Capital Markets and SecuritiesRegulations Law LLM 2010/2011 (UON) Seminar Question Week Seven “A robust and facilitative regulatory environment is critical for the maintenance of investor confidence as well as investor protection” In light of the foregoing: a) Discuss the salient advantages and challenges of self regulation in securities markets b) To what extent does you country’s securities laws promote self regulation of securities markets Seminar Paper Presented and Submitted By: Joash Ratemo- G62/78813/2009 Course Instructor: Dr. Jacob Gakeri Presented and submitted on: 11 August 2011 .......... 2000....................................................................................................................3 2........................... CHALLENGES FACING SELF-REGULATION IN SECURITIES MARKETS..................................2.....................................10 4...... COMPANIES ACT..........3 3............................. REGULATION OF SECURITIES MARKETS..............................7 3......7.............................10 3.... NAIROBI STOCK EXCHANGE....................................................................7 3......................................................3 3....................................Table of Contents 1................................................ ADVANTAGES OF SELF REGULATION IN SECURITIES MARKETS... INTRODUCTION......... CASE AGAINST SELF REGULATION.. THE CAPITAL MARKETS ACT....................................5 3.... CENTRAL DEPOSITORIES ACT................................................6................................... CONCLUSION.............4........11 5.................................11 ........................................................................1..............................................................5 3..........................8............................................................................ BACKGROUND.................5.......4 PART A ADVANTAGES AND CHALLENGES OF SELF REGULATION............... REFERENCES..................................9 3................... WHAT IS SELF REGULATION?..................6 PART B: TO WHAT EXTENT DO THE SECURITIES LAWS IN KENYA PROMOTING SELF REGULATION OF THE SECURITIES MARKET....3......................7 3................................................................................................... bonds. stocks. The current legal framework on securities markets in Kenya is traceable to 1907 when the United Kingdom Parliament promulgated an Orderin-Council declaring that the sources of law of Kenya would henceforth be the Statutes of General Application. the facilities and people engaged in such transactions.com/definition/securities-market 2 Cap 485A Laws of Kenya 3 Cap 486 Law of Kenya 4 3(1) Judicature Act.Derivatives. 3 . the United Kingdom Companies Act of 1907 was adopted in 1922 and remained in force until January 1962 when the Companies Act 1948 was adopted and remains the operative statute5. certificates of interest or participation in profit-sharing agreements. in Kenya. Collective Investment Schemes. institutional framework denotes legally established or sanctioned institutions. The institutional framework for the securities markets comprises the Capital Markets Authority. "share" means share in the share capital of a company. Part one of the paper contextualizes the role of the securities markets and canvasses the salient advantages and challenges facing self-regulation in securities markets. fixed income securities (T Bonds and Bills. transferable shares. Regulation of Securities Markets Securities markets in Kenya is regulated by the following legislation: Capital Markets Authority Act. bonds and any other securities of a company whether constituting a charge on the assets of the company. Types of securities include notes. government. The Central Bank of Kenya is included in the institutional matrix because of its crucial role in the bond market and the banking sector generally. Cap. attempt to ensure that investors have an informed. debentures. 3. issued by a corporation. Medium Term papers. Nairobi Stock Exchange. Securities are documents that merely represent an interest or a right in something else. the Chicago Board of Trade and the American Stock Exchange in the US among others1. oil.1. accurate idea of the type of interest they are purchasing and its value. collateral-trust certificates. or other organization which offers evidence of debt or equity. the demand for and availability of securities to be traded. pre-organization certificates or subscriptions. or other mineral rights. Government regulation of consumer goods attempts to protect consumers from dangerous articles. For purposes of corporate law. treasury stocks. other than an insurance policy or fixed annuity. 5 Dr. an brief analysis of self regulatory mechanisms in securities markets is considered with an aim to provide a comparative analysis. Ministry of Finance (Treasury). 2. the New York Stock Exchange. The Capital markets Act 2 defines the term “securities” as an investment instrument. There are two main types of securities markets namely: Over the Counter Markets and stock exchanges. Examples of stock Exchanges include the Nairobi Stock Exchange. and a fractional undivided interest in gas. and includes stock except where a distinction between stock and shares is expressed or implied. 