Query system: What more can be done

Published September 09, 2014

First published in Business Times, September 9, 2014

To improve its query system’s effectiveness, SGX should further review the system and consider timely disclosure of all its queries


Mak Yuen Teen

ON Sept 4, 2014, The Business Times published a letter from Singapore Exchange, or SGX (“Market reaction to queries: Singapore’s experience is consistent with Hong Kong’s”), which raised some methodological issues about research on responses to price queries in Singapore and Hong Kong, undertaken by Ho Yew Kee, Eugene Kwek and me. This research was the subject of our commentary titled “Responses to queries: how market reacts” that was published in BT on Aug 22.

Our study used market reaction to responses to price queries to assess whether responses to queries have information content. In our study, responses that provide no new explanation, partial new explanation and detailed new explanation can all have information content. If there has been an unusual price run-up or run-down, a response that provides no new explanation should cause the market to re-assess the share price of the issuer, if the market believes that there is really no explanation for the price run-up or run-down.

In its letter, SGX said: “The way prices move following a response from an issuer depends on many factors, including importantly the specific content of that response. For example, in a situation where there is a run-up in price before the query and the issuer’s response contains useful clarification that dampens any positive outlook for the issuer, the expected market reaction would be for the price to move in the opposite direction, instead of a continuation of the upward price trend as assumed in the study.”

I would like to point out that our study actually treated both reversal and continuation of price movements as evidence of responses having useful information content. This means that if there is a reversal of stock price following a response of partial or detailed new explanation, we still considered that as evidence of a response having information content.

A key reason why we concluded that the query system seems to be less effective in Singapore compared to Hong Kong is that there were more scenarios in Hong Kong where responses resulted in a market reaction. For example, where there had been a price run-down, responses from issuers in Hong Kong that provided no new explanation, partial new explanation and detailed new explanation all elicited a market reaction, while responses from Singapore issuers that provided no new explanation and partial new explanation did not elicit any market reaction.

While both markets have a large proportion of responses that provided no new explanation, three-quarters in Singapore did so, compared to two-thirds in Hong Kong. This is not to say that the query system in Hong Kong cannot be improved. We should not merely strive to ensure that our query system is no worse than Hong Kong’s, but we should strive to make our system as useful and robust as it can be.

Although our study cannot determine why the query system may be more effective in Hong Kong, we believe that this may have something to do with the stricter enforcement regime there, through an independent Listing (Disciplinary Review) Committee dealing with disciplinary matters. In our commentary, we also mentioned another study we have undertaken on the impact of administrative actions in the form of public reprimands in Hong Kong. In that study, we found that Hong Kong has a long tradition of using public reprimands and more than one-third of these reprimands were for failure to make timely, accurate or complete disclosure of material price-sensitive information.

Recent cases

The real crux of the issue is that there is much that can be done to improve the query system in Singapore. Two recent cases illustrate the deficiencies of the query system here. The first is the Xpress Holdings case, which was the subject of an earlier letter from me (“Closer scrutiny of Xpress may be warranted”, BT, July 25) and a commentary by R Sivanathy (“Tardy disclosures by Xpress Holdings”, BT, Aug 14). In this case, there are clear questions regarding the adequacy of Xpress’ response to an SGX query on July 1 regarding unusual trading in its shares. In its response, the company had said that it had no explanation, but about three weeks later, it issued announcements about several creditor claims against the company and its subsidiary, a proposed share placement and the appointment of a financial consultant to help deal with creditors. In the midst of all these, the executive chairman also sold off a substantial number of his shares.

After my letter, SGX issued a further query to Xpress which resulted in more information being disclosed, but the response only raised further questions as to whether the unusual trading volume which was the subject of the SGX query on July 1 may have involved trading by those who were privy to the impending lawsuits and other events.

The case raises a number of questions about the query system such as: Does SGX have a formal process for monitoring events post-query such that in cases such as in the Xpress case, it will follow up with additional queries if necessary? To be fair, SGX has on some occasions followed up with further queries when it was not satisfied with the issuer’s response, particularly in relation to queries relating to announcements and annual report disclosures. However, in the case of queries relating to unusual trading activity, I have not observed similar follow-up queries when significant events are later disclosed by the issuer not long after a response by an issuer. That was what prompted me to write to BT suggesting that the regulators revisit Xpress’ earlier response in the light of subsequent events.

More importantly, do SGX and other regulators follow up with enquiries and investigations in such cases to determine whether the listing rules and the Securities and Futures Act provisions such as those relating to continuous disclosure of material price-sensitive information and insider trading have been complied with? Can there be better transparency by regulators regarding whether investigations are being conducted or actions pursued, while still ensuring that investigations are not being prejudiced by premature disclosure of investigations?

Other deficiencies with the SGX query system can be seen in another recent case. On Sept 2, Telechoice International issued a response to a disclosure query by SGX. In its response, it disclosed that it had failed to comply with the SGX listing rules requiring immediate announcement of grants of options and shares. The company had failed to promptly announce 14 grants of restricted and performance shares dating back to June 1, 2008. The company also disclosed an “inadvertent clerical error” on the date of two of these grants in its annual report.

Delayed response

What surprised me was that in its response, Telechoice disclosed that it was queried on May 27 – that is, more than three months ago. In the interest of full disclosure, I should mention that I wrote to SGX asking why the company took so long to respond. The company was issued a further query, and it explained that the delay was because it had engaged its auditors to ensure that there was no “backdating” of these grants.

Having looked at the historical share prices of the company around the dates of the share grants, and given that the company had issued most of those grants on the same date each year rather than shifting the grant dates from year to year as some issuers do, I do believe that there was no attempt to manipulate the timing of the grants. However, more than three months seems an awfully long time to respond to a query about details of share grants if the company had kept proper records and documentation.

This case raises other issues about the query system. While issuers are expected to promptly respond to price and volume queries and to disclosure queries relating to market rumours or news, is more than three months acceptable for responding to disclosure queries such as those issued to Telechoice?

In the case of unusual trading activity, SGX announces its queries in a subcategory called “Query Regarding Trading Activity”, under the main category of “Trading Status”, under “Company Announcements” – not the easiest to find, I might add. The announcements are also inconsistent because in some cases, the issuer’s response is disclosed here, while in other cases, it is not.

In the case of disclosure queries, it does not appear that SGX announces them when they are issued. In such cases, the market learns about a query only when the issuer responds to it, such as in the case of Telechoice when it responded to the disclosure query. In many cases, the response does not disclose when the query was issued by the SGX to the issuer

Why does SGX not disclose to the market as soon as it issues a query, whether it is a query about unusual trading activity or disclosure? Regulatory actions such as queries can themselves contain information relevant to the investors and it is best that the market is made aware of any query immediately. In reviewing the corporate governance of issuers, I would consider repeated queries to be a red flag, and the timeliness of responses to queries would affect the usefulness of the information provided in the responses.

I would suggest that SGX further review its query system and consider timely disclosure of all its queries to improve the effectiveness of the query system.

The writer is an associate professor of accounting at the NUS Business School, where he teaches corporate governance and ethics.

He is currently involved in research on surveillance and enforcement actions by stock exchanges and other regulators, unusual share trading preceding significant corporate announcements, and a range of other corporate governance-related topics



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