Buyer beware and seller beware too

Business Times - 01 Jan 2009
By R SIVANITHY

AS A dismal 2008 rolls to a close, it's customary for us to draw up a wish-list for the new year. Last year, our list focused mainly on disclosure, particularly with regard to IPO prospectuses, short-selling positions and structured warrants. Some of these calls have been met - the Singapore Exchange (SGX) recently circulated a discussion paper on short-selling disclosure, and although IPOs were virtually non-existent in 2008, disclosures with particular reference to use of IPO funds have undoubtedly improved.

As for structured warrants, we are optimistic that it can only be a matter of time before SGX turns its attention to improving information dissemination in the segment. Having said that, which other areas could do with disclosure improvements in 2009? Before going into specifics, our preference is for a regulatory framework that not only stresses 'buyer beware' but should now also give equal emphasis to 'seller beware'.

For instance, the fiasco involving various failed structured products such as Lehman Brothers' Minibonds and DBS's High Notes exposed the very real possibility that those who sold these instruments did not adequately disclose the risks involved to hapless retail investors and yet appeared to have avoided accountability. Surely, these parties have to bear some responsibility for their lapses.

In addition, if an instrument is in essence one thing, the disclosure documents should describe that thing accurately and not imply something else - for example, the Lehman Minibond was an insurance policy to protect Lehman from defaults in debt instruments issued by five other banks but the prospectuses were cleverly worded to make it appear as if it was a bond issued by those five banks while Lehman's role was downplayed. This obfuscation started with the very name 'Minibond' which diverted attention from the product's true nature.

Stronger regulatory action would have been welcome but although it wasn't forthcoming, it isn't too late for the authorities to engineer a shift towards sterner penalties for parties that hide behind the fine print or legal disclaimers. In other words, if finance professionals don't call a spade a spade and try to conceal the true nature of a product they are selling, they should be penalised.

Similarly, we'd also like to see better disclosure on 'sell' side research reports, especially of how much risk there is to target prices, the extent of any investment banking relationships between the organisations in question for the past six months or one year and of the credentials and track record of the recommending analyst.

All of the above requires a stronger regulatory stance than what the market has become accustomed to since deregulation 10 years ago, which means that change has to start at the top.

For starters, SGX should scrap its controversial policy of privately censuring listed companies whose disclosures are less than satisfactory; and going public instead with all disciplinary actions. SGX says that it wants to have a range of measures at its disposal to tailor the punishment to fit the crime. Thus, if SGX judges a company's lapse to be minor and not having a material impact on the market and investors' decision-making, then a private censure is warranted, it argues.

But corporate governance advocate Mak Yuen Teen has already described the disadvantages of such a covert, private approach in a letter to this newspaper ('SGX should publicise all its enforcement actions', Nov 11). Suffice to say that the practice of judging what can be privately penalised and what might be publicly disclosed is in effect a step backwards to a merit-based regulatory system, the very system that the exchange sought to scrap when the market deregulated, giving way to a disclosure-based regime.

Perhaps the best suggestion we can make to the SGX and its overseeing body, the Monetary Authority of Singapore, is the same given to all listed firms, namely: a disclosure-based regime relies on full and public disclosure. If there're grey areas, then the correct approach should be 'when in doubt, disclose'.