1 http://www. exchange traded funds etc) The Companies Act3 defines the two forms of securities as follows: “debenture” as debenture stock. or illegal pricing practices.investordictionary. hedge funds. on the other hand. and alternative investments (property. certificates of deposit for a security. the Common law as modified by the doctrines of equity and judicial precedent 4 This transplanted United Kingdom law to Kenya and generally remains the state of affairs. In conclusion. For purposes of this paper. The paper also describes the conditions in which self-regulation might be an effective element of securities markets regulation in Kenya. investment contracts. and the willingness of participants to reach agreement on sales. Jacob Gakeri: Maurer School Of Law. Central Depositories Act and Nairobi Stock Exchange Regulations among others. Companies Act. Indiana University Enhancing Securities Markets In Sub-Saharan Africa: An Overview Of The Legal And Institutional Arrangements In Kenya. misleading advertising. Background Securities markets is defined as a place or places where securities trade. 8. Introduction This paper analyses the regulatory environment behind the securities markets. Some of the security classes include Equity. Part two discusses whether the securities laws are sufficient in promoting self-regulation of securities markets in Kenya. voting-trust certificates. Registrar of Companies and the Central Depository and Settlement Corporation (CDSC). Securities laws. Credit Rating Agencies. floating rate agreements etc) . C. 7This approach relies heavily on the members of any such group acting voluntarily. a copy had to be delivered to the Registrar of Companies for registration. When defining self-regulation. The Capital Issues Committee retained its role as the principal regulatory institution for the primary market until March 1990 when the Capital Markets Authority was inaugurated. Companies wishing to list had to prepare prospectuses in accordance with the provisions of the Companies Act and submit copies to the Ministry of Finance and the Nairobi Stock Exchange for approval. J.csae. and to the internal supervision and compliance functions within financial firms. codes of conduct.ox. 4 . and harmonized standards. However.ac. Finally. & COM. the question is whether Kenya securities markets has developed enough to realize the benefits that accrue from securities markets 6. non-governmental organization or associations to adopt amongst themselves and for themselves common guidelines. In much of the world. Free University.uk/pages/Conference%20Papers.” 33 N. Forces such as commercialization of exchanges. guidelines. “An Introduction to Co-Regulation and Self-Regulation in the EU. consolidation of financial services industry regulatory bodies. through which the Self (stakeholders or participants) initiates behavior-modifying activities (as opposed to top-down government imposition) for the benefit of the regulated community.ukconference2009 EDI. Under the assumption that government and other industry parties agree to the concept of self-regulation. In addition. the value of selfregulation is being debated anew. “Can Self-Regulation Satisfy the Transnational Requisite of Successful Internet Regulation?” 17th BILETA Annual Conference. 9 Ibid. and globalization of capital markets are affecting the scope and effectiveness of selfregulation and in particular the traditional role of securities in self regulation. This broad definition envisions the assumption by participants in the system of the duty to create and adopt common guidelines to govern their collective behavior 9. 111 at 114-115. Capital Markets: Financial Deepening and Economics Growth. No single definition of self-regulation is universally accepted. 219 (2007). Robust and efficient securities markets enable entrepreneurs to access financial resources necessary to commercialize innovation. however. for a common purpose and to avoid outside intervention. REG. pressures on selfregulatory frameworks have increased in markets worldwide. 8 as well as its consumers (customers).” See Anna Jassem. companies were subject to the Listing Rules of the Nairobi Stock Exchange. Recently. Self-regulation in securities markets takes a wide variety of forms around the world. but collectively. to standards set by financial industry associations. Amsterdam (5–6 April 2002): www. available at http://www. these markets promote mobilization of domestic and foreign financial resources. 2010). 7 Joseph A. However. they facilitate privatization of state enterprises. invest in capital improvement and new technologies and increase employment. development of stronger statutory regulatory authorities. Although such a system can take many forms. the social partners. Corporate Governance in South Africa: Analyzing the Dynamics of Corporate Governance Reforms in the “Rainbow Nation. Cannataci and Jeanne Pia Mifsud Bonnici. On listing. J. Developing Governance and Regulation for Emerging Capital and Securities Market. the following general definition is suggested: a system that encourages (“regulates”) certain social behaviors by a collective (the “Self”) in order to avoid direct State intervention (“regulation”).It is important to note that from their inception in the 1950s to 1989. some focus on the term “Self” as referring to any collective grouping that does not include the State. This definition assumes a bottom-up approach. self-regulation “must be consistent with Community law.” EPHA Briefing for Members (February 2005).bileta. Additionally. What is self regulation? Self-regulation is an important part of the regulatory structure of securities markets in many developing. INT‟L L. In the United Kingdom (UK). 