INVESTOR COMPLAINTS IN THE STOCK MARKET. Introduction

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1 INVESTOR COMPLAINTS IN THE STOCK MARKET Introduction Over the last five or so years, the capital markets in Kenya has seen unprecedented growth in terms of turnover, volumes of trades, market capitalization, products, issuers, as well market intermediaries. The number of investors participating in the market has also soared. This is largely attributable to the increase in economic growth which has turned around various sectors of the economy, occasioning positive change in the depth and diversity of the capital markets. This has precipitated new developments which include the introduction of the automated trading system and full implementation of the central depository and settlement system which have greatly altered the trading and settlement landscape of this market. The result of this is more efficiency, effectiveness, and transparency under this environment when compared to the previous one. Advancement in technology in particular is making it possible to set up market facilities, in the form of trading systems, at relatively low cost. This is making it easier for competitors to exploit efficiencies in the trading arrangements and meet investor demand for trading functionality that are more tailored to their specific needs leading to increased over all activity. The increase in the level of activity in the stock market has resulted in an increase in the number of participants. Unfortunately this has resulted in lowering the general level of sophistication for both for the investors and for markets players. At the same time the traditional order, on which regulation was initially based, is slowly changing leading to greater investor protection risks. It is also easier to pick out any form of market malpractice in the current transparent environment. As an inevitable consequence, the number of complaints on the part of the investors on a wide range of issues has been on the rise. These complaints can be divided into three levels: genuine complaints occasioned by inefficient market players when overwhelmed by this increased activity; complaints from investors as a result of sheer impunity in dealing with client accounts by unscrupulous market players; and investor complaints as a result of ignorance and limited knowledge of the going-ons in the market on the part of the investors themselves. Complaints are important to the regulatory process in that they do provide useful information and insight into malpractices in the market. Complaints can also serve as an early warning signal to preempt potential defaults. Investors are, therefore, encouraged to lodge complaint with the Authority. It is however important for investors to ensure they have the necessary information as they do so ensure that their complaints can stand the test of law. 1

2 The capital markets Act in particular and the Kenyan law in general provides several avenues for an investor to voice his grievances. Investors are however encouraged to try to settle their grievances amicably with the other party in the dispute. However, in the event that an amicable agreement cannot be reached, they can bring the matter up to the relevant authorities for further action. Investors complaints in the capital markets include but are not limited to the following: Failure to execute client orders This situation could arise either as a result of negligence on the part of the stock broker or investment bank, or as a result of the nature of the instruction issued by the client. Orders are either market or limit in nature. Market orders are those that are based on the market prices while limit orders are price specific. Apart from cases where failure to execute an order arises out of a price specific limit orders which are not executable in the market, lack of execution of orders may constitute a dispute. The regulations require that client orders are executed on a first come first served basis. This means that orders should be recorded in a chronological order in an order sheet by the floor dealers for execution at the trading floor. This document should be filed and made available to the regulating authorities during inspections. Failure to execute client orders on time normally causes distress to the client since it could lead to financial loss especially for a sale order when prices begin to fall or when the prices move upwards in the case of a buy order. It is important also to point out that the regulations require that every instruction by the client to his stockbroker or investment banker should be put down in writing since this will act as evidence incase of any dispute between the two parties. Investors are therefore advised to observe this requirement of the regulation whenever they are dealing with market intermediaries. While telephone orders are acceptable as a matter of practice especially to well known clients it always advisable that they are converted into written instruction to safeguard the interest of both parties i.e. the broker/investment banker and the investor incase of any dispute. Unauthorized transactions This refers to a situation whereby the stockbroker or investment banker executes a transaction in a client s account without the authority of the client. This is a criminal act which impinges on the integrity of the market if it is not checked. This is different from a situation where some investors give discretionary power to the stockbroker over their accounts and are thus enabling them to transact without necessarily contacting them. This is common with those investors who are not readily available when called upon by the stockbroker for one reason or the other. 2

