converts into fewer dollars after the yen weakens, so the dollar dividend shrinks. 'Paid in dollars, so no currency risk' is one of the most common ADR errors — the payment currency is dollars, but the payment's size is set by the exchange rate. The same logic applies to the ADR's price: a weakening foreign currency pressures the dollar value of the underlying shares. Remember the direction: foreign currency weakens versus the dollar, the U.S. ADR holder loses; foreign currency strengthens, the holder gains. The depositary is a conversion agent, not a currency insurer.

The Trap: Believing USD payment eliminates ADR currency risk

• be unaffected, because ADR dividends are paid to holders in U.S. dollars: The flagship ADR misconception: payment IN dollars does not remove currency risk — the dollar amount depends on the exchange rate at conversion.
• be larger in dollar terms, because a weaker yen makes Japanese payments more valuable: Direction inversion: a WEAKER foreign currency buys FEWER dollars; the holder gains only when the foreign currency strengthens against the dollar.
• remain fixed, because the depositary bank absorbs currency fluctuations for ADR holders: Depositary-as-insurer misconception: the depositary converts currency and passes the result through; it does not guarantee an exchange rate or absorb currency losses.

Verified against: SEC Investor Bulletin: American Depositary Receipts (sec.gov/investor/alerts/adr-bulletin.pdf)

Answer: A sponsored ADR program, established with the foreign issuer's cooperation

ADRs come in two flavors. Sponsored ADRs are created with the foreign issuer's active participation — the issuer works with a single depositary bank and commits to the disclosure and reporting obligations that U.S. exchange listing requires, so sponsored programs can list on the NYSE or Nasdaq. Unsponsored ADRs are set up by depositary banks on their own initiative, without the issuer's involvement, and generally trade only in the over-the-counter market. So sponsorship is exactly what separates exchange-listed ADRs from OTC-only ones, making both 'either' and 'neither' wrong. ADRs exist to make investing in foreign companies convenient for U.S. investors — trading in dollars during U.S. market hours — not the other way around.

The Trap: Not knowing sponsorship determines whether an ADR can be exchange-listed

• An unsponsored ADR program created by a depositary bank without the issuer's involvement: Sponsorship inversion: unsponsored ADRs, set up by banks without issuer participation, generally trade only over-the-counter.
• Either type — sponsorship does not affect where an ADR trades: Misses the key distinction: sponsorship is precisely what determines exchange eligibility versus OTC-only trading.
• Neither — ADRs cannot be listed on U.S. stock exchanges: OTC-only misconception: many large foreign companies' sponsored ADRs trade on the NYSE and Nasdaq every day.

Verified against: unsponsored OTC only)

Answer: It decreases in dollar terms, because the ADR holder bears the currency risk.

ADRs trade and pay in U.S. dollars, but those dollars come from converting a dividend that was declared in the foreign currency. When the yen weakens against the dollar, the same yen dividend converts into fewer dollars — the investor absorbs the loss. That is currency (exchange-rate) risk, and it also erodes the ADR's market price. Option A is the classic ADR trap: 'paid in dollars' describes how the money is delivered, not who bears conversion risk. Option B misunderstands the depositary bank's role — it converts at prevailing market rates as custodian and never guarantees a rate. Option C misapplies the sponsored/unsponsored distinction, which governs listing eligibility and issuer involvement, not FX exposure — every ADR holder bears currency risk. Source: SEC Investor Bulletin on American Depositary Receipts; FINRA SIE Content Outline, Section 2.

The Trap: "ADR dividends are paid in USD, so there is no currency risk" — false; the holder bears FX risk

• It is unaffected, because the depositary bank guarantees the conversion rate.: Misconception that the custodian/depositary bank absorbs the currency risk. The bank converts at prevailing market rates as a custodian; it never guarantees a rate — the investor bears the currency risk (spec §1.1).
• It decreases, but only if the ADR is unsponsored.: Misapplies the sponsored/unsponsored distinction, which affects listing eligibility (sponsored can list on NYSE/Nasdaq; unsponsored trade OTC) — not currency exposure. Every ADR holder bears FX risk (spec §1.1).
• It is unaffected, because ADR dividends are paid in U.S. dollars.: The #1 ADR trap (spec §1.2: 'dividends are paid in dollars, so no currency risk' — false). Payment in USD describes the mechanics of delivery, not who bears the conversion risk; the dividend was declared in yen and must be converted.

Verified against: SEC Investor Bulletin: ADRs