8 This has been defined as the “possibility for economic operators. economies. Aka. there have been efforts to move away from self regulation under the Financial Services Act 1986 and the Markets Act 2000. Rose Ngugi.1. charters. Kenya’s securities markets operated privately with no significant government interference until 1971 when the Capital Issues Committee was established for purposes of approving listings on the Nairobi Stock Exchange.ac. it was characterized by inefficiencies in enforcement. expand production of goods and services. (visited on May 10. as well as developed. the new British Government wants to go back to Self regulation next year. Use of self-regulation is often recommended in emerging markets as part of a broader strategy development.aspx. Ali Adnan Ibrahim. However. 39 RUTGERS L. The Nairobi Stock Exchange operated as a self regulatory organization ( SRO). 3. The self regulatory structures appear to have served the market well. The term self-regulation may be used to refer to formal self-regulatory organizations (SROs). including voluntary agreements. represent added 6 See Phillip C. Registration of prospectuses by the Registrar of companies is a mere formality. PART A Advantages and challenges of self regulation 3. a) The regime should make appropriate use of self regulatory organisations that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets. b) Uses knowledge and expertise of industry professionals The investment products. Selfregulation is often used ‘to correct a bad public image. the overarching purpose of any self-regulatory group is to keep industry interests aligned with the public interest so as to avoid government intervention and the possibility of more-restrictive regulation 10. and weigh the risks to the public and its individuals of any failures in the system.” Simply put. 5 . Justice Douglas for Chairman of the SEC referred to as "ethical standards beyond those any law can establish. government can operate satisfactorily only by proscription. an objective standard for deciding when and in what form regulation is needed is formulated. policy makers must define the objectives. Government regulators often cannot obtain approval to invest in the professional staff and infrastructure that thorough regulation requires.2. Self regulation has been influenced by the efficiency view of regulation that looks for the balance when “it is theoretically impossible to make someone better-off (in economic terms) without making someone else worse off”. p. . focus on the social policy implications. some of it lying beyond the periphery of the law in the realm of ethics and morality. The rules and systems required to effectively control and to regulate 10 11Ibid. That leaves untouched large areas of conduct and activity. 2. repealing. is its potential for establishing and enforcing what Mr. can be pervasive and subtle in its conditioning influence over business practices and business morality.. even if the agency is “self-funding” on the basis of fees charged to market participants. some of it susceptible of government regulation but in fact too minute for satisfactory control. for example. . Self-regulation can therefore be defined as an autonomy in creating. Self-regulation is taken to be where ‘business sets its own standards of conduct and enforces those standards without any government involvement either in drafting the standards. promoting the standards or in enforcing the standards’. can effectively reach” The International Organisation of Securities Commissions objectives and principles of securities regulation highlight certain principles that should be inherent in a self-regulatory regime. Some of the advantages of self regulation include: a) Increases overall level of regulatory resources Many countries rely on self-regulation because expansive resources are required to regulate securities markets effectively. especially in large and complex markets. amending. trading strategies.value for the general interest. Because securities dealers and exchanges benefit from self-regulation. [and] meet the criteria of transparency. originated by Pareto. Into these larger areas self-government and self-government alone. however." As he stated: “Self-regulation . b) Self regulatory organisations should be subject to the regulators oversight and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. In essence. balance the costs. Advantages of self regulation in securities markets Self-regulation may make the members of the securities industry more aware of the goals of regulation and their own stake in them while at the same time making the imposition of regulatory controls more palatable. By and large. In designing a self-regulatory system for any industry and evaluating its benefit over government intervention. policy makers may feel they should assume part of the burden and cost of regulation directly.and representation of the parties involved. The most important advantage of self-regulation. and enforcing rules of conduct with respect to entities subject to selfregulating organization’s jurisdiction and to resolve disputes emanating therefrom. to forestall legislation