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Bourse purge picked before SEC probe

By Peter V O'Brien

Friday 2nd May 2003

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Worldwide sharemarket confidence got a blow and a boost in the past week, with the former outweighing the latter.

The blow came from weak US economic information and corporate profitability and bad news from other markets, including Japan, where electronics group Sony Corporation produced a profit for the year ended March 35.8% below an earlier forecast, although well above the previous year.

US regulatory action provided the boost, admittedly intangible, when investment firms agreed to pay $US1.4 billion for analysts' research reports allegedly being tailormade to the promotions of the firms' investment banking sections.

That should do something to restore tattered confidence in the US securities industry and corporate governance, despite the action coming after the event.

The level of financial punishment, which apparently covered 10 firms and institutions, should awaken any New Zealanders unaware of the size of the US securities industry to its magnitude. It is unlikely any firm will go broke, another instance of their size and earnings. The fallout to reputations and lower income could be substantial.

There were the usual ritual sackings before imposition of the latest penalties, including grossly overpaid analysts whose talents (if any) were turned to effective prostitution.

The New Zealand Securities Commission said at the end of last year it would investigate potential conflicts between the investment banking and research of local firms.

While the commission was a Johnny-(or Janey)-come-lately in this area, (NBR, April 24), its announcement got a predictable response. Up jumped the Stock Exchange and people from its member firms.

They said New Zealand was different from the US, "it could not happen here" and there were insufficient transactions to create a conflict.

All of which was self-interested nonsense.

Broking firms and investment banks have got away with the financial equivalent of murder here for years. It was no surprise that institutional and private investor reactions to the commission's announcement differed from brokers and investment banks.

People want a clear indication of potential conflicts between research, float promotion, relationships with companies already listed, analysts' qualifications and positions in their firms' hierarchies and any other firm interests.

It is no good dismissing US experience as inapplicable to New Zealand. Anyone who has been around markets for more than a few whiz-kid years knows we adopt techniques from the US and other countries shortly after their development.

The time span decreased rapidly in recent years with global, 24-hour trading and instant communication.

Stock Exchange apologists may have worked themselves into a corner, or created a paradox, in their approach to regulation of listed companies and member firms.

They developed continuous disclosure rules but want Securities Act exemptions for organisations included in the proposed AX market.

The barricades went up against the suggestion members should be monitored, or regulated, for conflicts of interests.

It is normal for people with vested interests to resist change. It revealed another paradox about the exchange.

There are regular exhortations for the public to have faith in the organisation but resistance to outsiders' attempts to improve the basis for faith.

Cynics could conclude the exchange made no such exhortations in the long-lunch, big-bonus days but spin-doctored things after falls in incomes.

It has been in a muddle for more than 30 years, with changes forced either through reaction to public opinion, regulatory moves or threats of moves.

It is a fair bet the exchange will attempt to resolve promoter/research conflicts, despite current protestations, before the Securities Commission concludes its investigation.

The exchange could then have another proclamation of its virtue.

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