RESEARCH PROJECT TOPIC ON INVESTOR PROTECTION AND THE CAPITAL MARKETS (CORPORATE GOVERNANCE) (MARKET INTERMEDIARIES) REGULATIONS 2011: A CRITIQUE

INVESTOR PROTECTION AND THE CAPITAL MARKETS (CORPORATE GOVERNANCE) (MARKET INTERMEDIARIES) REGULATIONS 2011: A CRITIQUE

CHAPTER ONE

1.0  Introduction

Capital market is a financial market that works as a conduit for demand and supply of debt and equity capital.¹ A study of and into the capital market can be a daunting one but whose importance and relevance cannot be overlooked or assumed by governments, financial market players, regulators, scholars and the general public. Suffice to say capital market plays a vital role in any economy. First, capital markets promote economic growth of a country² through mobilizing of resources and diverting them into productive channels. It also acts as a link between savers and investors;³ it encourages savings and investment by businessmen and government as it facilitates lending to businessmen and government.

With the development of capital markets, the banking and non-banking institutions provide facilities which encourage people to save more in the market.⁴ It tends to promote stability in security prices by stabilizing the values of stocks and securities and reducing the fluctuations in the prices to the minimum⁵. It is as well more beneficial to those investors who want to invest in long term financial assets⁶ as it is part of the financial market that provides funds for long term development.⁷ It goes without say that capital market is the barometer of the economy by which one is able to study the economic conditions of the country due to its ubiquitous nature. With increasing significance and development of capital market over time there arose the need to

¹www.businessdictionary.com (accessed April 2017)

²Aparajita Sinha, ‘fuctions and importance of capital markets.’ Preserve article. (Accessed April 2017.)

³Ibid. “…the capital markets plays a vital role in transferring the financial resources from surplus and wasteful ssareas to deficit and productive areas….’; Frank Fabozzi et al, ‘Capital Markets Institutions and Instruments.’2^ndedition pg 11 “…the interaction of buyers and sellers in financial markets determines the prices of traded assets…’’

⁴ Supra note 2.

⁵Ibid. “…the process of stabilization is facilitated by providing capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities.”

⁶Ibid

⁷CMA ‘Our History.’www.cma.or.ke (Accessed on April 2017)

regulate the market. Three modes of regulations have been adopted by market players. They include self-regulation, government led regulation and regulation with oversight or cooperative regulation or government supervised regulations.⁸ The widely used is government supervised regulations due to its flexibility.⁹ In Kenya, we adopted government led regulation.

1.1  Background

 The regulatory enforcement in the securities market became increasingly important for market players when the capital markets started growing tremendously and its importance to the country could no longer be overlooked. In 1980s the government of Kenya realized the need to design and implement policy reforms to foster sustainable economic development for an efficient and stable financial system to promote and enhance capital markets development.¹⁰ This urge by the government instigated the study on development of money and capital markets in Kenya in 1984. The study was undertaken by the central bank of Kenya (CBK) and International Financial Corporation (IFC) to give recommendations on measures that would ensure active development and strengthening of financial sector. This became a blueprint for structural reforms in the financial markets.¹¹

The government did not stop at that, it re-affirmed its commitment in regulating capital markets by creating a regulatory body for the capital markets in 1986 Sessional Paper on “Economics Management of Renewed Growth.” The recommendations emphasized on the need to develop

⁸ Dr. Jacob Gakeri, ‘Regulating Kenya’s Securities Market: An Assessment of the Capital Markets Authority enforcement jurisprudence.’ International Journal for Humanities and Social Science. Vol. 2 No. 20 [Special Issue – October 2012] .

⁹Ibid. “…government supervised self-regulation is a combination of self-regulation and government led regulation…”

¹⁰ Supra note 7.

¹¹Rose Ngugi, ‘Development of Nairobi Stock Exchange: A Historical Perspective’ KIPPRA Discussion paper No. 27 (Kenya Institute for Public Policy and Research, KIPPRA, Nairobi, March 2003)

money market instruments and removing taxation differences between the debt and equity finance in order to achieve diversity in the sector. Another proposal made was the need to establish a regulatory authority with the powers to provide regulatory measures.

