Last week, the Australian Securities and investments Commission (ASIC) ramped up its enforcement action against a range of organisations involved in the Shield and First Guardian scandals.
Alongside advice firm MWL Financial Services and advice licensee InterPrac, the regulator also launched civil proceedings against SQM Research.
In a statement on LinkedIn on Monday, the firm’s managing director Louis Christopher acknowledged the proceedings and said he intends to defend SQM’s actions.
“For more than 17 years, SQM Research has built its reputation on providing objective, high-quality and transparent investment research to financial advisers, platforms and institutional clients across Australia,” Christopher said.
“We have always operated with the highest standards of integrity and in full compliance with all applicable laws and regulatory guidance.
“Our methodologies are robust, continually reviewed and enhanced, and our ratings have consistently been recognised for their objectivity and value to the market. Our track record before this terrible event, has been solid.
“SQM takes its regulatory obligations extremely seriously and has cooperated fully with ASIC throughout its investigation.”
He added that because the matter is before the court, SQM would not make any firther public comments.
“We remain fully focused on continuing to deliver high-quality, objective research to our clients and the broader financial services community and so it is very much business as usual,” Christopher said.
In its claim against SQM Research, ASIC alleged that the research house prepared reports containing “misleading representations and its processes fell short of expected standards” when it published “Favourable” ratings for Shield.
SQM rated the different classes of Shield as “3¾ stars, Favourable” in reports it published in October 2021, March 2022 and October 2022.
The corporate regulator has alleged that SQM Research:
- failed to obtain the information it needed to properly assess Shield;
- failed to properly consider inconsistencies in information it received when preparing its reports about Shield;
- misrepresented that it had a reasonable basis for giving Shield a “Favourable” rating and had exercised reasonable care and skill in doing so; and
- made misrepresentations that understated the percentage of funds managed by parties related to Shield and the asset allocation of Shield.
ASIC also alleged that the SQM Research reports “did not accurately depict the standard, quality, value or grade of Shield, and that reflected deficiencies in the processes SQM followed”.
Deputy chair Sarah Court noted that the proceedings against SQM Research marked the first time the regulator had taken action against a research house.
“Research houses have a responsibility to ensure they obtain the information needed to prepare their reports, take real care and skill in assessing that information and to present that information accurately,” she said.
“We believe research houses are important gatekeepers and form part of a critical line of defence against poor quality investments or unsuitable products.
“Given the important role research houses play in rating funds and investments, the community is entitled to expect that their reports will be accurate and based on appropriate information and analysis.”
“We have always operated with the highest standards of integrity and in full compliance with all applicable laws and regulatory guidance.”
If that were true, ASIC wouldn’t be bringing its first ever case against a research house alleging misleading reports, failure to obtain key information, and understated related-party exposure. That’s not what “full compliance” looks like.
“Our methodologies are robust, continually reviewed and enhanced, and our ratings have consistently been recognised for their objectivity and value to the market. Our track record before this terrible event, has been solid.”
“Robust” methodology doesn’t keep publishing “3¾ stars, Favourable, consider for APL inclusion” while, as ASIC pleads, property exposure was sitting around 60–70% but still being reported to advisers as ~20% and “largely static”. That’s not a solid track record, that’s a fundamental miss on the core job of verifying what you’re rating. And what about a 2nd fund First Guardian that received the same rating and also went on to fail. This is not a one off event.
“SQM takes its regulatory obligations extremely seriously and has cooperated fully with ASIC throughout its investigation.”
“Taking obligations seriously” would have meant:
Not giving a Favourable rating when around 70% of the fund was allocated to a related-party property vehicle that was supposed to be ~20%, and
Actually analysing that related-party property fund, instead of (as ASIC alleges) failing to properly assess the very asset that made up the bulk of Shield’s exposure.
If you don’t know what 70% of the portfolio is really doing, you don’t have enough information to give it a positive rating at all.
Well said, advisors used this information to assess recommending it to clients. ASIC said that research houses should be gatekeepers and they community should be able to rely on this information. And yet ASIC ban the advisors for using for recommending a product that was given a favourable rating. ASIC witch hunt against advisors. Meanwhile where is the action against the Shield fund manager? ASIC fail.