3 Unauthorized transactions could also arise as a fraudulent act by the stock broker or investment banker. Unauthorized transaction is also known as client front running. This is a situation whereby the stockbroker sells the shares of a client when prices are high and quickly moves to buy them when the prices come down to restore the original position without the knowledge of the client. Investors are therefore advised to monitor their investments by regularly looking at their statements of account so as to see whether there are any irregularities and incase of any report this to the Authority for intervention. Issuing of bounced cheques This is an offence which can either be perpetrated by the stockbroker/investment bank or the investor himself. Depending on the relationship of the client and the stockbroker, a client may run his account with a broker into debit. This is contrary to the provisions of the regulations which require that a stockbroker should not execute a buy order for a client without ensuring that there are adequate funds to cover the transaction. On the other hand the stockbroker/investment bank can issue a cheque to a client for the sale of shares without making adequate arrangements for funds. This is normally a typical case of mismanagement of funds where there are no proper control mechanisms within the stock broking firm. IPO refunds delay Over the last three or so years, the stock market in Kenya has witnessed phenomenal growth which has seen a number of companies list at the stock exchange. This has occasioned an increase in the number of participants in the stock market both in the primary as well as the secondary market leading to the inability of the market intermediaries to cope with expanded clientele. This manifest itself in Long queue that has become inherent at brokerage houses during the IPOs. Further more owing to the sheer number of applicants during IPOs and the limited number of issued shares and the allotment criteria, there have been cases where procedure of refunds of money for those shares which were applied for but not allotted. This is usually a cause for concern in term f time spent before refunds are remitted. This causes a lot of distress to the investors who would otherwise invested this money in the secondary market in time to benefit from market upswing after the IPO. These investors have a case to lodge complaints. Forgery There are a number of documents that are used to transact business in the capital markets which are liable to abuse by the participants in the industry. The level of technological development in the capital markets industry will determine the use of physical documents to facilitate transactions. These documents 3

4 include share certificates, transfer deeds, letters of indemnity, daily transaction schedule, statements of accounts, order entry sheets, letters of discretionary authority, and any other authorization document. Fraudsters sometimes use these documents to perpetrate fraud. In the era of share certificates there were instances where certificates were forged. Shareholders complaint against listed company Complaints against listed companies which include; misleading, inaccurate, and/or insufficient disclosure of information; failure to disclose material information in financial statements or annual reports; actions or lack of actions detrimental to the interest of shareholders; misconduct by the directors/ management/ share registrars of a listed companies. Again, being the owners of the company, shareholders are entitled to certain rights which include: dividend, bonus, right to vote, right to voice their opinions, right to attend a meetings etc. Violation of these rights by the listed company would generate complaints on the part of the shareholder e.g. failure to receive declared dividend or bonus in good time. Complaints could also arise if the listed company for example does no call for an annual general meeting within the required time. Shareholders also normally complain about the manner in which meetings are conducted by the board of directors and the senior management of the company. During meetings shareholders must be given as much freedom as possible to express their grievances or concerns. Churning: Among unscrupulous brokers, churning is one of the oldest tricks in the books. The broker simply keeps buying and selling stocks to create hefty commissions for himself. What is the procedure for resolving complaints? Whenever a dispute arises between you as an investor and your stockbroker, investment banker or any other market intermediary it is important that you know the procedure to follow while trying to have the dispute resolved. If one feels aggrieved by a broker in any way, the initial step should be to to try to settle their grievances amicably with the other party in the dispute. However, in the event an amicable agreement cannot be to both parties satisfaction then the complaints should be forwarded to the Capital markets Authority or the Nairobi stock Exchange. General market complaints should ideally be lodged with the Capital markets Authority while particular individual complaints should be lodged with the Nairobi 4

5 stock exchange. It is however important to note that both the NSE and the CMA deal will all the complaints forwarded to them as follows; If a complaint is forwarded to CMA for example the Authority will either deal with the situation, or rule that the stock exchange should first handle it, and only have it forwarded to the Authority if the exchange deems it necessary. The stock exchange will either take up complaints and deal with them or refer them to the Capital Markets Authority depending on its nature. The two institutions work very closely with each other in dealing with all complaints. In conclusion it is important to note that while the Capital Markets Authority (CMA) will continue to endeavor to protect investors, ensure that markets are fair, efficient and transparent and to in reduce systemic risk; it must ensure that it facilitates and not impede capital market development. This calls for an appropriate balance between competing goals and objectives, for example protection of investors against malpractice versus allowing businesses to flourish without being shackled by burdensome regulations. Investors must therefore take a center stage in ensuring they complement the Authority in performing this role by whistle blowing on any malpractices over their investments. It is particularly critical therefore that investors exercise utmost vigilance when operating within the capital markets. 5