In November 1988, the government set up Capital Markets Development Advisory council mandated to working out the necessary modalities including drafting of a bill for the establishment of Capital Markets Authority (the authority that was to be the regulator). And in November 1989, the bill was passed in parliament and subsequently received presidential assent. The capital markets authority was set up in 1989 through an act of parliament cap 485A Laws of Kenya. The authority was eventually constituted in January in 1990 and inaugurated  on 7^th March 1990. The authority is a corporate body with perpetual succession and common seal.¹² The CMA is charged with responsibility of regulating capital markets in Kenya to basically assist in creating conducive environment for general growth and development of markets in Kenya. As spelt out in the CMA act cap 485A (11) the aim of CMA was to develop all aspects of the capital markets with particular emphasis on the removal of impediments and the creation of incentives for long term investment in productive enterprises. It also targeted to protect investors’ interest in the bourse through formulations of rules and guidelines to regulate the market and also by operating a comprehensive fund to cushion investors from financial loss arising from the failure of licensed stock broker or dealer to meet its contractual obligations.¹³ Efforts were also made to ensure the regulator is independent to carry out its mandate as provided for in the capital markets act effectively.

¹² Supra n 10.

¹³NSE ‘Regulatory Framework.’ Available atwww.nse.co.ke. (accessed April 9, 2017)

The CMA thereafter commenced its responsibility as the government regulator charged with licensing and regulating the capital markets in Kenya. It also approves public offers and listings of securities traded at the NSE.¹⁴ Several regulations and guidelines were thereafter enacted by the regulator to protect the investors and also to ensure growth of securities market in Kenya. The first attempt to protect the investors was in 1995 when the CMA established investor compensation fund (ICF) that was to compensate investors who suffer loss arising out of the failure of a licensed stock brokers or dealers in carrying out its contractual obligations. Many guidelines were also published to regulate the market and offer investors’ protection. They include the capital markets (securities) (public offers, listings and disclosure) Regulations 2002, the capital markets (licensing requirements) (General) Regulations 2002 just to mention but a few. These regulations were to play the core objective of investor protection in the bourse. Whether the existing rules and regulations are sufficient to protect the investors’ interest in the bourse in still debatable? Whether the CMA has succeeded in fulfilling its overarching functions and ensuring investors are adequately protected in the bourse is still illusionary. This is what this research paper seeks to find out.

1.2  Problem Statement

 It was dark moments for the securities market players in Kenya during the period 2007-2010. The capital markets in Kenya during this period experienced a successive and consecutive collapse of four major stockbrokers firms. Francis Thuo and partners went under in early 2007 marking the collapse of three other major firms. It was immediately followed by the collapse Nyaga stockbrokers in 2008 then later by Discount securities Ltd in 2009 and finally Ngenye stockbrokers put under statutory management by CMA in 2010. During this period several

¹⁴Ibid.

potential investors lost millions of shillings, their hard earned cash gone. Their confidence in the bourse waned. The collapse has been argued to be contributed by the weak legal, regulatory and enforcement regime in the bourse.¹⁵

The CMA is the government regulator charged with the mandate to license and regulates the capital markets in Kenya.¹⁶ Therefore it is in its capacity to oversee the activities of market intermediaries such as licensed stockbrokers and investment banks to ensure they carry out their activities prudently in compliance with the laid down rules and regulations. Moreover, CMA has the responsibility of protecting investors’ interests as one of its objective principles.¹⁷This responsibility the CMA has not been able to perform effectively. This was underscored in the forensic audit report by PricewaterhouseCoopers (Pwc) on the collapse of Nyaga stock brokers which deeply question the role of CMA in the Capital Markets in protecting investors.¹⁸ The report went further to point fingers on the CMA to have contributed immensely to the collapse of Nyaga Stock broker, the CMA officials having acted safeguard their own interests instead that of the investors in Nyaga stock brokers’ firm,¹⁹ yet no guidelines have been put in place by CMA to ensure avoidance of conflict of interest between employees of the authority and their duties.

