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Brokers must play their part in governance

Tuesday, June 7, 2016 - 11:22

SGX's chief regulatory officer Tan Boon Gin in a column in Straits Times on Monday this week makes the very valid point that in order for the exchange to properly oversee the local stock market, it needs the help of everyone connected to the industry. Mr Tan focused his comments on listing and delisting, so the relevant parties would be lawyers, bankers, auditors, liquidators and judicial managers. All of these are undoubtedly crucial in helping instill confidence in the local market but I would like to add stockbroking firms to the list of parties who, if they properly self-regulate themselves, can play an equally important role in building trust.

The idea that the broking community has an important part to play in strengthening governance is surely not novel, nor is it new. Twelve years ago, after certain guilty parties were convicted of manipulating the shares of a construction firm called Leong Hin (which later changed its name to Enviro-Hub Holdings) I wrote a column saying that brokers must tighten their internal controls and ensure no repeat. Here is an excerpt from that July 2004 article:-

"What is particularly alarming about (the Leong Hin)  episode is that one individual had access to 73 trading accounts - 23 in his own name and 50 belonging to seven acquaintances. Although it's not unusual for one person to open more than one account, control of a number as large as 73 is way out of the ordinary and warning bells at the broking firms where these accounts resided should have rung - especially since the manipulation occurred over three years, giving ample time for detection...In the meantime, the lesson to be learned is that detection of wrongdoing and the responsibility for preserving the integrity of the market shouldn't rest solely with the regulatory authorities.Brokers, too, have a part to play and must recognise that more investors are more likely to trade in an open and transparent market where crooked dealings are kept to a minimum than one which relies on manipulation and price fixing. Internal controls may, therefore, need to be tightened, even if doing so could lead to less brokerage income in the short term. This is all part of self-regulation, an integral component of the move to a disclosure-based regime that the government is seeking to engineer. Hopefully, it won't take another Leong Hin to drive home this message''.

The problem of course, is that the money to be made is attractive, and in the minds of those who indulge in that sort of thing, attractive enough to risk suffering the consequences of detection. As one observer noted in remarks to me "when everyone is making money and the money is so big, nobody wants to do anything and everyone will look the other way''. This explains why there have been several similar episodes in the intervening years. Of cours, when the gravy train gets overturned when the authorities step in, then that's when everyone runs for cover and the recriminations start. Meanwhile, confidence in the market's integrity suffers and everyone is worse off. 

 If however brokers make a concerted effort to stamp out illegal activities and if there are improved rules surrounding share pledges by large/substantial/major shareholders, I believe the market as a whole will be better off. Is this a reasonable wish on my part? Of course - all it takes is for backroom,  compliance staff and management to be on their toes and do their jobs properly.

It isn't rocket science by any means - for example, if a company is losing money but its shares keep rising, and if those shares are then pledged at a high level in exchange for a loan, then it doesn't take a genius to recognise the potential for disaster if the authorities were to suddenly step in. Knowing that millions could then be lost should be disincentive enough.