Paper 3

REGULATION OF FINANCIAL MARKETS

This paper is intended to equip the candidate with knowledge, skills, understanding and attitudes that will enable him/her to comply with and implement the regulatory framework governing financial markets in practice.

On completion, a candidate should be able to

Identify the key elements of the legal and regulatory framework relating to financial markets
Demonstrate understanding of the licensing requirements of intermediaries in the financial market
Relate with and enforce requirements of market regulators, the securities exchange and other financial market players
Demonstrate an understanding of the processes and law on anti-money laundering and financing of Terrorism;
Apply corporate governance principles in the management of market intermediaries

Content

1
Introduction to Law
1. 1.1
  Nature, purpose and classification of law
2. 1.2
  Sources of law
3. 1.3
  The court system; establishment, composition and jurisdiction;
4. 1.4
  Fundamentals of the law of contract: definition; classification; formation; terms of a contract; vitiating factors; illegal contracts; discharge of contracts; remedies for breach of contracts; limitations of actions
5. 1.5
  Fundamentals of the law of agency: nature of agency; formation of agency; authority of agents; duties and rights of principals and agents; personal liability of agents; termination of agents
2
Financial markets regulatory institutions
1. 2.1
  Historical development of the law and regulations governing financial markets
2. 2.2
  Objectives of regulation; need for regulation of financial markets
3. 2.3
  Regulatory strategies in financial services
4. 2.4
  Financial market regulators (as applicable in Kenya or other jurisdictions where relevant): central banks; capital market authorities; deposit insurance corporations and deposit insurance funds; insurance regulatory authorities ; retirement benefit authorities; sacco societies regulatory authorities; unclaimed financial assets authorities; competition authorities or equivalent bodies
5. 2.5
  Professional bodies in financial services- Institute of Certified Investment and Financial Analysts (ICIFA)
6. 2.6
  Regulations in the international financial markets
3
Regulations of Capital Markets
1. 3.1
  The Capital Markets Authority (CMA) - Powers, functions and roles
2. 3.2
  Investor Compensation Fund (ICF)
3. 3.3
  The Capital Markets Tribunal: Powers, functions and roles
4. 3.4
  The Capital Markets Fraud Investigations Unit
5. 3.5
  The International Organisation of Securities Commissions principles relating to the regulator (8)
4
Financial market intermediaries
1. 4.1
  Requirements for licensing of market intermediaries
2. 4.2
  Market intermediaries:
  1. 4.2.1
    Investment Banks, Stock Brokers and Dealers
  2. 4.2.2
    Fund Managers and Investment Advisers
  3. 4.2.3
    Credit Rating Agencies
  4. 4.2.4
    Collective Investments Schemes (Unit Trusts and Mutual Funds)
  5. 4.2.4
    Custodians/ Authorized Depositories
  6. 4.3.5
    Online Foreign Exchange Brokers and Money Managers
  7. 4.3.6
    REIT Managers and REIT Trustees
  8. 4.3.7
    Foreign Exchange Bureaus
  9. 4.3.8
    Private Equity and venture capital Firms
  10. 4.3.9
    Savings and Credit Cooperative Societies
3. 4.3
  Obligations of licensed intermediaries: conduct obligations; client accounts; record keeping and reporting obligations
4. 4.4
  Roles of an authorised depository and when the appointment of a custodian is required
5
Central Securities Depository
1. 5.1
  The Central Depository Settlement Corporation
2. 5.2
  Establishment of the Central Depository
3. 5.3
  Role and duties of a Central Depository
4. 5.4
  Central Depository agents
5. 5.5
  Rules relating to Appointment of Central Depository Agents
6. 5.6
  Rules of a Central Depository
7. 5.7
  Structure of Central Depository Accounts; settlement of trades
8. 5.8
  Insurance of a Central Depository
9. 5.9
  The Business Conduct Committee of the Central Depository Corporation
10. 5.10
  Establishment and Management of the Central Depository Guarantee Fund
6
Securities Exchanges and Clearing Agencies
1. 6.1
  Establishment of Securities Exchanges
2. 6.2
  Role of the Securities Exchange
3. 6.3
  Membership of the Securities Exchange
4. 6.4
  The Board and committees of the Securities Exchange
5. 6.5
  Securities Exchange listing rules; listing process; role of advisers; eligibility and disclosure requirement; continuing obligations
6. 6.6
  Takeover and Merger Regulations
7. 6.7
  Foreign Investor Regulations
8. 6.8
  Derivatives Exchange Regulations: Requirements for Derivative Exchanges
9. 6.9
  Raising capital in the securities market: Initial Public offering, introductions, offers for sale of issued securities, Additional new listing of securities