In an attempt to safeguard investors’ interest in the bourse, the CMA also operates investor compensation fund (investors’ compensation fund) which is engrained in the cap 485 Laws of Kenya to grant compensation to investors who suffer pecuniary loss resulting from failure of a

¹⁵ Michael Musau, ‘Capital Markets Authority indicted.’ The African Executive (Nairobi, 14^th June, 2006) available athttp://www.africanexecutive.com/modules/magazines/articles.php?aricle=741 accessed 29^th April, 2017 ¹⁶www.nse.co.ke. ‘’….CMA also approves public offers and listing of securities traded at NSE..” (Accessed 26^th April, 2017); Capital Markets Act cap 485 s

¹⁷ Capital Markets Act cap 485 section 11

¹⁸ Cedric Lumiti, ‘Kenya: Report Unearths the Rot in Capital Markets’ East Africa Business week. 14^th February 2009. www.allafrica.com accessed 29^th April, 2017.

¹⁹Ibid

licensed stockbroker or dealer.²⁰ ICF is grossly inadequate to protect investors who invest millions of shillings in the bourse. The current statutory provision allows the CMA to compensate investors who suffers loss a maximum of Ksh 50,000 regardless of the value of the lost investment from the compensation fund²¹ which is a great detrimental to investors who supposedly loss millions of shillings from the licensed stockbroker. This was profoundly illustrated from the Nyaga stock brokers’ debacle.²²

In addition, the CMA does not provide any compensatory fund for those investors who might suffer loss from other market malpractices such as non-disclosure, insider trading and other market abuses.²³

The NSE on the other hand, as a self-regulator must regulate the activities of its members in the market not to act in jeopardy of its investors which so far is an illusionary.

1.3  Justification of the Study

 To say Capital Market Intermediaries (CMI) plays a vital role in the Kenyan securities market is not disputable. CMI such as stock brokers, dealers and investment acts as a link between issuers and investors. The Kenyan capital markets has witnessed an increasingly tremendous growth over the past few years being categorized as one of the fast growing African Markets in terms of economy, investment, real estate banking and of course stock markets.²⁴ This growth is attributable to the role CMI play in the securities market recently notwithstanding, the jinxed period in the securities market when investors lost billions of shillings due to collapse of close to

²⁰Ibid”.

²¹Capital Markets Act section 18.

²²James Anyazwa and Jackson Okoth, ‘Nyaga investors to take home sh50,000’ Daily Nation. Saturday, May 23^rd 2009. Accessed 23^rd Aril 217

²³Ibid.

²⁴ Kenyan WallStreet, ‘How to invest in stocks in Nairobi Stock Exchange’ January 24, 2016 available at kenyawallstreet.com accessed on 29^th April, 2017.

four stock brokers firms. With the ubiquitous nature and role played by the CMI in the capital markets, a study into the legal, regulatory and enforcement regime regulating their activities in the capital market is imperative.

Regulation of various types of market securities intermediaries should be design to address entry criteria, capital and prudential requirements, ongoing supervision and discipline entrants, and the consequences of default and financial failure.²⁵ The oversight of market intermediaries should primarily be directed to the areas where their capital, client money and public confidence may most be put at risk.²⁶ High standards of prudential and business conduct by market intermediaries are of vital significance because investors are more willing to invest if they are assured that their orders are carried out fairly and efficiently, and that their interests are safeguarded.

From the foregoing, it is evident that the conduct of the CMI in the bourse is not adequately regulated to protect investors’ interest and promote their confidence. This is the thrust of this  new study. The research paper will delve into the murky waters of the current legal, regulatory and enforcement regime in the Kenyan capital markets. It will highlights the strength in the current legal, regulatory and enforcement paradigm, critiques the regulatory and enforcement regime and draws lessons from another jurisdiction with sound and develop regulatory regime. This research will also demonstrate that without certain fundamental amendments being made on the current regulatory regime, they are unlikely to achieve their intended goal. In conclusion, this research makes a cogent argument for those amendments to be done to make the regulations effective.

²⁵International Organization for Security Commission (lOSCO) Objectives and Principles of Securities Regulations (Feb 2008) pp5 available at www.iosco.org. (last accessed on April 29, 2017)

²⁶Ibid pg 33

1.4  Research Objective

The general objective of this research paper is to assess whether the current regulatory and enforcement regime adequately protects investors against the CMI in the bourse.

