The Capital Markets Regulatory Framework

The Objectives of Securities

Regulation
Governments are responsible for setting the role of regulators and, in
doing so, will clearly look to see that international best practice is adopted
through the adoption of IOSCO objectives and principles, and by cooperation
with other international regulators and supervisors.
In 1998, IOSCO issued a comprehensive set of Objectives and Principles
of Securities Regulation (the IOSCO Principles), recognized today by
the worlds financial community as international benchmarks for all markets.
The objectives of securities regulation are:

to protect investors

to ensure that markets are fair, efficient and transparent, and

to reduce systemic risk.

The three objectives are closely related and, in some respects, overlap. Many
of the requirements that help to ensure fair, efficient and transparent
markets also provide investor protection and help to reduce systemic risk.
Similarly, many of the measures that reduce systemic risk provide protection
for investors.

The Capital Markets and

Securities Act 1994
The Capital Markets and Securities Act was passed in 1994 as part of
government plans to develop a Tanzania capital market in order to assist in
mobilizing Tanzanians to save and to channel these into long-term
investments.
Some of the key initiatives introduced by the Act were the following:

The establishment of an industry regulator, the Capital Markets and

Securities Authority.

Power was given to the CMSA to authorize the establishment of a stock

exchange.

A requirement that dealers in securities and investment advisers must

be licensed by the CMSA.

A requirement for dealers, investment advisers and financial journalists

to disclose their interests in securities in a register of securities.

Rules on the conduct of securities business.

Requirements for dealers to maintain accounts and for them to be

subject to periodic audit.

Requirement for a stock exchange to establish a fidelity fund to

compensate investors who suffer losses caused by a member firm.

Rules surrounding stock market trading and the prevention of false

trading and market rigging.

Rules for the authorisation and regulation of collective investment

schemes.

Rules for the public issue of securities, advertisements for securities

businesses and other miscellaneous provisions.

Regulation and Market Structure

The Capital Markets and Securities Authority (CMSA) was established
under the Capital Markets and Securities Act 1994 as a corporate body. It is
financed by fees payable by the industry.
Its chairman is appointed by the President on the recommendation of the
Ministry of Finance and its board consists of the chief executive, four other
members nominated by the Ministry of Finance, along with representatives
from the Ministry of Finance, the Bank of Tanzania, the Attorney General and
the Registrar of Companies.
Its role includes:
 authorising and licensing investment advisers, securities dealers and
their agents

controlling and supervising the activities of licensees, including setting

proper standards of conduct and protecting the interests of consumers
from the insolvency of a firm by setting and monitoring capital
requirements

maintaining surveillance over securities markets to ensure orderly, fair

and equitable dealings and adopting measures to minimise and
supervise conflicts of interest and to protect against market abuse, and

reviewing and approving takeovers, mergers and acquisitions.

The Capital Markets and Securities Act 1994 gave authority to the CMSA to
authorise the establishment of a stock exchange the Dar es Salaam Stock
Exchange has subsequently obtained authorization.
The Act permitted a stock exchange to be established as a self-regulatory
organization that can set rules for its own members. These rules, and any
subsequent amendments, require approval from the CMSA. The stock
exchange is expected to provide appropriate information to the CMSA so that
it can effectively supervise the activities of the exchange and meet its
objectives.
Other rules include the following:

The CMSA can issue directions to the stock exchange concerning

trading or how it conducts its business if it feels they are contrary to
the public interest. If the stock exchange, without reasonable excuse,
fails to comply, then it is guilty of an offence and liable on conviction to
a fine of not less than one million shillings and any director or officer
involved liable to imprisonment for a term of not less than five years.

The CMSA can require the stock exchange to prohibit trading in any
security to protect the interests of the public.

Where a stock exchange reprimands, fines, suspends, expels or

otherwise takes disciplinary action against a member, it must provide
written details to the authority within seven days.

Stock exchange members and issuers are under obligation to observe

the rules of the exchange and the listing rules. The CMSA may make an
order giving directions for that person to perform their duty, or apply to
the court to issue directions.
 Market Participants
Financial markets involve a number of different participants their role, and
some of their characteristics, are outlined here:

A dealer is a person who carries on the business of dealing in

securities, either as principal or as agent. A dealer's representative is
any person who performs the functions of a dealer and is in the direct
employment of, or acting for, or acts by arrangement with, a dealer. It
excludes the work ordinarily performed by accountants, clerks or
cashiers.

An investment adviser is someone who advises others about

securities, undertakes and publishes investment analysis, or
undertakes the management of a portfolio of securities whether on a
discretionary or non-discretionary basis. An investment representative
is, again, someone that performs the functions of an investment
adviser, and is in the direct employment of, or acting for, or acting by
arrangement with, an investment adviser. It excludes the work
ordinarily performed by accountants, clerks or cashiers.

Fund managers, also known as asset managers, run portfolios of

investments for others. They invest money held by pension funds,
insurance companies and others. Some are independent companies,
others are divisions of larger entities, such as insurance companies or
banks. Fund managers will buy and sell shares, bonds and other assets
in an attempt to increase the value of their clients portfolios.

A trustee is an organization authorized to act as trustee of a collective

investment scheme. Their role is to safeguard the assets of the
collective investment scheme and supervise the activities of the fund's
manager.

Custodians are banks that specialize in safe custody and asset

services, looking after portfolios of shares and bonds on behalf of
others, such as fund managers, pension funds and insurance
companies.

Investment banks provide advice to, and arrange finance for,

companies that want to float on the stock market, raise additional
finance by issuing further shares or bonds, or carry out mergers and
acquisitions. They also provide trading services for those who might
want to invest in shares and bonds, in particular pension funds and
asset managers.
 A nomad, or nominated adviser, is a firm authorized to act as a key
consultant to companies and assist them in complying with the rules
surrounding public offer issuance and listing requirements.

Case Study
A collective investment scheme is an investment vehicle that pools the funds
of investors and invests these in accordance with a stated investment
objective and policy. A key characteristic of a collective investment scheme is
that the management of the assets of the fund, and the safeguarding of
those assets, are segregated in order to provide investor protection. Different
institutions will undertake these separate roles. Which statement concerning
their respective responsibilities is correct?

A nomad is responsible for the investment of the assets, and the manager is responsible
for the safeguarding of the assets and oversight of the nomad an investment adviser is
responsible for the investment of the assets, and the custodian is responsible for the
safeguarding of the assets and oversight of the manager The manager is responsible for
the investment of the assets, and the trustee is responsible for the safeguarding of the
assets and oversight of the manager.