or to give an industry a competitive advantage’. the design for self-regulation is often self-originating and self-driven. and risks involved in today’s securities markets are complex and rapidly changing. This rationale applies in the US. According to this theory.. ‘Pure self-regulation’ would include voluntary codes. practitioners in the markets.intermediaries’ and exchanges’ to understand and supervise. and free riding by competing markets on the primary market’s regulation. which do not perform regulatory functions. The ability of for-profit exchanges to perform regulatory roles effectively. it may create incentives to cut regulatory costs. Intensive competition also exacerbates conflicts.3.) Many exchanges are retreating to a “business approach” to their regulatory roles by focusing on core regulation functions that directly impact the quality of their services. the law cannot legislate on every minute thing and some areas can only be covered by selfgovernment or regulation. and listings requirements. the potential for regulatory arbitrage. given inherent conflicts of interest with their commercial objectives. the regulator is able to concentrate more resources on identifying and responding to major systemic risks. activities are complicated and require a very high level of expertise Self-regulation is often seen as a way to tap the knowledge of especially if the regulator has difficulty attracting people with may offer considerable depth and expertise regarding market c) Enables the regulator to focus on other priorities while relying on an SRO for front-line supervision of its members and regulated markets SROs are often referred to as frontline regulators. form of formal SRO that exists in the great majority of markets. These functions include trading surveillance. or at least predominant. which set quality standards for listed securities. analysis of regulatory reports. to divert resources to commercial priorities. and to avoid regulatory actions that could damage business interests. Self Regulatory Organisations operations and practices. Exchanges also compete with private marketplaces. h) Flexibility: Self regulation is more dynamic and flexible to market changes and is likely to have a more effective complaints procedures since it can respond more quickly and flexibly than the government authority i) Setting of standards: Self regulatory organisations are bound to set realistic and attainable standards and achieve greater comprehensiveness of rules within their industry 3. such as electronic communications networks (ECNs) and ATSs. Intensive domestic and cross-border competition among exchange SROs increases exchanges’ concerns about cost structures. specialized knowledge. (This is so even though conflicts of interest were always inherent in self-regulation. Annual compliance examinations. Those reforms aim to mitigate conflicts of interest. and online market surveillance are resource-intensive tasks that require teams of experienced officers. If a regulator can rely on an exchange or another SRO to carry out thorough supervision of securities dealers’ operations and market activity. appropriate and cost effective as compared to government regulation of the same industry. business practices and morality. Intensive competition Competitive forces are an important driver for changes to exchanges’ regulatory roles in many countries. g) Information: There is a lot of information available within the industry being regulated and this makes self regulation more efficient. Understandably. as well as enable exchanges to focus on business priorities. d) Awareness: Makes members of the exchange more aware of the goals of regulation and how they stand to benefit e) Acceptability: Regulatory controls are made more palatable and acceptable to the members f) Ethical guidelines: Self regulation achieves what the law cannot achieve by legislation and this is in the area of ethical standards. and to other priorities outside of the ambit of self-regulation. Questions on the effectiveness of self-regulation 6 . continues to be debated. or monitoring market integrity and quality. Challenges facing Self-regulation in Securities Markets Privatization of securities exchanges The widespread demutualization and privatization of securities exchanges is having far-reaching effects on the role of self-regulation because securities exchanges are the only. which improves the content of new initiatives. exchanges. and in some cases virtually eliminate. Globalization of the markets translates into a growing emphasis on meeting international standards and.isgportal. Such decisions may be based on concerns about the efficiency of regulation. 