In addition to the general objective, this research paper will concentrate on the following specific objectives to;-

1. Assess the current legal and regulatory framework governing the CMI in the securities market in relation to investor
2. Undertake a comparative study with those jurisdictions with sound and well developed securities market such as
3. Suggest appropriate recommendations to the legal and regulatory framework that governs the CMI in the securities market to ensure investor

1.5  Research Questions

This research is guided by the main question:-

Do the current regulatory and enforcement regime adequately protect investors from market intermediaries in the Kenyan stock market? This research is premised on the need for suitable regulatory regime which augments the investor protection and subsequent development of the securities market. Hence three sub-questions have been subsequently developed to help in accomplishing the objective of the study;

2. Is the current legal and regulatory framework adequate to govern CMI in the Kenyan capital markets to protect investors?
3. What lessons can be learnt from other jurisdictions with sound and well developed securities market to adequately regulate CMI?
4. What are appropriate recommendations for an optimal regulatory framework to govern CMI in the Kenyan capital markets to ensure investor protection?

1.6  Research Hypothesis

1. The current legal and regulatory framework governing CMI in the bourse is inadequate to protect investors. This is premised on the weak legal and regulatory framework in the Kenyan capital markets that has not been able to adequately to protect investors’ interest in the
2. The legal and regulatory framework of other countries such as UK may be borrowed to greatly improve the current regulatory framework governing CMI in the bourse to ensure investor
3. That the recommendations arrived herein at this paper will go a long way to ensure that investors in the bourse are adequately protected against

1.7  Research Methodology

My research methodology will largely rely on the use of the library. The use of the library will be grounded on the use of capital markets books relevant to the topic, journals, articles and any other relevant materials in the library. Not indispensable, is the analysis of the capital markets act and other regulations and guidelines such as markets (securities) (public offers, listings and disclosure) Regulations 2002.

Apart from the use of library materials, internet materials will also be helpful and the same will be adequately cited in this paper which will majorly include; e-journals, books and articles relevant to the topic of study.

1.8  Theoretical Framework

 Many economists’ writers have looked at the role of government regulations in the development of the national economy. They have come up with two major theories to explain the pattern of government regulation in any given economy. These theories include the public interest theory and interest group or capture theory.²⁷ Posner classifies these theories, as theories of economic regulation and states that, the properly defined, “economic regulation” refers to taxes and subsidies of all sorts. It also includes the legislative and administrative control over rates, entry and other facets of economic activities.²⁸ These two theories will be relevant to this research.

1.8.1   Public Interest Theory

 Public interest theory is an economic theory first developed by Arthur Cecil Pigou²⁹ that holds that regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices. According to Posner, “this regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices.” To him this is a theory that has been bequeathed by previous generation of economists to the present generation of lawyers.³⁰ Fundamental to public interest theories are market failures and efficient government intervention.³¹According to Andrei³² public interest theory is hinged on two

²⁷Richard A. Posner, ‘Theories of Economic Regulation,’ the Bell Journal of Economics and Management Science, vol2 no.5

²⁸Ibid.

²⁹Pigou Arthur C, ‘The Economic of Welfare’(4th edn, London: Macmillan and Co 1932) p 70.

³⁰ Supra note 23.

³¹ Johan den Hertog, ‘Reviews of Economic Theories of Regulations.’ Utretcht Shool of Economics Tjalling C. Koopmans Research Institute Discussion Paper series 10-18. December 2010.

assumptions. First, unhindered markets often fail because of the problems of monopoly or externalities. Second, governments are benign and capable of correcting these market failures through regulation. From the foregoing, it is evident the enactment of capital markets authority act of 1989 (as it was then) and other subsequent guidelines and regulations formulated by the CMA was meant to regulate the market which for a long time was left unregulated according to Rose Ngugi in her paper³³ and even protect investors the constituents players in the market.

