The Capital Markets Authority (CMA) is set to shake up the boards and management of stockbrokers as it seeks to strengthen corporate governance in market intermediaries with a new set of regulations.
The draft rules published by CMA will force some stockbrokers to reconstitute their board membership and appoint new chief executives in order to comply.
CMA is seeking to end family dominance in stockbroking firms by capping the number of directors with close relations at one-third of the board. Stockbrokers have largely been family-run businesses, with founders still playing an active role in the day-to-day management of the firms.
Close relations have been defined to include children, grandchildren and spouses.
Each intermediary will now be required to have at least three board members, one of whom must be an independent director.
The regulator further seeks to give more power to the boards by making them responsible for appointing chief executives.
Under the new rules, the chair of the board cannot also serve as chief executive and must also be an independent director. This rule will push some of the founders to reconsider the nature of their relationship with the institutions they established, given that they currently serve both as chair and chief executives.
“The objective of these regulations shall be to promote good governance within the capital markets, safeguard investor interests and enhance market confidence,” said the CMA.
Market intermediaries will also have to streamline their payrolls in order to ensure the pay to executive and top management is commensurate with their size of business and performance. CMA will have powers to inspect the payroll to ensure adherence to the remuneration guideline.
Conflict of interest
Employees of the brokerage units will be required to disclose their interest in traded securities and any conflict of interests that arise in the course of business.
Market intermediaries, who include stockbrokers, investment banks, fund managers, custodians, real estate investment trust (Reit) managers and online foreign exchange (forex) brokers, will also be mandated to have an audit committee. The membership of the committee shall include a certified accountant who is a member of the Institute of Certified Public Accountants of Kenya (ICPAK).
Other compulsory positions that the brokers will need to fill are those of internal auditor, compliance officer and risk manager.
The internal auditor will have direct access to the board of directors, enabling them to report any concerns without fear of reprisal.
Intermediaries will disclose the requirements of each job position in a move to ensure that only qualified personnel are hired, not mere cronies of the executives.
CMA is pushing to have a say on changes of ownership, directorship and key personnel in institutions under its mandate as it will have to sign off before such changes take effect.
CMA has been gradually raising the bar of corporate governance in stockbrokers and fund managers with new regulations issued each year since 2023.
In the first round, the authority went for character vetting by enforcing the fit and proper test on directors.
Last year, the CMA increased the capital thresholds of the market intermediaries to ensure their financial soundness.
The rules pushed the minimum liquid capital of investment banks to Sh50 million or eight percent of their total liabilities, whichever is higher.
The regulations also introduced minimum cash requirements for broker-dealers, trustees, custodians, money managers, Reit managers and online forex brokers.
