Independent Directors of CMA-Licensed Firms in Kenya

When a firm is licensed by the Capital Markets Authority, its board is not purely a matter for its shareholders. The Corporate Governance (Market Intermediaries) Regulations, 2011 set minimum requirements for who sits on the board, how many must be independent, and what happens when the line-up changes. This article summarises those requirements for market intermediaries, and flags where the position is being revised.

Who the Regulations cover

The Regulations apply to market intermediaries licensed under the Capital Markets Act, such as stockbrokers and investment banks. They are separate from the Code of Corporate Governance Practices for issuers of securities to the public. Check which instrument binds your licence before you plan board changes.

What “independent” means

Regulation 2 defines an independent non-executive director in strict terms. Broadly, the person must not have held an executive position with the intermediary in the last five years, must have no contract of service with the intermediary or its senior management, and must have had no business relationship with it in the last five years other than service as a director that requires disclosure. The person must also not be a close relation of its directors or senior management. The same tests are applied to the intermediary’s affiliates.

The practical lesson is that independence is lost by relationships and contracts, not by a label. A director described as non-executive who holds a contract of service has a problem under this definition. Our article on independent directors and contracts of service explains why, and what a compliant appointment looks like.

How many independent directors

Regulation 3(1)(b) requires that at least one third of the board are independent non-executive directors. For a board of six, that means two. A board that loses an independent director through resignation or removal can therefore fall below the minimum overnight, which is one reason replacement should be planned before a departure takes effect.

Changes to the board need the Authority’s consent

Regulation 3(3) provides that the composition of the board shall not be changed without the prior written consent of the Authority. Separately, section 24(8) of the Capital Markets Act forbids a licensed person to change its shareholders, directors, chief executive or key personnel without the Authority’s prior written no-objection. Treat these as two layers: the Act governs licensed persons generally, and the Regulations add a specific rule for the board of a market intermediary. Our companion article on replacing a director of a licensed firm walks through the sequence.

Fit and proper, and training

Regulation 4 requires directors to be fit and proper. Section 24A of the Act sets the suitability criteria the Authority applies. The Regulations also expect a director to complete corporate governance training within six months of appointment, so build that into the induction plan.

A rule set under review

The Authority has consulted on replacement corporate governance regulations. The 2011 text remains the one we have verified here, and the 2025 Licensing Requirements Regulations separately require current and proposed directors of a broker-dealer to be fit and proper. Confirm the current position with the Authority and the Kenya Gazette before relying on any single document. A consultation draft is not law.

Practical checklist

• Test each proposed independent director against the regulation 2 definition, including past contracts and business links.
• Count independent directors against the one-third minimum before and after every change.
• Obtain the Authority’s prior written consent before the change takes effect.
• Diarise fit and proper documentation and governance training.
• Keep the appointment letter consistent with independence: fees for board service, no contract of service.

An illustration of the arithmetic

Suppose a licensed intermediary has a board of six, with two independent non-executive directors, which meets the one-third minimum exactly. One independent director resigns. The board now has one independent director out of five, below one third. The firm needs a replacement approved by the Authority, or it must manage the gap with the Authority and not simply wait. Contrast a board of nine with three independents: losing one still leaves two of eight, which is below the one-third mark of just under three. The margin matters, and a planned succession protects it.

Keep in mind that regulation 2 tests relationships over a five-year look-back. A candidate who recently acted as an adviser to the firm, or who was an executive within five years, may not qualify even though the candidate is respected and willing. Screen early and keep the evidence. Boards that hold a short list of pre-screened candidates avoid rushed appointments, and their applications to the Authority are easier to complete accurately because the declarations have already been collected.

The short version

Independence is tested on facts and history, at least one third of the board must be independent, and no change to the board takes effect without the Authority’s prior written consent. Boards that screen candidates early, count the independent seats before every change, and keep appointment terms consistent with independence rarely run into trouble. Boards that treat these as formalities tend to find out at licence renewal or inspection, when the cost of correcting the record is far higher than the cost of getting it right at the time.

Frequently asked questions

This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.