CHARTERED INSTITUTE OF STOCKBROKERS
QUESTIONS
Examination Paper 2.4
Ethics and Professional Standards
Law relating to Securities and Investments
Regulations of Securities and Corporate Finance
Professional Examination
March 2014
Level 2
SECTION A: MULTI CHOICE QUESTIONS
Ethics and Professional Standards (1 – 14)
1.
Dagogo John, a CIS Member, is a securities trader for a small stockbroking firm.
Which of the following are requirements of CIS Code and Standards with respect
to maintaining his competency?
I.
He should take reasonable action to ensure that he has sufficient knowledge
of securities and investment practice.
II. He has a responsibility to be competent, conscientious, and effective in his
work
III. He should maintain his competency through continuing professional
development
IV. He should acquire at least one other professional certification in Securities
and Investment, apart from the CIS certification.
A.
B.
C.
D.
I and II only.
II and III only.
I, II and III only.
All of the above.
2.
According to the CIS Code and Standards, which of the following statement is
incorrect?
A. A stockbroker should always act in the best interest of his clients.
B. Fair dealing involves treating all clients equally.
C. A stockbroker can make any investment recommendation to his clients as
long as he is also willing to adopt same.
D. (A) and (C) above.
3.
With respect to trading rules and practices as provided by the CIS Membership
Regulation and Code of Conduct (2005), which of the following statements is not
correct. A CIS Member should_____________
A. Not practice as a stockbroker unless he is an employee, attaché or agent of a
firm.
B. Not practice as a stockbroker without a currently valid practicing license
issued by the Institute.
C. Never, if in practice, buy or sell securities in the secondary market, for the
account of his spouse or children except with the written consent of his
employer.
D. (A) and (C) above.
4.
Which of the following is most likely to conflict with the CIS Code and Standards?
A. An analyst changes his investment recommendations without obtaining
approval from his supervisors.
B. A portfolio manager conducts fact-finding about a new customer before
undertaking investment action on the customer’s behalf.
C. Transactions in the personal account of a Stockbroker are kept strictly
confidential.
D. (A) and (C) above.
5.
Dahiru, a CIS Member is a portfolio manager in one of the top Investment Banks.
One of his firm’s clients has promised to compensate him beyond what is
provided by his firm on the basis of the capital appreciation of his portfolio each
year. Which of the following actions is most appropriate in line with CIS Code and
Standards? Dahiru should ___________
A. Obtain permission from his employer and clients prior to accepting the
compensation arrangement.
B. Turn down the additional compensation because it will certainly result in
conflict of interest with other clients accounts.
C. Receive permission from CIS to accept the compensation arrangement.
D. Turn down the additional compensation because it has fraudulent
connotations.
6.
Samuel Coolhead is the Chief Executive of a large stock broking firm. He
supervises many brokers and analysts, some of whom are subject to the CIS
Codes and Standards. He frequently delegates some of his supervisory duties.
Which statement best describes his responsibility under the Code and Standards?
A. The CIS Code and Standards discourages delegation of supervisory
responsibilities by Samuel.
B. Samuel’s supervisory responsibilities do not apply to those subordinates who
are not subject to the Codes and Standards.
C. Samuel no longer has supervisory responsibilities for those duties delegated
to her subordinates.
D. None of the above.
7.
Juliet, a CIS Member, while preparing an investment report on Nigerian Breweries
Plc, had copied and used in substantially the same form as the original, materials
contained in the CBN Annual Report (2012), as well as Federal Bureau of
Statistics Report on the Nigerian economy (2012). Which of the following
statements is in line with CIS Code and Standards?
A. Juliet has done nothing wrong because of the public nature of the sources of
the materials.
B. Juliet has violated the CIS Code and Standards for copying and using another
person’s material.
C. Juliet has not violated the CIS Code and Standards since the reports copied
are not the most current.
D. Juliet has done nothing wrong since she did not make any commercial gain
from the material.
8.
Ekpeyong, a CIS Member and securities analyst for the Conglomerates Sector,
has recommended to his clients to take equity interest in GlobalReach, a new
entrant into the industry. After writing and publishing his initial report, Ekpeyong
purchases GlobalReach stock for his own portfolio. He has been asked to write a
second report on GlobalReach. What action should Ekpeyong take in order to be
compliant with the Code and Standards?