1.8.2   Interest Group or Capture Theory

 The essence of this theory is to question the regulations techniques of a benevolent and competent government effort in regulating an economy.³⁴ Peltzman successfully summarized the theory into two basic propositions.³⁵First, the political process of regulation is typically captured by the industry. Regulation not only fails to counter monopoly pricing, but is to the contrary used to sustain it through state intervention. Second, even in the cases where, under the influence of organized consumer groups, regulators try to promote social welfare, they are incompetent and rarely succeed. Thus the scope for government regulation is minimal at best, and such intervention is futile and dangerous even in the rare cases where there is focus.³⁶ This theory basically opines that inasmuch as the government can intervene, it’s out of the market players the interest group to ensure the economic conditions are balanced. Another theory crucial in this research is the contracting theory.

³² Andrei Shleifer, ‘Understanding Regulations.’ European Financial Management, Vol. 11, No. 4, 2005, 439–451 ³³ Rose Ngugi, ‘Development of Nairobi Stock Exchange: A Historical Perspective’ KIPPRA Discussion paper No. 27 (Kenya Institute for Public Policy and Research, KIPPRA, Nairobi, March 2003)

³⁴Supra note 28.

³⁵Peltzman, S., ‘The economic theory of regulation after a decade of deregulation’ Brookings Papers on Economic Activity, Special Issue, 1989, pp. 1–41.

³⁶Ibid.

1.9.3 Contracting Theory.

This theory is associated with Coase.³⁷ According to him, when competition and private orderings don’t successfully address market failures, impartial courts can do so by enforcing contracts and common law rules for torts. As long as courts can enforce some legal obligation in the market, equilibrium outcomes are sufficient. When courts award sufficient damages to the harmed plaintiff in the market, potential tort-feasers face exactly the right incentives to take sufficient level of precaution.³⁸ With well-functioning courts enforcing obligation rights in the market, then even the scope for desirable regulations by government is minimal. This theory envisages court as impartial body the mandate to deal with market malpractices of market intermediaries.

1.9  Literature Review

It’s worth noting that there is extreme paucity of literature with specific reference to this research topic. Notwithstanding, a number of books and articles that having been written in relation to the role of securities regulations in investor protection. With reference to the research topic, the literature review of this paper commences with the discussion as to why securities market regulations is of importance to the Kenya’s nascent economy. It then emphasizes on the need of optimal legal and regulatory framework for investors’ protection in the securities market. It delves the literature of the Kenyan authors in relation to investor protection in the Kenyan capital markets. It assesses the learning of other jurisdictions with strong and well developed securities market. Finally, it narrows down to the knowledge gap which is the thrust of this study.

³⁷Coase, R., ‘The problem of social cost’, Journal of Law and Economics, Vol. 3, 1960, pp. 1–44.

³⁸Posner, R., ‘A theory of negligence’, Journal of Legal Studies, Vol. 1, no. 1, 1972, pp. 29–96.

1.9.1   Investor Protection Through Regulations and Promotion of Investors’ Confidence.

To begin with, the golden thread cutting across all literature underpinning the need for securities market regulation is to protect investors. Investors’ protection in the capital markets is the cornerstone of securities regulations³⁹ since investors are the major constituents in the bourse. Its ubiquitous nature and positions across the globe vindicates the above propositions. The same is observed by Dr. Jacob Gakeri in his paper, Calibrating Regulatory Disclosure in Kenya’s securities market: challenges and opportunities for investors where he argue that deep and vibrant securities markets are characterized by effective investor protection frameworks.⁴⁰ He therefore urges the developing jurisdictions globally to devise and institutionalize mechanisms that foster investor protection. In his paper he emphasize on the disclosure philosophy. He illuminates on the centrality of the regulatory disclosure as an investor protection mechanism and its working in the Kenya’s capital market. CMI are ubiquitous when it comes to disclosure in the capital market. Investors rely on the information they provide to make an informed decision. This paper will be relevance to this study as this paper will also study the existing regulatory framework in connection with the disclosure.