11 www. focus. Internationalization Globalization of securities markets and major securities dealers makes it more difficult for exchanges and member associations to effectively regulate markets because they have a local. governments are vesting greater authority in public regulatory bodies. The effect is to diminish. and usually a market-specific. which increases pressure on SROs. Today investors’ expectations.Questions have been raised about how effective self-regulation really is in ensuring market integrity and protecting investors. where capital markets developed only recently. the securities industry is concerned about the ever increasing costs of regulation at all levels. Controlling regulatory costs is an important factor in the efficiency and competitiveness of a capital market. therefore. such as Canada and the US. rather than multiple public and private agencies. OTC market. The central question is whether the general trend toward reduced reliance on SROs in global securities markets will continue. The industry is seeking more efficient and streamlined regulation. Many SROs have taken steps to address this issue through bilateral and multilateral agreements to cooperate on regulatory matters and supervising cross-border trading. a significant amount of trading has a crossmarket.org 7 . or cross-border aspect. self-regulation is stronger and more professional than ever. and the likely credibility of self-regulation in a market with no history of the concept. and international standards of regulation are higher than ever. and they are seen as stronger. carry it out on a centralized basis. in response to pressure to increase standards of conduct in the markets. more effective regulators. Others argue that the system benefits from the checks and balances inherent in the involvement of SROs. the role of self-regulation has been diminished or virtually eliminated. the industry. At the same time. the capability of exchanges focused on specific trading systems and products to effectively regulate overall market activity is increasingly questioned. For example. In developed markets. the role of selfregulation. Major dealers do business globally and are far less tied to affiliations with local exchanges and regulators than they were decades ago. while in a smaller number of countries. in many countries. or if fresh interest in self-regulation will arise from ongoing reforms and pressures to continually raise standards of conduct and the quality of supervision. Government bodies have much broader jurisdiction and powers than SROs. policy decisions were made not to rely extensively on self-regulation. leading more policy makers to question if it is still useful. resources. to strengthening the powers. Investor confidence The question is whether declines in investor confidence (because of real or perceived conflicts of interest) threaten the continued vibrancy of the financial market Summary In summary. This concern lies behind pressures to consolidate SROs in countries with multiple SROs. Strengthening of government regulators Partly because of the preceding four points. As the number of products and strategies proliferates. In other countries. the Intermarket Surveillance Group (ISG) 11now comprises over 35 exchanges around the world. Trend to consolidation of financial regulators A global trend toward consolidation of financial regulators is another factor in reducing reliance on self-regulation. Some governments believe that regulation is more efficient if fewer government agencies. Pressure to increase efficiency and lower costs Governments want to improve regulatory efficiency to make their markets more competitive with regional and global competitors. and the regulators in response to the issues. Scandals and regulatory failures leading to reforms in self-regulation are nothing new. but the difference today is that the overall environment is less hospitable for selfregulation. Regulation services agreements that enable an exchange to outsource certain regulatory functions to another SRO and other types of outsourcing arrangements are other ways of increasing efficiencies. Market scandals have been another catalyst to strengthening government regulators. government scrutiny. and independence of statutory regulators. Although the Companies Act was the oldest Act to make reference to securities markets. the entry of his name in the company's register of members ( by allotment etc). Promote Investor Education and Public Awareness 5. which is a body corporate with perpetual succession and a common seal. Strengthen the Institutional Capacity The CMA. regulating and facilitating the development of an orderly. Guidelines for the issuance of Corporate Bonds and Commercial Paper have also been published. 12 Ibid note 2 13 Jacob Gakeri: Maurer School Of Law. It provides rules on company membership. In summary. Rules are opaque. Annual contributions to the fund are made out of the Authority budget and from market practitioners. However. The Ugandan and Tanzanian statutes on securities markets have identical preambular provisions. the objectives of CMA are: 1. or by agreeing to become a member. The CMA Act also provides rules on frauds like insider dealing or trading and other offences relation to capital markets. Enhance market Infrastructure. a selfregulatory organization (SRO) under the supervision of the CMA was formed in 1954 as a voluntary organization of stockbrokers and is now one of the most active markets in Africa. Indiana University Enhancing Securities Markets In Sub-Saharan Africa: An Overview Of The Legal And Institutional Arrangements In Kenya. prospectuses. The NSE. the CMA has limited capacity. was constituted and inaugurated in 1990. Section 28 of the Act provides that a person can become a member of a company by subscribing the memorandum of the company. facilitative. The Authority may approve or reject the proposed issue or sale. the focus of the statute was the Authority not the securities markets 13. compliance is low and enforcement is weak. regulation and winding up of companies and other associations. conduct of business. and lacks operational mechanism. Companies Act The companies Act provide for a framework for registration of companies. Section 102 of the CMA Act14 empowers CMA to make regulations prescribing any matter required or permitted by the Statute to be prescribed for carrying out or giving effect to the Statute.4. legal and regulatory framework that conforms to International Best Practice 4. establishment of Stock Exchanges. Capacity and Institutional arrangements 3. advertisements the maintenance of registers of interests in securities. 