The Capital Market Authority (CMA) issued a resolution aimed at regulating the securities business sector. CMA’s reason for regulating the securities business sector is to create a suitable environment for investors. The resolution issued by the CMA requires the application of corporate governance standards and requirements on Authorized persons in the securities business sector. The main reason for application of corporate governance is to protect investors in the securities business sector. Investors require protection from illegal business practices. This requires an increase in transparency and disclosure in the sector. Such an increase is expected to result in a suitable investment environment. To achieve this, CMA established various practices in corporate governance.
Authorized persons are required to set up a governance infrastructure established by the CMA. The three main principles of the infrastructure are; the procedures, systems and policies of governance developed under the regulation of the CMA.
Procedures, especially those of supervision, require enhancement by the Authorized persons. Recent practice in the department of supervision in the securities business sector is the establishment of an independent Supervisory Board. An independent Supervisory Board is advantageous because it is not biased compared to an internal Supervisory Board. The main functions of a Supervisory Board are:
- Monitoring and controlling the actions of the board of managers.
- Appointment of members of the board of managers.
- Approval of key decisions made in by the board of managers.
It is crucial that the functions and powers of the Supervisory Board be well defined. These functions and powers should also be written clearly in the regulatory articles of the Authorized persons.
The CMA also proposes that Authorized persons adopt effective systems of governance in their governance infrastructure. Systems of corporate governance are mechanisms useful in controlling the board of managers. According to (Edwards), there are two main types of systems of governance; outsider systems and insider systems. In outsider systems, the managers and the shareholders have a distant relationship. In this system, the shareholders usually influence the major decisions of management. In insider systems, the managers and shareholders have a close relationship. The influence in the making of major decisions is usually balanced between employees and shareholders. The insider system of governance forms the right structure for the best practices in corporate governance. Hence, some authorized persons may be required to restructure their system of governance and adopt the internal system.
The third principle provided by the CMA is establishment of effective governance policies. Governance policies help in ensuring that the procedures and systems of governance are followed to the letter. The policies also provide a system of redress in cases where management fails to adhere to the systems of governance. Governance policies prevent illegal practices in the securities business sector. Governance policies also affect the structure of the Authorized persons’ organizations. The CMA requires Authorized persons to increase the effectiveness of their board of managers. To achieve this, the Authorized persons formulate policies to restructure the board of managers. This is done by including independent members to the board of managers. The Authorized persons are also required to issue reports of their financial year and form special audit and remuneration committees.
The application of governance rules on authorized persons is a crucial part of the development of the securities business sector. This is because implementation of the governance rules will lead to an improvement of transparency in the sector.
Works Cited
Edwards, Tony. “Corporate governance systems and the nature of industrial restructuring”. Eurofound. 2002. Web.