National Social Security Fund requires sound investment advice

The National Social Security Fund (NSSF) Board of Trustees is no stranger to controversy. In most cases, it involves millions of shillings.

In 2002 for instance, NSSF held a Treasury Bill with the Central Bank of Kenya (CBK) with a maturity date of August 26 2002 valued at Sh256 million. Acting on the instructions of NSSF, before the date of maturity, CBK rediscounted the Treasury Bill at Sh251,505,500 and the money was paid into the NSSF account at National Bank of Kenya.

At the time, NSSF held two accounts with National Bank of Kenya. A payments account and an expenditure account.

The funds from the discounted Treasury Bill were paid into the payments account. NSSF transferred the funds from its payments account to its expenditure account. From the expenditure account it issued a cheque for Sh251,505,500 in the name of a stockbrokerage firm.

The cheque was paid into the office account of the stockbroker held at Euro Bank Ltd who issued a fixed deposit receipt in the name of the stockbroker. This fixed deposit receipt was subsequently changed into the name of NSSF.

The stockbroker introduced itself to NSSF on May 3 2002, just over a month before the Treasury Bill was rediscounted. NSSF rediscounted the Treasury Bill because the stockbroker advised them that there was a Treasury Bond in the secondary bond market which would yield a higher return on maturity.

At the time the cheque was deposited, the office account of the stockbroker in Euro Bank Ltd was overdrawn. It had a debit balance of Sh49,209,434.91. The said cheque settled the indebtedness with Euro Bank Limited and reflected a balance of Sh202,296,065.90 on July 1 2002.

Between July 2 2002 and July 8 2002, the stockbroker withdrew or paid out from its office account Sh75,388,900. Approximately a week after receiving the funds from NSSF, the stockbroker informed NSSF that it had not purchased the Treasury Bond from the secondary market. When NSSF demanded for repayment of the sums, the stock broker in turn made demand to Euro Bank Ltd.

The money was not paid to the stockbrokers by Euro Bank Ltd. NSSF did not recover the money from the stockbrokers.

This Fixed Deposit Receipt in the name of NSSF has never been honoured. NSSF never recovered the sum of Sh251,505,500. Euro Bank Ltd soon thereafter went into liquidation and was incapable of honouring any of its debt. NSSF lodged a complaint against the stockbrokers with the Capital Markets Authority (CMA).

The complaint was lodged under the provisions of the Capital Markets Act. CMA suspended the stockbroker for a period of 30 days. It imposed a financial penalty of Sh1.5 million against the stockbroker. These funds were to be paid into the investor compensation fund. All the directors of the company became ineligible for directorship of the stockbrokerage any and listed companies for a period of one year.

The stockbroker appealed to the Capital Markets Tribunal. The tribunal upheld the decision of CMA, and imposed stiffer sanctions. The 30-day suspension was increased to three years. The one year ineligibility as director was increased to five years. The Capital Markets Tribunal found that the stockbroker did not give sound investment advice to NSSF and as a result caused it to put public monies in a bank that was then publicly reputed to be experiencing difficulties. The stockbroker also placed client monies in its overdrawn office account from where it made withdrawals.

CMA regulates the Nairobi Securities Exchange, the players in the company and the listed companies. The authority was established in 1989. The role it plays at the stock exchange is critical. Other than protecting investors, the stock exchange of any country is used to determine at a glance the health of its economy.