La Portaet al⁴¹argue that protection of investors encourages participation in share trading and enhances the development of financial markets. They further argue that countries that protect shareholders have more valuable stock markets, large number of listed securities per capita and a high rate of IPOs. Further, it is observed that protection of investors and qualities of law

³⁹ Asia-Pacific Regional Committee Findings on ‘Investor Protection in the Asia Pacific’ Nov 20035th OECD Roundtable on Capital Market Reform in Asia; Andrew Guzman & Stephen J. Choi, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. CAL. L. REV. 903,941 (1998); Toan Le Minh & Gordon Walker, Investor Protection: Case Studies of the Vietnamese Securities Market, 38 HONG KONG L. J. 713, 713-14 (2008).

⁴⁰ Dr. Jacob Gakeri, ‘Calibrating Regulatory Disclosure in Kenya’s Securities Markets: Challenges and opportunities for Investors.’ International journal of humanities and social science. March 2014.

⁴¹La Porta R, F Lopez-de-Silanes and A Shleifer, ‘Law and Finance’ [1998] 58Journal of Political Economy, p1113.

enforcement as proxy for governance have predictors power on the extent of market declines during crises and even better than macroeconomic variables.⁴² They, however, do not tell us how to go about protection of investors‟ interests or promoting investors confidence.

Llewellyn in his paper⁴³ argues that there is an economic rationale for financial regulations. He opines that the objectives of financial regulations need to be clearly defined and circumscribed. He postulates three broad and core objectives financial regulations to include promoting systemic stability, to maintain safety and soundness of financial institutions and lastly protect the consumer.

1.9.2   Regulations of Market Intermediaries in the Capital Markets.

Kevin Rothwell in his book Regulations and Market Practice (Kenya) provides an insightful layout of rules and regulations governing the operations in the Kenyan capital markets. He outlines both primary and secondary legislations governing the market player in the stock market and more emphasis on the capital markets intermediaries corroborating the need of the CMI to adhere to the regulations in the course of offering their services.⁴⁴ He nevertheless fails to indicate whether the provided rules and regulations adequately protect investors in the bourse instigating me to find out the same. This is the thrust of my study.

⁴²La Porta R, F. Lopez-de-Silanes, A. Shleifer and R Vishny, ‘Investor Protection and Corporate Governance’ [2000] 58 Journal of Financial Economics p3.

⁴³ Llewellyn David, ’TIhe Economic Rationale for Financial Regulation’ (1999) London, Financial Services Authority, Occasional Paper no 1 pg 11

⁴⁴ Kevin Rothwell, Regulations and Market Practice (Kenya). 1 May, 2016

1.9.3   Do Regulations Provide the Best Protection for Investors in the Securities Market?

There is substantive literature to vindicate the above proposition. According to Njaramba Gichuki⁴⁵ regulations of the securities market especially in the nascent markets serves both as a “disciplinary” role and a “development” role.

AfriCOG argues that there is “a positive and economic rationale for regulation in financial markets, more so where there are market imperfections and failures in financial sector players” and they proceed to give examples of the collapse of Francis Thuo and Nyaga stockbrokers.⁴⁶

Another important literature relevant to this study is that of Jacob Gakeri’s exploration of the role of legal norms in the enhancement of securities markets in Kenya.⁴⁷ He postulates that appropriate legal and highlights that the legal framework must facilitate the proper functioning of the securities markets by ensuring that relevant disclosure requirements are complied with. Gakeri further argues that whereas developing jurisdictions can learn from legal regimes of jurisdictions with deep and vibrant securities markets, such laws should not be replicated without testing their appropriateness. He asserts that rules and institutions that function well in one country may not be appropriate in another because of the absence of supportive norms and corresponding institutions. This factor is recognized in this paper while gathering strengths of capital markets intermediaries’ legislation in various jurisdictions for their comparative value. These strengths provide a point of reference for proposing improvements to Kenya’s law only

⁴⁵ Njaramba Gichuki, ‘The Paradox in the Implementation Matrix in Capital Markets Reform in Kenya’ (Emerging Trends in Commercial & Financial Law workshop, KCB Leadership Centre, Karen, 9 and 10 June 2011).