A. Sell his GlobalReach stocks immediately.
B. Disclose his GlobalReach holdings at the time of the second report.
C. Restrict any additional purchase of GlobalReach stock.
D. Request to be removed as a GlobalReach analyst.
9.
Which of the following actions is not likely to affect the independence and
objectivity of CIS Members and Registered Students in the performance of their
duties?
A. Offering, soliciting or accepting gifts.
B. Beneficial ownership of securities on which they make recommendations and
take investment actions.
C. Disclosure of basic principles and methods of valuation of securities.
D. Close relationship with issuers of securities and other interested parties.
10.
According to the CIS Code and Standards, which of the following best describes
appropriate conduct related to the acceptance of gifts from clients?
A. Members may accept gifts so long as their market value is less than N10,000.
B. Members cannot accept gifts under any circumstances, in order to avoid the
appearance of a conflict.
C. Members cannot accept gifts under any circumstances, because research has
shown that any gift, large or small, impairs ethical judgment.
D. Members may accept gifts from clients if they are disclosed and if the
employer finds that the gifts will not affect their independence and
objectivity.
11.
The decision of the Federal Executive Council to ban with immediate effect, the
importation of rice and wheat was both unexpected and bad news for Staples
International Limited, a company quoted on the Nigerian Stock Exchange, and
into the business of importation of these commodities. Although the Federal
Government has decided not to make the decision public yet, the news was
received after the close of trading on Friday from one of the Federal Ministers, a
close associate of the Chairman of Staples International. Over the weekend, the
Managing Director of Staples International leaked the news to a select few family
and friends. One of those friends, Babafemi Katsina, called his broker, Amaka
(ACS) on Sunday to describe the situation and to instruct her to sell all his
Staples International shares. Amaka promptly executed the order.
Which of the following describes Amaka’s behavior with respect to the CIS Code
and Standards?
A. There is no violation as Amaka owes no duty to Staples International’s
shareholders.
B. There is no violation since Amaka is a Stockbroker, doing her job.
C. Amaka violated the CIS Code and Standards because she placed a trade
without first consulting her other clients.
D. None of the above.
12.
Your colleague, Aminu, a newly registered CIS student is a research analyst in a
portfolio management firm. He learns that a portion of the firm’s research,
prepared by another department, includes some bias such that some of the firm’s
performance is exaggerated. Aminu presents the report to prospective clients in
order to solicit new business, but steers clear of any reference to the exaggerated
performance.
Aminu is likely to have violated which of the following CIS Code and Standards?
A. Misrepresentation.
B. Independence.
C. Plagiarism.
D. Self Dealing.
13.
David, ACS is a Research Analyst with an Investment Bank. He regularly provides
investment information and makes investment recommendation to clients and
prospective clients on the shares of Unilever and Cadbury, quoted on the Nigerian
Stock Exchange. He own 1,000 units and 5,000 units of shares in Unilever and
Cadbury respectively.
What is the appropriate action David should take in order not to violate the CIS
Code and Standards?
A. David should not have beneficial interest in the shares of Unilever and
Cadbury.
B. David should never give investment advice on the shares of Unilever and
Cadbury.
C. Only David’s wife and children can own the shares of Unilever and Cadbury,
so he should invest through their accounts.
D. None of the above.
14.
NSE Article 149 provides that a Dealing Member should maintain the
confidentiality of client information, but allows for exceptions under certain
conditions. Which of these is not one of the exemptions?
I.
When he knows or suspects the person has committed treason, money
laundering, terrorist financing, drug trafficking, and other felonies.
II. To protect the interest of dealing member, to enable it collect brokerage fees,
to defend an action instituted against it.
III. When the dealing member feels that the shares purchased by a client is large
enough to influence the market.
A.
B.
C.
D.
III only.
I and III only.
II and III only.
All of the above.
Law Relating to Securities and Investments (15 – 26)
15.
Which of the following terms is a fundamental term of a contract, the breach of
which entitles the wronged party to repudiate the contract?
A. Implied terms.
B. Warranties.
C. Representations.
D. Conditions.
16.
Which of the following persons are disqualified from being liquidators of
company?
I.
II.
III.
IV.
A body corporate.
An undischarged bankrupt.
Chartered stockbroker.
An auditor of the company.
A.
B.
C.
D.
I, II and III only.
I, II and IV only.
II, III and IV only.
All of the above.
17.
Which out of the following is the meaning of the special mistake of non est
factum?
