Since late last year, the government has made efforts to crack down on insider trading and other irregularities on the local stock market, following a slew of scandals involving rogue fund managers misusing government-owned funds. Some of the government’s efforts are valuable, but others are counterproductive.
For instance, the government previously instructed four state-owned funds — the Civil Servants Pension Fund, the Postal Savings Fund, the Labor Insurance Fund and the Labor Pension Fund — to stop trading “small-cap” stocks, meaning companies with a market capitalization of less than NT$1 billion (US$33.58 million), as well as stocks that have an “F” prefix on their ticker symbol (meaning companies that are registered overseas), because it believes such stocks are an easy target for fraudsters due to their smaller share capital. The government later dropped the bans after strong criticism from outsiders.
However, the Bureau of Labor Insurance still bans fund managers handling the Labor Pension Fund from trading “little-traded” stocks, which are defined as those whose average five-day trading volume over the past 20 trading sessions is less than 500,000 shares. Bureau of Labor Insurance president Luo Wu-hu (羅五湖) told the legislature’s Judiciary and Organic Laws and Statutes Committee on Wednesday that banning this type of trading aimed to avoid future liquidity risks, because the bureau fears little-traded stocks may not be easily unloaded.
While there is no such ban for the other three government funds, one has to ask whether this is the government’s answer to the longstanding complaint that the Labor Pension Fund Supervisory Committee is not up to the task of improving its risk management. One also has to wonder if such a ban will cause investors to negatively view little-traded stocks, such as restaurant chain operator Wowprime Corp and convenience store operator Taiwan FamilyMart Co, which have exhibited high profitability and efficient management, and therefore jeopardize those companies’ plans to raise funds on the open market.
The bureau has missed the point. People are concerned about risk management in government funds and question the low investment returns of these funds in the wake of the scandals. They demand that the government review the current system, in which the government entrusted outside fund houses to handle government funds, and seek effective ways to prevent irregularities. Yet, the bureau has only shown its intention to achieve this goal with the least possible effort — no buying at all, while falling short of telling the public its answer to help enhance the efficiency of its fund utilization.
Chinese Nationalist Party (KMT) caucus whip Lai Shyh-bao (賴士葆) last week ridiculed the bureau’s ban and branded it government intervention in the stock market. However, what matters is whether the government is doing things the right way.
Nevertheless, Lai has a suggestion for the government: applying a liability insurance scheme to outside fund houses and fund managers, which he says could minimize the risk of managers engaging in unethical practices while keeping the trading of little-traded stocks intact. His suggestion deserves attention from the government, but the problem is that no such insurance policy exists in Taiwan and there is no indication whether insurers are interested in providing it.
The most efficient way to deter wrongdoing by rogue fund managers is to impose heavy fines and penalties. However, both the financial and judicial authorities must realize that only prompt prosecution and a high conviction rate for financial crimes can really help investors gain confidence in the government and improve the health of capital markets. In the end, no matter what the government plans to do to improve the state funds’ risk management and investment returns, all people ask is that the government be worthy of their tax money.