Recent speculation that the Financial Supervisory Commission is devising measures to regulate the distribution of equity research reports by foreign brokerage houses demonstrates yet again that the financial regulator must confront the long-persisting problem of how to maintain market conditions in an orderly manner.
Foreign brokerage houses, which have for a long time invited concerns about a potential conflict of interest between their underwriting businesses and research arms, need to be part of the solution, too. Domestic investors are generally in favor of the research reports by foreign brokerages, and Taiwanese media like to publish those reports to increase viewership or readership rates. With such free publicity comes the responsibility to at least avoid misleading investors.
According to securities laws, brokerages are allowed to give advice to only their clients. They are required not to release research reports to the media to impact the local stock market.
The commission is reportedly in the final stage of deliberation about the measures, and is considering extending the regulation to the distribution of local brokerages’ equity studies as well.
The commission’s potential action certainly reflects market jitters over several reports in recent months, including the US-based Glaucus Research Group California LLC’s downbeat outlook on Asia Plastic Recycling Holding issued in April, Barclays Capital Securities’ strong “buy” recommendation on shares of semiconductor intellectual-property firm eMemory Technology in May, and an industry study released by Barclays last month, which offers a long-term pessimistic view toward Taiwan’s original design manufacturing business.
Conflicts of interest between the research and underwriting roles of brokerage houses exist in financial markets around the world and Taiwan is no exception. Investors do look for independent research firms that provide no conflicting investment and advisory services.
However, the commission’s planned action is more than a matter of maintaining market order or solving the problem of stock market speculation by banning brokerage houses from spreading research results and dispensing analysis services to the public via the media. It is likely to walk on the brink of disregarding and disrespecting analysts’ equity research and industry views.
Indeed, some have questioned whether the Glaucus and Barclays analysts’ actions were really that bad, as their reports were backed by hard facts or other resources. Meanwhile, the media has every right to use any possible means to get experts’ insights and to take the action it believes is necessary to inform the public. Whether the research reports are objective or if their forecasts are accurate, only investors can judge. Believe it or not, Macquarie Group earlier this month forecast the TAIEX would surge to 15,300 points in the next few years, saying Taiwan is entering a bull-run cycle. That is food for thought.
That some big investors or insiders have more information about potential investment gains or risks than others has long been one of the biggest problems in investing in the stock markets. Not everyone has access to foreign brokerages’ research reports, and the government’s plan to set restrictions on the distribution of equity research reports is likely to exacerbate the problem of “information asymmetry,” a phenomenon that causes failures in a free market and a move that may not safeguard the rights of small investors.
If the government wants to protect investors’ rights, it must draw a clear line between brokerages’ underwriting or advisory work and their research services. The commission also needs to enforce financial transparency from listed companies and full disclosure of their operations in a timely manner. Placing pressure on researchers and the media could force them to stop doing research on Taiwan, which would be a disservice to investors and local companies, and could hinder the Taiwanese market’s upgrading to a “developed market” in global investors’ perception.
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