By Mak Yuen Teen

I am dismayed, but not totally surprised, with the report in the Business Times today (March 23)  titled “SGX says no conflict of interest with expanded research unit”. SGX can say what it likes, but the market may perceive it differently.

I am not totally surprised with this latest development because this is in line with recent signs of SGX looking at increasing its profits by attracting more listings using dual class shares and reducing quarterly reporting requirements. As it is, there is already a perception issue as to whether the fact that SGX earns revenues from trading fees influences its decisions as to whether to suspend a stock from trading. One often hear, or read of, comments (often online in investor forums) as to why a particular stock which has had many issues has not been suspended from trading. Or if SGX mandates sustainability reporting and then aims to monetise sustainability indices, is there not a perception that business considerations may drive regulation?

It seems that for this latest development, SGX is once again using the argument that there is now a separate subsidiary responsible for regulation and enforcement. I had earlier written that I was concerned that the establishment of SGX Regco has given SGX an excuse to more aggressively pursue listings, by arguing that there is now an “independent” regulatory unit which will not be constrained in imposing or enforcing rules. Unfortunately, SGX Regco is still part of SGX. The sooner the regulatory role is removed totally from SGX the better – although structural independence in whatever form is no guarantee of substantive independence.

SGX is also relying on the “Chinese Wall” argument by saying it can “ringfence” the work of the research unit. This is the same argument used by many service providers with conflicts of interest and we have seen how “well” that has worked. “Chinese walls” are quite useless in dealing with perception issues. At the end of the day, the research unit head is fully aware that his salary is paid by SGX and determined by SGX management. SGX being a self-regulatory organisation needs to set and uphold higher standards for itself, not descend to the standards used by others.

While SGX has said that the research unit will not make buy or sell recommendations, the report will probably speak for itself. If a stock has a current price of $1 and the report has a target price of $3, is there a need to make a specific recommendation? If it doesn’t set a target price, it would be like an academic journal article with no conclusions. Where a report is positive about a stock – with or without a specific recommendation – would there be a perception that SGX would be embarrassed by regulatory action against the stock and would therefore be hesitant to take action, such as suspending a stock? If the report provides a favourable target price and it then tanks, how does SGX look?

Then there is the question as to whether the research reports will be just like most other research reports that only cover business and financial fundamentals, but not corporate governance. Perhaps the thinking is that the research reports will draw on existing corporate governance ratings and incorporate them. From my own many years of experience being involved in corporate governance ratings, I believe that most ratings are too superficial for investors to rely on for their investment decisions. They can at best be a starting point for deeper research into the corporate governance of a company. And there may be inadequate quality assurance or other objectives that influence the production of these ratings.

In summary, I really hope that SGX would stick to its knitting and focus on being a platform for helping good quality companies to raise capital in a cost-effective manner. Unfortunately, when an exchange is demutualised and listed, and there is a small potential pool of domestic companies which are good candidates for listing, this is what we will get. A race to the bottom and a constant search for new ways to make money.

But there is a deeper concern: how does SGX actually think through these issues, and who does it talk to, if at all? I shudder to think of what’s up SGX’s sleeve next.