⁴⁶Economic Governance Program, Africa Centre for Open Governance, “Review of Securities Regulations, AfriCOG‟s comments on the draft Capital Markets Authority Regulations” (2010) p3 available at

<http://www.africog.org/reports/review-securities-regulation-africog%E2%80%99s-comments-draft-capital- markets-authority-regulations >accessed 19 June, 2017

⁴⁷J. Gakeri, ‘Enhancing Securities Markets in Sub-Saharan Africa: An Overview of the Legal and Institutional Arrangements in Kenya’ [2011] 1(9)International Journal of Humanities and Social Sciences

134-169, 136< http//www.ijhssnet.com/journals/vol_1_9_Special Issue_July2011/18.p.d.f> Accessed 5^th June 2017.

where weaknesses or gaps have been identified. In this way, Kenya’s legal framework is brought in line with developments globally.

The study by Celia R. Taylor⁴⁸ examines how economies of former communist states. Eastern European states have developed their capital markets since the fall of communism. Case studies of the Russian and Polish models are provided. This study is in keeping with the trend in literature that focuses on the need for development of capital markets in the emerging economies through proper structures and regulatory requirements. The author states that she does not seek to answer all the relevant questions relating to a regulatory structure but focuses on the need for issuer disclosure in capital markets and the regulatory framework required to facilitate  this. There is some discussion on the place of self regulatory bodies in the capital markets and the views of the proponents and detractors of self regulatory bodies which will be relevance to my research paper.

Paul nelson in his book “Capital Markets Law and Compliance: The implications of MiFID” insightfully illustrates the evolution of capital markets regulations in UK. The circumstances that instigated the need for capital markets regulations and the subsequent enactment of Financial Service Act (FSA) of 1986 and the development European single market. He gives a detail information of the regulations of the capital markets while analyzing the financial service act.⁴⁹ In his book he presents practical guidance on the regulation of the capital market ranging from new issues and IPOs to investment banking, broker-dealing and asset management. All laws and rules relevant to the regulation of the capital markets are analyzed and put into context within the

⁴⁸Celia R. Taylor, ‘Capital Markets Development in the Emerging Markets: Time to Teach an Old Dog Some New Tricks,’

the American journal of comparative law, vol 45 No.1 (winter 1997), pp 71 – 107 published by American society of comparative law at www.jstor.org

⁴⁹Paul Nelson, Capital Markets Law and Compliance: The Implications of MiFID. Cambridge 2008.

economic operation of markets, the European single market, the FSA’s policies and objectives. Paul Nelson’s work will aid this research into drawing lessons we need from a sound and well developed market of London.

1.10  Scope of the Study

For the purposes of this research, this study is limited to the study of the current regulatory and enforcement regime that regulates CMI activities in the Kenyan securities market to safeguard investors’ interests in the bourse.

This research will also limit itself to study of stock brokers and investment banks as the licensed CMI under the act and other CMI will only be highlighted.

1.11  Chapter Breakdown

Guided by the provided research questions, Guided by the provided research questions, this research is designed in chapter format whereby, each chapter will explain profoundly on the research. The thus research consists of five chapters.

Chapter one: Introduction.

This chapter outlines on the introduction to the study, the background of the study, statement of the problem, justification of the study, statement of objectives, research questions, research hypothesis, research methodology, theoretical framework that will guide this study, literature review and the scope of the study.

Chapter Two: Critical analysis of the current legal and regulatory framework in the capital markets in relation to investor protection.

The chapter critically examined and analyzed the existing legal and regulatory framework regulating securities market intermediaries in Kenya with regards to investor protection. The chapter identified the gaps and weaknesses in the regulatory framework. It also examined the  role of CMA as a state regulator and NSE as a self-regulatory body.

Chapter Three: Comparative Study.

 In this chapter, the study considered the weaknesses in the existing legal and regulatory framework regulating securities market intermediaries identified in the previous chapter. It undertook a comprehensive analysis of how the United Kingdom as a developed market has addressed the weaknesses in regulating its capital markets intermediaries. The aim was to learn and bring out how the weaknesses can be addressed by considering a successful jurisdiction.

Chapter Four: Reforms and Recommendations.

 This chapter concludes our research by providing a way forward. Having considered in the previous chapters the Regulations in details, brought out the weaknesses, offered the critique and considered how the UK has addressed those weaknesses, the research concluded by offering the recommendations that the research deemed mandatory to improve the Regulations to ensure they meet their intended goal.