ASIC action against SQM Research a test case

ANALYSIS

The Australian Securities and Investments Commission (ASIC) has broken new ground by initiating Federal Court legal action against a research and ratings house, SQM Research, over SQM’s rating of the Shield Master Fund.

Whereas ASIC also yesterday initiated action against financial advice group, Interprac, over a number of alleged compliance failures including inappropriate relationships, its case against SQM Research rests very much on proving to the court a failure of systems and processes which led to the publication of report which were false or misleading.

It appears to be a case of black letter law allegations against Interprac versus greyish allegations against SQM.

In a very real sense, the ASIC action against SQM Research has all the hallmarks of a test case in circumstances where the regulator has never previously had a serious opportunity to investigate or challenge how such companies go about their business.

This has been acknowledged by ASIC deputy chair, Sarah Court, who said the regulator had never pursued such action before.

To date, there has been no hard regulatory guidance with respect to ratings houses and it is clear both ASIC and, indeed, the Government believe there ought to be.

Over the years, there has been speculation about when and how ASIC would look at ratings houses and it was mostly suggested that the regulator would be looking at those companies which provided ratings whilst also running funds. SQM Research is the one significant ratings house that does not run funds.

The other major ratings houses, Morningstar, Lonsec and Zenith are operating within corporate structures which actually run financial products. Indeed, Zenith is owned by UK-based funds data aggregator, FE fundinfo which was in the news as recently as September for only removing a “five crowns’ rating on the First Guardian investment option five months after the scheme collapsed.

There has been acknowledgement that SQM Research’s approach to rating the Shield Funds had its failings, but a thorough reading of ASIC’s statement of claim against the company suggests that the regulator’s legal counsel may struggle to explain to the satisfaction of the court the nuances of the researcher’s alleged shortcomings.

There is, too, the question of why the auditor of the Shield Fund, BDO, did not point to concerns about the Shield Master Trust until July, last year.

SQM Research founder and managing director, Louis Christopher told Financial Newswire in early August this year that auditors represented key gatekeepers and the accuracy and timeliness of their reports are fundamental to making ratings assessment.

Christopher yesterday said he was reviewing the ASIC statement of claim against his company and considering how SQM would respond.