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Our Investigation into the FMA's commitment to "protect the interests of retail investors
Investigation into NZX's "Meridian Energy Independent Research Reports"
"Thank you for providing these additional comments which have been noted. We will not be responding further." - F.M.A.
As outlined in our October 2013 newsletter (Issue 496), we had concerns over (1) stockbrokers Initial Public Offering (IPO) reports being called "independent research" (which appears to breach the Code of Professional Conduct) and (2) NZX Ltd publishing five "Buy" reports to support an IPO in which it has a significant financial interest.
We shared these concerns with the Financial Market Authority (FMA). As our earlier report anticipated, the response reveals much about "how impartially the FMA applies the law and how seriously they take their regulatory responsibilities and commitments to protect the interests of retail investors" or whether they are "involved in a conspiracy and cover-up to protect vested interests of the Government, Stock Exchange, brokers and other interests in the Finance industry".
We wrote to the FMA expressing our concern that as brokers are paid by the vendor, "advice on an IPO can not be independent" and "looks to be a breach of Code Standard 3".
The FMA responded "The information provided with this IPO is of a type that is provided with every IPO. It is not AFAs [Authorised Financial Advisers] that are providing this information and therefore the Code of Professional Standards does not apply."
This statement would appear to suggest that the broker is simply reprinting information from the prospectus and that this is not its own research. The FMA's answer poses more questions than it answers:
We also expressed our concerns that
"NZX Ltd calling its pages and/or the research independent
The FMA's response to this was also revealing. They sent a link to a NZ Herald report, obviously an NZX press release, announcing the NZX research page as a result of "feedback the NZX received after the Mighty River Power float". The FMA has "no concerns regarding this service" which is a "new initiative". They also stated that "the reports are from reputable NZ companies" and "we have no reason to believe there has been any bias in selecting reports".
We don't know where the NZX receives its feedback, but we do know from experience that they do not listen to investors, so it probably came from brokers requesting more marketing support for the next power float. The FMA (and everyone else) should not believe everything they read in the newspaper or on the internet.
The FMA's lack of concern about a new service does concern us. We believe the FMA also had "no concerns" about Ross Asset Management before investors reported difficulty getting money out, and the FMA then de-registered the company. The FMA (and investors) need to be little sceptical and suspicious.
Of the five "reputable NZ companies", one is not an AFA. It would be perfectly acceptable to publish their report on Meridian Energy in a newspaper, as journalism is "exempt", but NZX Ltd should have known better than to include this report on their website. The FMA will be talking to the innocent company involved, not the NZX, about this breach.
We asked the FMA if the NZX intended to provide this research service "for all IPOs in future, or just the ones where they have a major financial interest in the outcome?".
So what was the FMA's response to our further comments and questions? Just a simple "Thank you for providing these additional comments which have been noted.", so we prompted "Noted and you will get back to us? Or noted and you have no explanation?", to which the FMA stated "We will not be responding further.". Subsequent emails have gone unanswered.
Summary and Recommendation
Need we say anything more? We rest our case.
Now you decide who you can trust. You decide who is working to "protect the interests of retail investors". Or working to protect the interests of the NZX and brokers.
Stockmarket investment may not be a "level playing field" (although it is the best place to build investment wealth, if you know the rules). The first rule is to know which other players out there are on your side and which are playing for the opposition teams.
[Editor's Hint: Stockmarket investment is not a "team sport". You are on your own. Trust no one.]