14 Ibid note 2 8 . The Act provides rules on Share capital. and licensing of market operators.5. Facilitate development of capital market products and Services 2. 3. Some of the provisions include: 3.PART B: To what extent do the securities laws in Kenya promoting self regulation of the securities market There are various provisions in our laws that seem to promote self regulation of the securities market. The CMA Act provides that a public company wishing to offer its securities to the public or a section of the public for subscription or sale must prepare an information memorandum and file a copy with the Authority. An Investor Compensation Fund for the purpose of granting compensation to investors who suffer pecuniary loss resulting from the failure of a licensed broker or dealer to meet his contractual obligations has also been established by the CMA as under Section 18(1) of the CMA Act. transfer and transmission by death. To date rules and regulations have been promulgated covering prospectus requirements. Listing of shares among others. The aim of the fund is to enhance investor confidence in the newly created markets. Public company. fair and efficient capital market in Kenya with the view to promoting market integrity and investor confidence. accounting and financial requirements. The Capital Markets Act The Capital Markets Authority (CMA) was set up in December 1989 through an Act of Parliament Capital Market Act12 as the regulator and supervisor of capital markets for the purpose of promoting. In addition documents covering procedures for companies going public and an investor’s guide to shares and public flotation have been issued. Implicitly. its provisions are too imprecise to make any substantial impact on regulation of the securities markets. Establishment of a robust. prospectuses and investor remedies which are important in the regulation of the securities markets. the CMA licenses Securities Exchange (Nairobi Stock Exchange). Investment Advisers. In several cases. the Authority has strived to deepen and broaden the capital markets by developing a regulatory framework that facilitates the development of new financial products and institutions through research and ensuring fairness and orderliness in the capital markets industry. In Malasya. The legislative framework makes no provision or regulations on professional standards of market intermediaries and recognition of self regulatory organizations in the securities markets. the Capital Markets Authority has promulgated a number of regulations and guidelines on various aspects of the securities markets. The Monetary Authority of Singapore (MAS) which oversees the entire financial services sector has ten members. The capital markets industry operates within a certain regulatory framework which the players in this industry must adhere to in the course of offering their services. carries out Its mandate of regulating and developing the Kenyan capital markets through a regulatory framework that is deliberately designed to meet this objective. The above Acts. The CMA consists of eleven members and quorum to transact business is six members. regulations and guidelines as may be required for the purpose of carrying out its objectives. The number of stock brokers has oscillated between 18 and 26 since 1995. 2002 The Capital Markets (Takeovers and Mergers) Regulations. Overall. The Act does not consolidate all the laws relating to securities markets but rather just lays the institutional framework.). disclosure. the regulations or guidelines were promulgated in anticipation. The CMA does not confer a private right of action on investors for violations of securities laws for example non disclosure. 2001 The Capital Markets (Securities) (Public Offers. Authorized Securities Dealers. Some of the shortcomings of the CMA include: The statute is silent on investor education and yet investor education is an important public policy issues. In exercise of its expansive legislative mandate. Some of the laws not harmonised include. Stockbrokers. The paragraph below provides a snapshot of the Regulations and Guidelines promulgated by the Capital Markets Authority. 2002 The Capital Markets Asset Backed Securities Regulations 2007 The Capital Markets (Registered Venture Capital Companies) Regulations 2007. The regulatory framework is crafted in such a way that it encourages self regulation to the maximum practical extent. the Securities Commission has eight members. 2002 The Capital Markets (Licensing Requirements) (General) Regulations. This has been argued to be a big number of persons to assemble regularly and deliberate constructively and arrive at a consensus. 