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Stock market

True to label: how the new retail investor has changed investor relations

No one would have believed that the COVID-19-induced ASX nosedive of 2020 would transform into a precedent-breaking bull run.

Record low interest rates, coupled with massive stimulus spending, saw many enter the financial markets for the first time. It also saw the ASX’s regulatory body, the Australian Securities and Investment Commission (ASIC), undertake an ambitious structural shift – the true to label project – to protect the emerging classes of investors and demand that ‘the product must do what it says on the tin’.

Here are five issues that caught our eye — and why they matter to ASX-listed companies and investors:

ASIC vs Mayfair 101 Group

The collapse of the Mayfair 101 Group in 2020 is a sorry saga that left investors more than $200 million out of pocket.

ASIC pursued the Group on a number of fronts and, among other findings, the Federal Court found companies in the Group engaged in “misleading or deceptive conduct and made false or misleading representations” in marketing its products through GoogleAds and other online avenues to unsophisticated wholesale investors.

A key point here is the blurring distinction between wholesale and sophisticated investors, and how the rules around marketing to different investor classes have changed.

The case redefined the obligations around advertising to investors and was a wakeup call to funds that dishonestly promote their products, specifically through their use of search engine advertising and sponsored links. The Federal Court ordered four companies in the Mayfair 101 Group to pay a combined penalty of $30 million for misleading advertising.

ASIC noted that, “marketing and product suitability are no longer the exclusive concern of the retail [shareholder] market”. Not only do companies need to ensure their ads and online content represent truthful risk, return and liquidity involved with investment, they must also ensure advertising methods such as domain names, meta-title tags and Google Ads do so, too.

ASIC vs the pump and dumpers

While no court action has been taken — yet — ASIC is cracking down on the use of social media groups driving up prices in a modern version of the classic ‘pump and dump’ scheme.

It came after a spate of speculators on Reddit and encrypted platform Telegram coordinated to push up the prices of Australian stocks then sell out at higher rate – think Gamestop and similar schemes in the US.

Although the groups are frequently shut down, they often pop up again quickly under new names. Famously, as reported by the Sydney Morning Herald last October, ASIC logged on to deliver a warning about the practice:

“Co-ordinated pumping of shares for profits can be illegal. We can see all trades and have access to trader identities. We’re monitoring this platform, and we may be investigating you. You can run the risk of a criminal record, including fines of more than $1M and prison time by being involved.”

Many were shocked that ASIC would engage in this way, but for those who like to play chicken with the regulator it signalled that not even an encrypted chat platform is safe.

ASIC vs short and distort

Short selling is the practice of borrowing stocks from long-term holders and selling them on the market with the aim to buy them back at a lower price. Essentially, a bet on a security losing value. It is an important self-regulation mechanism that actively discourages speculation and the emergence of ‘bubbles’.

Activist short selling is the publication and advertisement of a short position – normally in the form of a research report. A ‘short and distort’ report is the deliberate targeting of a company through misleading information, personal attacks on company leadership or other information presented in ways that can constitute market manipulation.

In June 2021, ASIC released a note warning activist short sellers to play fair with ASX-listed companies. Among the recommendations were that short sellers should release reports outside Australian trading hours in order to give target companies adequate time to enter a trading halt and respond, that short sellers should consult target companies to ensure factual accuracy of a report and that reports should avoid emotive or imprecise language.

The recommendations represent a shift toward a more tightly regulated market in favour of listed companies, and the response has been mixed. Some argue short reports are a tactic used by multi-billion-dollar hedge funds to tank companies and rob individual investors of value in the name of fast profits. Others say that it contradicts a ‘true to the label’ approach, as the recommendations take the heat off individual companies with dishonest or opaque reporting practices.

ASX vs ‘finfluencers’ – pump and dumpers 2.0

Research by Finder showed that Millennials and Gen Z, at 46% and 42% respectively, made up an overwhelming group of new retail investors entering financial markets during the pandemic. With new generations joining investor ranks came a new iteration of an old problem – biased financial advice from unqualified speculators.

‘Finfluencer’ Tyson “ASX Wolf” Sholz is currently in court, charged with allegedly dishing out financial advice without a license while stiffing punters more than $1000 each to join a members-only chat room where he dished out stock tips – all while marketing his services through social media. ASIC claims the ‘ASX Wolf’ is in contravention of the Corporations Act through carrying out financial services without a license.

The Sholz case is part of a wider ASIC crackdown on the activities of social media ‘finfluencers’ who, in recent years, have gained massive online followings and partnered with listed companies to promote shares directly to a younger and harder-to-reach audience.

Finfluencers can be legitimate and very effective. But, just like any third-party promoter, check their credentials. Australian financial services license holders are required to manage conflicts, provide financial services efficiently, honestly, and fairly and to meet education standards – ensuring the product is ‘true to the label’.

The greenwashing dilemma

Greenwashing is the misrepresentation of the extent to which a financial product or investment strategy is environmentally friendly, sustainable, or ethical. Has taken aim at companies and funds boasting dubious claims about their lack of clarity on Environmental Social Governance (ESG) reporting.

ASIC commissioner Cathie Armour said, “Misrepresentation of such products poses a threat to a fair and efficient financial system… [and] distorts relevant information that a current or prospective investor might require in order to make informed investment decisions driven by ESG considerations.”

More than ever, investors and funds have voiced ethical concerns about where investment dollars are going – especially with their superannuation. Indeed, the superannuation industry is throwing its weight behind the push. The powerful Australian Council of Superannuation Investors (ASCI) has threatened to vote against the re-election of company directors that do not respond adequately to climate risks.

The Glasgow Summit of 2021 promised a multi-trillion-dollar ‘wall of money’ was coming for companies that sign on for net zero. ASIC and ASCI have both made it clear that companies and fund managers must be ‘true to the label’, and that internal policies and controls will be put in place to ensure that they are.

About the author

Gerard McArtney is a Senior Consultant in our Investor Relations team, bringing experience in the mining and resources sector, with a background that equips him to contribute to merger and acquisition work, media liaison activities and our regular Investor Insights publications. Contact Gerard.

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