ASIC’s court action against SQM Research will be a test case for the research industry and the extent to which it is viable to research multi-asset funds.
The corporate regulator announced on Thursday morning it is suing SQM for not accurately depicting the standard, quality, value or grade of the Shield Master Fund.
It’s the first time ASIC has taken action against a research house and SQM is weighing up it’s legal options.
“We’re currently assessing the claim made by ASIC and we’ll be making our position known in due course,” SQM Research owner and managing director Louis Christopher told Professional Planner.
SQM was paid fees by Keystone Asset Management, the responsibility entity for Shield, for preparing the research reports.
The regulator said the researcher published reports on October 2021, March 2022 and October 2022 that rated different classes of the Shield fund as 3.75 out of 5 stars or “Favourable”.
The proceedings will likely become a test case for the economic viability of the research industry – Professional Planner understands for products like the Shield Master Fund industry practice is to rate the umbrella fund but not the individual underlying options due to the greater cost, which would make researching multi-asset funds commercially unviable.
However, ASIC will allege 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 the fund; 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 the fund.
SQM research reports were provided to advisers and superannuation trustees who recommended Shield to clients or onboarded Shield onto their platforms.
Christopher also flagged issues with the Shield audit report and said that there was no way for the researcher to know if there was fraudulent conduct, including inappropriate payments made by the funds to advisers as alleged by ASIC.
It’s expected ASIC will take action against the Shield and First Guardian auditors, having acted against the auditor of United Global Capital, while the auditor of Brite Advisors had surrendered its registration.
Brite Advisors offered an investment platform to self-invested personal pension providers, qualifying recognised overseas pension schemes, and self-managed superannuation funds, but ASIC commenced action against the firm because over failures to lodge financial statements and auditor’s report for FY22.
ASIC had previously said it was investigating a researcher and has been explicit in its intention to take action against all those involved in the advice chain for the Shield and First Guardian collapse, including trustees and researchers.
ASIC has alleged the trustees and researcher failed in their due diligence, unlike the lead generators, advisers, licensees and the two funds, which ASIC alleges had conflicts of interest.
SQM was the only researcher to cover Shield and First Guardian, but quantitative data firm FE fundinfo also published performance data which has been used in Statements of Advice seen by Professional Planner and failed to make updates after the products were halted.
ASIC is suing Equity Trustees; Macquarie came to an arrangement with ASIC to reimburse Shield investors on its platform; and the regulator is expected to take action against Netwealth and Diversa Trustees.
Netwealth has applied for government assistance to remediate clients, while Equity Trustees and Diversa Trustees are expected to do the same.
The $1.2 billion collapse of the Shield and First Guardian master funds has left the retirement savings of approximately 11,000 people up in the air.
ASIC shut down the funds due to concerns over misuse of investor money including spending on luxury personal expenses and inappropriate investments into pet projects of directors of the fund.
Furthermore, it is alleged the funds were paying advice firms to market the funds via lead generators who funnelled clients into the products without considering their best interests or their individual needs and circumstances.
ASIC’s SQM announcement came as the regulator launched separate action against InterPrac Financial Planning and MWL Financial Services for their oversight role of the advisers involved in distribution of the fund.
The regulator commenced civil penalty proceedings against InterPrac in the Federal Court for allegedly failing to ensure its former authorised representatives Venture Egg, run by Ferras Merhi, and Rhys Reilly Pty Ltd complied with their best interests obligations and for failing to have adequate risk management systems.
Together these representatives advised around 6843 clients to invest around $677 million of their superannuation savings into both funds.
ASIC alleges InterPrac failed to have an adequate process in place for approving financial products it allowed onto its approved product list, including Shield and First Guardian, and that it relied entirely on external research to add those funds to its approved investments list for advisers.
Furthermore, ASIC alleges that InterPrac also failed to respond appropriately to the use of lead generators Imperial Capital Group Australia and AGAT Business.