9 . Regulations as well as the Guidelines are what the Authority uses to supervise and regulate the market intermediaries. Section 12(1) of the Capital Markets Act confer upon the Authority power to formulate rules. The regulatory framework of the Authority is comprised of the Capital Markets Act and the Central Depositories Act. misrepresentation and insider dealing. Credit Rating Agencies and Venture Capital Companies among others. Authorized Depositories (Custodians).The Authority. Guidelines on Corporate Governance Practices by Public Listed Companies Guidelines on the Approval and Registration of Credit Rating Agencies In addition. 2002 The Capital Markets (Foreign Investors) Regulations. The Act does not establish an objective criterion of licensing stock brokers and other market intermediaries. Dealers. Adoption of some of the regulations appears to have been motivated by the anxiety to keep pace with global developments as opposed to demands by local constituencies. The objective of the summaries is to underscore the specific aspects of the securities markets in respect of which legislative intervention has been made. A lower number like 5 would have been advisable since the enlarged membership undermines efficiency. Fund Managers. Listing and Disclosures) Regulations. 2002 The Capital Markets Tribunal Rules. The regulations include: The Capital Markets (Collective Investment Schemes) Regulations. led by the Board of Directors and supported by the Chief Executive together with the management. the CMA still stands short of promoting a proper self regulatory legal environment for the securities markets. Since inception. Central Depository (The Central Depository and Settlement Corporation Ltd. Investment Banks. 2000. with the CDS. institutions). Providing book entry accounts: this means an accounting system for securities and cash. A manual registration process would then follow this. intermediaries (e. the shares would remain in safe custody with a book entry debit to A’s account and a credit to B’s account. cash settlement and beneficial ownership can be transferred intra-day. In many respects the NSE is self-regulatory. duties and responsibilities of the company. This requires an electronic link between the CDS and the national central payment system. In an environment where DVP is possible. to provide for the immobilization and eventual dematerialisation of. The provisions of the Central Depositories Act vest substantial power in the Capital Markets Authority giving it overwhelming control over the CDSC. the securities move between parties without the need for movement of physical documents. It is licensed by the CMA to carry out the business of a securities exchange. the exchange is required to have. The guarantees are held by the members of the NSE who also are stockbrokers/investment banks.7. Dematerialised Securities – which means the elimination of physical certificates or documents of title. Company X issues some shares. Rather than the shares being delivered to A and B. Delivery Versus Payment (DVP) or Effective DVP: this means that the exchange of securities and cash payment between counter parties in a transaction occurs simultaneously. Central Depositories Act. securities deposited therewith in Kenya.g. 10 . Overally the industry is regulated by the CMA and subsidiary regulations made therein. However. operation and regulation of central depositories. corporates). The typical functions of a CDS are: Immobilization of securities: This means the storage of securities’ certificates in a vault in order to eliminate physical movement. so that those securities exist only as computer records. settlement and depository services for securities held in electronic form. It is a market that deals in the exchange of securities issued by public quoted companies and the government. This is whereby the cash settlement element is transferred into the Kenyan banking system. In Kenya.g.g. This is a computer system that facilitates holding of securities in electronic accounts and facilitate faster and easier processing of transactions for NSE securities (shares and bonds) A simple example best demonstrates how a CDS operates. A would deliver the shares to B in exchange for payments via a broker. The objective is to minimize physical movement of securities where complete elimination of physical movements is not achievable. brokers) and interested third parties (e. Nairobi Stock Exchange The NSE is one of the most active capital markets in Africa with more than 50 listed companies. regulators). who holds those shares in safe custody for A and B. B will pay A. and dealings in. Whether the control of the Authority is good for the securities markets remains uncertain.3. Central Depository Agents and by implication the Nairobi Stock Exchange. 3. If A decides to sell to B. It is licensed under a law defining all the powers. The NSE is a private company limited by guarantee. Thus. The cash moves with aid of cash clearing mechanisms. it is likely that settlement will be on an effective DVP basis. which electronically facilitates the exchange of ownership of securities and the movement of cash.g. The CDS is a separate legal entity to be incorporated and is licensed in Kenya to provide central clearing. Company X delivers the shares to the CDS. Thus the CDS plays an important role in bringing together issuers (e. Simultaneously. then in non-CDS environment. 2000 The Central Depositories Act. 2000 is an Act of Parliament to facilitate the establishment. In terms of the CMA licensing requirements for a securities exchange. investors (e. which are subscribed by party A and party B. and for connected purposes CDS stands for the Central Depository System.6. openness. protectionism and anti-competition tendencies Self regulated organizations might not be sufficiently dedicated to their regulatory tasks. 