The biggest investment bank in the US, Merrill Lynch, recently reached a settlement to the tune of US$100 million with the New York State Attorney General over a conflict-of-interest case. Merrill Lynch agreed to reform its securities research division, while at the same time reviewing the payroll system for research analysts.
That Merrill Lynch would actively seek an out-of-court settlement isn't surprising because its reputation has hit bottom since the investigation was initiated and its market capitalization has shrunk by over US$10 billion. Had legal proceedings been initiated, the loss would have been even higher.
This incident not only high-lights the conflicts of interest between financial institutions and investors, but also shows that financial institutions must take responsibility for intentionally misleading investors.
The investigation of Merrill Lynch was linked to the crash of information technology (IT) shares. Toward the end of the 1990s, bullish Wall Street analysts created a wave of investment in IT shares. When the dotcom bubble burst in 2000, investors suffered severe losses. IT shares took a serious fall, but analysts still continued to go long for fear of affecting the underwriting inter-ests their institutions. As a result, many investors who had trusted the experts became victims of the crash. Many of them sued financial institutions, in particular Merrill Lynch and Goldman Sachs. The US government also initiated investigations against other financial institutions that had used the same methods.
Here in Taiwan, we see financial institutions making use of the same techniques and causing even more harm to investors. But very few investors have woken up to this and politicians and government agencies are completely indifferent to it. Foreign financial institutions frequently release so-called "research reports" in Taiwan's media to help them to recruit clients and attract funds.
Even more frequently, domestic financial institutions encourage speculation or promote funds under the guise of giving expert advice. Their efforts are aimed at earning enormous consignment underwriting benefits, sales commissions and fund management fees. Investors who suffer losses because they fail to investigate matters for themselves can only resign themselves to their misfortune. No government organ is willing to help members of the public seek justice.
Conflicts of interest between the research and sales roles of financial institutions exist in financial markets around the world. But in Taiwan, not only does no one seem concerned about introducing laws to control this kind of behavior, but existing laws are not enforced.
The most obvious example lies in the management of securities and investment advisory companies. Article 39 of the Regulations on the Management of Investment Advisory Businesses 2000 (投顧事業管理規則) states, "Securities investment advisory businesses providing services of promoting and recommending foreign securities may not raise money for, distribute, or trade [those securities] domestically."
Some foreign fund companies, however, have established investment advisory services in Taiwan. They provide research reports about the funds sold by the companies and publicize these reports in the media. They also sign contracts with the banks commissioned to sell the funds and take a share of the handling fees collected. Investment advisory companies are effectively acting as marketing organizations, but I have never seen the Securities and Futures Commission take action against this illegal practice.
Whatever happened to the rights of investors?
The heart of the conflict of interest in the Merrill Lynch case lies in the fact that the marketing of financial products should be carried out entirely independently of related research and analysis services.
Taiwan should learn from this and completely de-link research and analysis services from the marketing work done by financial institutions. These institutions should be restricted from providing research and analysis services to the public while the revenues of investment advisory companies must be strictly controlled so that their is no relationship whatsoever between such revenues and the marketing efforts. It is particularly important, at a time when financial holding companies are springing up, to prevent them from providing conflicting investment and advisory services.
The results of the Merrill Lynch case may seem exotic and foreign to us in Taiwan because similar conflicts of interest are so widespread here that it barely raises eyebrows. This also high-lights the low priority given in Taiwan to the protection of the rights of investors. Moreover, given the lack of clarity regarding investor's rights, it is impossible to raise people's interest in investment. This will have a negative effect on Taiwan's economy, one which will not be quickly dissipated.
Brian Yu is general manager of MagniFinance LLC.
Translated by Perry Svensson and Ethan Harkness
US President Donald Trump last week told reporters that he had signed about 12 letters to US trading partners, which were set to be sent out yesterday, levying unilateral tariff rates of up to 70 percent from Aug. 1. However, Trump did not say which countries the letters would be sent to, nor did he discuss the specific tariff rates, reports said. The news of the tariff letters came as Washington and Hanoi reached a trade deal earlier last week to cut tariffs on Vietnamese exports to the US to 20 percent from 46 percent, making it the first Asian country
Life as we know it will probably not come to an end in Japan this weekend, but what if it does? That is the question consuming a disaster-prone country ahead of a widely spread prediction of disaster that one comic book suggests would occur tomorrow. The Future I Saw, a manga by Ryo Tatsuki about her purported ability to see the future in dreams, was first published in 1999. It would have faded into obscurity, but for the mention of a tsunami and the cover that read “Major disaster in March 2011.” Years later, when the most powerful earthquake ever
Chinese intimidation of Taiwan has entered a chilling new phase: bolder, more multifaceted and unconstrained by diplomatic norms. For years, Taiwan has weathered economic coercion, military threats, diplomatic isolation, political interference, espionage and disinformation, but the direct targeting of elected leaders abroad signals an alarming escalation in Beijing’s campaign of hostility. Czech military intelligence recently uncovered a plot that reads like fiction, but is all too real. Chinese diplomats and civil secret service in Prague had planned to ram the motorcade of then-vice president-elect Hsiao Bi-khim (蕭美琴) and physically assault her during her visit to the Czech Republic in March last
As things heated up in the Middle East in early June, some in the Pentagon resisted American involvement in the Israel-Iran war because it would divert American attention and resources from the real challenge: China. This was exactly wrong. Rather, bombing Iran was the best thing that could have happened for America’s Asia policy. When it came to dealing with the Iranian nuclear program, “all options are on the table” had become an American mantra over the past two decades. But the more often US administration officials insisted that military force was in the cards, the less anyone believed it. After
RSS