10. 6.10
  Market Segments and Eligibility requirements: Main Investment Market Segment (MIMS), Alternative Investment Market Segment (AIMS), Fixed Income Securities Market Segment (FISMS) and Growth Enterprises Market Segment (GEMS)
11. 6.11
  Appointment and Responsibilities of nominated advisors, sponsoring stockbrokers and lead transaction advisor
12. 6.12
  Procedure for admission to listing of REITS securities
13. 6.13
  Suspension and delisting of securities listing and post listing requirements
14. 6.14
  Demutualization and Self-Listing of the Exchange
15. 6.15
  Cross border listing
16. 6.16
  Over the counter (OTC) markets and other multilateral trading facilities (MTF) (9)
17. 6.17
  Clearing Agencies
18. 6.18
  The International Organisation of Securities Commissions (IOSCO) principles for self-regulation and enforcement of securities regulation
7
Investment Funds
1. 7.1
  Collective Investment Schemes (CISs): types of CIS; requirements for authorisation of a fund and the restrictions on advertising content; purpose and main contents of the information memorandum; role of the main participants in a collective investment scheme; rules surrounding the valuation and pricing of a fund and investor dealing
2. 7.2
  Exchange-Traded Funds (ETFs): characteristics of exchange-traded funds; Listing ETFs; Trading and Settlement
3. 7.3
  Real Estate Investment Trusts (REITs): Types of REITs; characteristics of REITS; Regulatory Requirement of REITS; Role of the REIT Manager; Role of the Trustee
4. 7.4
  Venture Capital Companies: characteristics of Venture Capital Companies; Eligibility Requirements for a Registered Venture Capital Company
5. 7.5
  Employee Share Ownership Plans (ESOPs): Creation of an ESOP; Scheme Requirements
6. 7.6
  Special Interest Schemes: characteristics; requirements for special interest schemes
8
Corporate Governance and Conduct of Business of Market Intermediaries
1. 8.1
  The concept of corporate governance
2. 8.2
  Objective of the corporate governance Regulations
3. 8.3
  Role of the Board, its committees and the Board Charter
4. 8.4
  Responsibilities of shareholders
5. 8.5
  Employees and prescribed Code of Conduct
6. 8.6
  Management of a market intermediary
7. 8.7
  Internal controls and risk management
8. 8.8
  Capital Markets Authority Audit
9. 8.9
  Conduct of business of market intermediaries
  1. 8.9.1
    Principles when conducting business with the public
  2. 8.9.2
    Know your client procedures
  3. 8.9.3
    Client rights, contract notes, confidentiality, funds and complaints handling procedures
  4. 8.9.4
    Purpose of the fair and clear communications rule
  5. 8.9.5
    Rules surrounding cold calling
  6. 8.9.6
    Rules surrounding the disclosure of charges
  7. 8.9.7
    Required content of a client agreement
  8. 8.9.10
    The concept of fiduciary duty
  9. 8.9.11
    Rules around client confidentiality and access to client information
  10. 8.9.12
    Conflict of Interest
  11. 8.9.13
    Suitability of advice; investment advise process
  12. 8.9.14
    Client Money: segregation of client money bank accounts; Operating Client Money Accounts; Reconciliation and Accounting Record; Registration of Asset
  13. 8.9.15
    Unacceptable trading practices: front running; churning; insider dealing; market abuse; penalties for unacceptable trading practices (10)
9
Anti-Money Laundering and Combating the Financing of Terrorism
1. 9.1
  Money laundering, the process and related offences; suspicious transactions reporting
2. 9.2
  Financial Reporting Centre-objectives, functions and powers
3. 9.3
  The Anti-Money Laundering Advisory Board; Anti-Money Laundering obligations of a Reporting Institution
4. 9.4
  Money laundering checks: best execution rule; timely execution rule; timely and fair execution rule; contract notes rule; off-market transactions
5. 9.5
  Assets Recovery Agency (ARA)- functions, powers and funds
6. 9.6
  Criminal Assets Recovery Fund - functions, powers and funds
7. 9.7
  Role of the financial Action Task Force
8. 9.8
  Role of Egmont Group of Financial Intelligence Units
9. 9.9
  Role of Eastern and Southern Africa Anti Money Laundering Group (ESAAMLG)
10. 9.10
  Role of United Nations Office on Drugs and Crimes (UNODC)
11. 9.11
  Customer Due Diligence requirements for natural persons, legal persons, partnerships and trusts
12. 9.12
  Counter Financing of Terrorism: Inter-Ministerial Committee - Functions and powers of the Committee; mechanism for coordinating counter - terrorism measures
13. 9.13
  Enhanced due diligence measures
14. 9.14
  Establishment of ultimate beneficiaries
15. 9.15
  Politically exposed persons
16. 9.16
  Correspondent relationships
17. 9.17
  Wire transfers
18. 9.18
  Legitimacy of source of funds