Globally, capital markets regulation has moved away from merit-based regulation to disclosure-based regulation.

Merit based regulation involves evaluating desirability of product and appropriateness for the targeted investors including the business prospects of the issuer and the offer price.

The Capital Markets Act and associated regulations require that an entity intending to make a public offering such as an initial public offer (IPO) or a bond issue should ensure that information relating to its business operations, strategic direction, financial performance, and governance structures should be clearly detailed in an Information Memorandum.

The onus is therefore placed on the directors of the company to ensure that information contained in the Information Memorandum is balanced and accurate, and does not mislead investors.

Directors have a fiduciary duty towards shareholders and prospective investors and must therefore produce credible information.

A fiduciary duty is one of a high standard of care and has been variously described as an obligation to act in the best interest of another party.

A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.

Capital markets regulatory frameworks reflect this by requiring directors of issuers to sign ‘responsibility statements’ which confirm that they bear responsibility for the reliability of the statements contained in disclosure documents.

In addition, the directors of a company are required to inform investors immediately they become aware of material information that impacts the operations of their business.

In a disclosure based regime as is the case in Kenya, the regulator is tasked with ensuring that an issuer of securities has provided all the information required to enable an investor make an informed decision.

An approval on the basis of available information does not prevent the regulator from conducting an in-depth investigation, at issuers own expense, if there is reason to believe that the issuer provided or caused to be provided inaccurate information to the market or the regulator.

Where fraud is perpetuated by an issuer and is kept hidden from regulators, investigations can only follow once the existence of such fraud is unearthed.

The Companies Act itself recognizes that the persons who are responsible and accountable to shareholders and stakeholders of a company are the directors of the company.

To facilitate the growth and sustainability of Kenyan Capital Markets issuers must provide reliable information, investors must make rational investment decisions based on available information and the Regulator must have sufficient latitude to supervise the market including taking deterrent and nondiscriminatory action against malpractices.

Mr Muthaura is CEO, Capital Markets Authority.