Parliament will now vet and approve the appointment of future heads of the country's spy agency.
The House will also audit the agency's accounts.
The move is aimed at making the new spy agency, to be known as the National Intelligence Service (NIS), more accountable to the public.
The National Intelligence Service Act, 2011, takes away the exclusive powers hitherto enjoyed by the Executive to hire and fire the director-general of the National Security Intelligence Service.
According to the new law, the President shall henceforth have to submit the name of his nominee for the post of director-general to Parliament for approval before making the appointment.
If MPs reject the nominee, the President will be forced to forward another name for Parliament's consideration.
There was an outcry in January this year when President Kibaki unilaterally extended the term of the current NSIS director-general, Mr Michael Gichangi, by another five years despite protests from the ODM wing of government and human rights activists.
The Muslim for Human Rights unsuccessfully challenged the move in court.
A team to be known as the Parliamentary Intelligence Oversight Committee will oversee the administration, expenditure and policy of NSIS.
Terms of service
The new law also takes away the powers hitherto enjoyed by the agency to fix salaries and allowances for its staff without reference to any other authority.
Under the new law, terms of service for the director-general and employees of NIS will be set by the Salaries and Remuneration Commission in consultation with the Public Service Commission (PSC).
The law further states that the PSC will review the terms and conditions of NIS staff at least once every four years.