stockbrokers to remain hidden

The Kenya Capital Markets Authority (CMA) has published new rules at its website on how they propose to regulate stockbrokers. They have also published proposed rules for Kenya real estate investment trusts – a.k.a. REIT’s as they are called.

Unlike with other plublications like the Treasury Budget process or (new rules from) the Communications Commission of Kenya, the CMA is not inviting public comments or suggestions; these are finalized new rules.

What they include

The Capital Markets (Conduct of Business) (Market Intermediaries) Regulations, 2009
– Intermediaries (i.e. stockbrokers / investment banks) will be required to engage in know your customer (KYC) practices (to prevent money laundering)
– brokers will not recommend unsuitable transactions once they know profile of their customer
– No cold calling allowed (does that happen in Kenya? Banks and insurers sometimes do that)
– Brokers must have policies for customer confidentially, handling customer complaints,
– Brokers barred from front running and account churning
– Brokers must separate client funds and stockbroker funds
– Broker employees undertake not to use information gained from clients for personal gain

contentions clauses
– Will customers really have a right to be paid interest on their funds held?
– Will brokers prepare objective client agreements that will be signed between them and clients – and which call on them to disclose third party remuneration, conflicts of interest etc?

The Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2009
– Each stockbroker must have board of directors, who are not children (i.e. under 25 years), and one must not be related to any other director; also the CMA will have to approve any board changes
– new rules vest management of the broker in the board of directors on matters such as audit, risk assessment, key employee hiring & duties
– broker to hire a compliance officer
– broker to hire an internal auditor
– employees to disclose securities they or their close associates own

REIT rules

The Capital Markets (Real Estate Investment Trusts) Regulations, 2009
– REIT/schemes will distribute at least 90% of after tax income as dividends like in other countries
– Scheme may borrow for investments, but these will not exceed 1/5 of total assets
– REIT must have an independent Principal valuer to value the scheme assets. He/she must be changed every three years
– Trust founders may not own more than 50% , and publicly listed ones may have a minimum of 100 members

Summary: The CMA to be notified in advance of key events at stockbrokers; e.g. new key managers, likely changes in ownership, material pending lawsuits, auditor changes. Also, the new compliance rules make it more expensive for small stockbrokers to comply; this may force them to merge or seek new shareholders.

Stockbrokers will however remain hidden as their disclosure requirements remain only to the CMA even on the basic issue of sharing financial returns with the public; stockbrokers are required to prepare only annual balance sheets and profit & loss statements using IFRS; but these they will only be shared with the CMA – not published for the public. Contrastingly , the rules are lenient for stockbrokers and harsher for REIT’s who will publish its (quarterly) un-audited financial results in at least two national daily newspapers of national circulation. REIT’s are also required to employ auditors recognized by the institute of certified public accountants of Kenya (ICPAK), but that does not apply to stockbrokers whose auditor qualifications are not spelt out. why not?