Capital Markets

CMA seeks tighter rules to rein in stockbrokers

uchumi

Uchumi shareholders at a past meeting. Analysts see CMA’s drive for rules as intended to protect investors. File

The Capital Markets Authority (CMA) is seeking to prescribe rules on corporate governance which have so far been left to the judgment of market players.

Under the new proposals, chief executives will not be allowed to be chairmen as is the case with several investment banks and brokers.

The point is to separate boards from management functions. The move is meant to help boards to provide effective checks and balances against possible excesses of management as was the case in some of the collapsed institutions where owners were also CEOs and chairmen of boards.

A number of institutions are expected to change their management and board structures. “We expected this to have been in place by now as a way to bring back investors in big numbers to the stock market. We need to create confidence among investors and so the regulations are very welcome,” said Mr Samuel Wachira, the general manager at Drummond, a brokerage firm at the Nairobi Stock Exchange (NSE).

He said some collapsed organisations had operated without boards of directors, leading to poor corporate governance and impacting negatively on the market.

A third of board directors are supposed to be independent, putting paid to the long-held tradition of appointing relatives and cronies or fellow business associates as directors.

Analysts, however, said that the real test of the Corporate Governance Market Intermediaries Regulations will be in the implementation as there might be some owners who may be tempted to install proxies in the name of CEOs or directors. “The main challenge will be in the implementation. CMA needs to ensure that the regulations are followed because it won’t make sense if they are just on paper,” said Mr Wachira. Directors and staff of intermediaries will be expected to adhere to a code of conduct that will outlaw conflict of interest.

Even changes within senior management of a broker or investment bank will have to be approved by the CMA for them to be effected. This is supposed to make it easier for staff to report independently about operations of their institutions to the board of directors and prevent situations where malfeasance occurs without knowledge of either the board or CMA.

Analysts see the move as intended to protect investors, especially after CMA paid hefty amounts of money to investors who lost when some brokerage firms collapsed. In the past five years, Francis Thuo and Partners, Nyagah Stockbrokers, Discount Securities, and Ngenye Kariuki and Company have either collapsed or been placed under statutory management. “The regulator is concerned about what has happened in recent years, especially after recently paying a huge amount to investors after the collapse of Nyagah Stockbrokers, and wants to protect investors,” said Mr Wilson Nyakera, the general manager at NIC Securities.

Mr Nyakera said the move is also meant to ensure market growth. Lower investor confidence has kept firms off the market.

Changes

Preventing of ad hoc changes in senior management is intended to ensure that staff members are not forced to do things they would not otherwise do in a properly managed firm as they operate without fear of being sacked for doing the right thing.

The new corporate governance guidelines specify what certain senior personnel — including risk and auditing officers — should be hired on merit. Unlike in the past when brokers could hire unqualified auditors, they will be required to hire members of the Institute of Certified Public Accountants of Kenya (ICPAK).

The risk officer is expected to carefully document operations of the institutions in so far as risk is concerned and report directly to the board of directors.

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