11 . Investors will leave markets that fail to protect investors to find markets that will. 2008) James A. L. an efficient and robust securities markets are dependent on institutional building blocks and the mainstream institution is the legal architecture15. The many choices that investors have today remind exchanges that investor protection is a crucial part of their business. References Alastair Hudson: Securities Law (1st ed. J.8. 3. The above points demonstrate the extent to which the NSE is self regulatory. Government must provide exchanges with sufficient authority to regulate and provide criminal enforcement of exchange rules when necessary. 1690–1860. CAMBRIDGE UNIVERSITY PRESS. 1. 2011 Stuart Banner: Anglo-American Securities Regulation Cultural and Political Roots. Investors can trust exchanges to regulate because of their powerful incentive to maximize trading volume. Case against self regulation (i) Self regulation does tend to insulate an industry group from effective regulation by creating an illusory facade that consumer interests are well catered for. 5.” Investors need to be able to verify the quality of self-regulation when allocating their capital among different markets.. 3. In doing so it also acts as a self-regulatory organization by having in place rules and regulation to regulate the practice and conduct of its members. a) The listing manual 2002 b) The automated trading system rules 2006 c) The management and membership rules d) The disciplinary rules e) In addition to the above. In Kenya capital markets for example we have seen collapse of a few brokerages that have gone down with substantial investor funds Self regulation has been criticized as more expensive than direct regulation Absence of checks and balances of government may permit abuse of rights of members. Indeed. The Importance of Corporate Law: Some Thoughts on Developing Equity Markets in Developing Countries. Government regulation. & DEV. (Cambridge.a) Procedures and appropriate systems of exercising self regulation over its members b) A code of conduct for its members c) Adequate trading surveillance and compliance capacity d) Procedures for dispute resolution e) A system of self regulation with respect to its full and associate members and ensure that the day to day management of trading.shtml on 13th July. government has an important role to play in auditing the exchanges to ensure that they enforce their rules as written. is unlikely to be as responsive to the needs of the securities markets and risks burdening investors with the cost of unnecessary regulation. 1998) 15 See Troy Paredes. settlement. Klimek: A Brief History of Securities Law accessed at http://klimek-law. delivery and all other activities of its full and associate members. The NSE has put into place the following rules and regulations to regulate its business. Sweet & Maxwell. MCGEORGE GLOBAL BUS. Notwithstanding the advantages of exchange. government must play a role even in a largely self-regulatory scheme. 2. In addition. London. 19 PAC. by contrast. but verify. It has been argued that self regulators are generally considered and understandably motivated by self interest to lean towards the lesser degree of regulation There are concerns of equity and market abuse that are evident where there are self regulatory schemes Self regulatory models have been found to lack transparency. 401 (2007). Such system shall be in accordance with the memo and articles of associate and rules of the securities exchange which have been approved by the authority. The formulation of all these rules by the NSE is an indication that it possesses the capacity to regulate its affairs. accountability and acceptability to the public and consumers of the services (ii) (iii) (iv) (v) (vi) 4. As President Ronald Reagan put it in another context: “Trust. Conclusion Securities markets cannot operate without trust. the NSE is also mandated to carry out additional regulatory roles by virtue of provisions made in the CMA rules and regulations.com/Brief %20History. mapsfworld.html accessed on 13th July.org/fi/securoties/regexemp/history.4.htm on 13th July.com/Securities/Brief-History-of-Securities-Regaulation.html accessed on 13th July. 9..com/2011/06/securities -regulation. 5. 2002. 12 .pdf on 13th July.camagazine. Tureen Afroz: Bubbles and Manias in securities markets: Is Regulation as Answer? Accessed at http://www.findlaw. Corporate Disclosures <http://www.lawyers.www. 8. 6. 13. Corporate Disclosures< http://www.htm accessed on 13th July. 7. Capital Markets Act Cap 485. 2011 http://finance. 11.wdfi. Constitution of Kenya 2010.com/5660book. 2011 http://. Kitch: Regulation of the Securities Market.com/archives/printedition/2011/March/regulars/camagazine 46345 >accessed 05.com/archives/printedition/2011/March/regulars/camagazine 46345> accessed 05 August 2011. Laws of Kenya. 2011 http://securities. 1999 accessed at http://encyclo. 2011 http://kenyalawresourcecenter-blogspot.August 2011.thedailystar. 12. Listings and Disclosures) Regulations.net/law/2006/07/04/regulation. 14. 2011 Edmund W.html accessed on 13th July. 10.camagazine. 2011 Capital Markets (Securities) (Public Offers.com/stock-market-exchange.