Johnstone Ole Turana
23 February 2010
The Capital Market Authority (CMA) is looking at importing stiffer penalties for capital market offenders from the United States Securities and Exchange Commission (SEC) in a bid to stem rampant unethical trading.
The recent announcement that broker Ngenye Kariuki was being placed under statutory management has brought to the fore concerns that the regulator was failing in supervision.
Despite the introduction of the risk-based supervision (RBS) by the CMA to detect financial problems facing stock brokerage firms early enough, investor concerns over the stability of several stockbrokers abound.
Under the civic injunction actions, SEC can order permanent injunctions, recover ill-gotten gains, order freezing of assets, impose civil penalties and deregister stockbrokers from trading.
On the other hand administrative proceedings which are undertaken through authorisation of a court allow forfeiture of gains made from inappropriate trading activities such as fraud, insider trading and front running as well as imposing fines, censure, suspension and revocation of licence.
According to Robert Fisher, officer of International Affairs at SEC, these stiffer penalties act as deterrents to potential fraud.
Proper perspective
The risk-based approach which replaced compliance based supervision (CBS) is expected to check in advance any potential problem facing brokerage firms.
"We adopted risk based supervision to allow us have a proper perspective of the players thereby forestall any potential risk of failure", said Stella Kilonzo, Chief Executive Officer of CMA.
Speaking at an international capital market conference organised by the United States Securities and Exchange Commission (SEC), she noted that the placement of Ngenye Kariuki under watch of the State was necessitated by the need to protect investors' investments and build market confidence.
The conference brings together market regulators from Africa and Middle East.
Ngenye Kariuki stockbrokers was placed under a six month statutory management two weeks ago, pointing to the inability of the regulator to detect in time and act swiftly on firms under distress.
Adoption of SEC supervision system would deter malpractices especially those bordering on fraud.
Currently, CMA needs to seek a magistrate warrant to carry out investigation whose findings form the basis of an application to block assets irregularly acquired from being transferred.
In the case of US SEC, it has authority to carry out its function without recourse to a court of law allowing it to strike faster hence forestalling any possibilities of disposal of assets obtained through proceeds of unauthorized trading such as front running.
Under a Preliminary Risk Profiling where firms are assigned High, Moderate & Low risks status, the CMA determines the level of inspection to be undertaken.
"Focusing on potential risks posed to the investors is an effective approach for both the licensees and the regulator," said James Wangunyu, managing director of the Standard Investment Bank.
The placement of Ngenye Kariuki stock brokers under statutory management, the fourth to experience distress in three years points to the challenge CMA faces in a market that is at its lowest ebb.
The three other brokerage firms which have gone under are Discount Securities, Nyagah Stock Brokers and Francis Thuo.
The collapse of these three firms has led to loss of investors funds estimated to be Sh2.7 billion.
The folding up of Ngenye Kariuki stock brokers comers at a time the regulator has enforced other new requirements such as capping of individual ownership to 25 per cent, divorcing ownership from management and seeking the CMA authorisation to change top management.
In addition, the regulator raised the share capital of stockbrokers and investment banks to Sh50 million and Sh250 million respectively in order to adequately capitalize them.