A. It is not my fault.
B. It is not my deed.
C. It is not my intention.
D. It is not his doing.
18.
Which out of the following is the statutes for which the Economic and Financial
Crimes Commission is the coordinating agency.
19.
20.
21.
I.
II.
III.
IV.
The
The
The
The
Money Laundering Act.
Criminal Code.
Advance Fee Fraud and other Related Offences Act.
Companies and Allied Matters Act.
A.
B.
C.
D.
I and II only.
I, II and III only.
I, II and IV only.
II, III and IV only.
Which of the following can be regarded as essential elements of a trust?
I.
II.
III.
IV.
The legal title of the trust property is vested in the trustees.
The trustees are legally entitled to use the property for their own benefits.
Any of the beneficiaries may enforce the trust obligation on the trustees.
The beneficiaries must be natural persons only.
A.
B.
C.
D.
I and II only.
I and III only.
I and IV only.
I, II and IV only.
Which out of the following are conditions required for share capital reduction of a
public company?
I.
II.
III.
IV.
Holding of general meeting.
Passing of ordinary resolution.
Passing of special resolution.
Registration with the Securities and Exchange Commission.
A.
B.
C.
D.
I and II only.
I and III only.
II and III only.
II and IV only.
Actions based on ordinary contracts must be brought within which of the following
periods before they become statute barred?
A. 3 years.
B. 6 years.
C. 9 years.
D. 12 years.
22.
23.
24.
Which out of the following general defenses are not available to a person who has
been sued in tort?
I.
II.
III.
IV.
Justification or self defence.
Specific performance.
Violenti non fit injuria.
Inevitable accident.
A.
B.
C.
D.
I and II only.
II and III only.
II and IV only.
I, II and IV only.
Which out of the following factors will terminate an agency relationship by
operation of law?
I.
II.
III.
IV.
Renunciation of the agent.
Effluxion of time.
Death of principal or agent.
Insanity of principal or agent.
A.
B.
C.
D.
I and II only.
II and III only.
I, II and III only.
II, III and IV only.
Which of the following constitute similarities or differences between a bill of
exchange and a cheque?
I.
A bill of exchange may be drawn on anybody while a cheque may only be
drawn on a banker.
II. Both of them may be made payable either at a fixed or determinable future
time or on demand.
III. The provisions relating to crossings are applicable to both bills of exchange
and cheques.
IV. The rules relating to acceptance are not applicable to cheques but they are
applicable to bill of exchange.
A.
B.
C.
D.
25.
I and II only.
I and III only.
I and IV only.
I, II and III only.
Which out of the following are parties to a mortgage?
A. The mortgagor and the mortgagee.
B. The mortgagor and the guarantor.
C. The mortgagor and the indemnifier.
D. The mortgaged property, the mortgagor and the mortgagee.
26.
Which of the following actions can an executor take before he obtains probate
from the appropriate High Court?
I.
II.
III.
IV.
To
To
To
To
collect all the assets of the deceased.
dispose of real estate of the deceased.
receive payment of debts due to the deceased.
carry on the business of the deceased for the purpose of winding it up.
A.
B.
C.
D.
I, II and III only.
I, III and IV only.
II, III and IV only.
All of the above.
Regulations of Securities and Corporate Finance (27 – 40)
27.
Which of the following statements is/are not correct in respect of securities rules
and regulations in Nigeria?
A. When a company’s shares are placed on technical suspension, the implication
is that the shares are not traded temporarily.
B. In the process of transmission of shares, a Stockbroker is not needed.
C. When a Dealing Member trades ahead of customers in the same direction of
their orders before the said customers’ orders have been executed, he
commits an infraction.
D. (A) and (B) above.
28.
The shares of Epson Plc have been placed on full suspension by the Nigerian
Stock Exchange. Which of the following are possible reasons for the suspension?
I. A share reconstruction is going on in the company.
II. Allegation of share price manipulation in the company is being investigated
by the NSE.
III. The company is raising additional funds through a rights issue.
IV. Consistent violation of post-listing rules.
A.
B.
C.
D.
29.
I and II only.
I, II and III only.
I, II and IV only.
All of the above.
Which of the following statements is correct about ‘book building’? It is primarily
____________
A. A process of price and demand discovery.
B. Designed to reduce regulatory checks.
C. An arrangement to assist companies in dire need of funds.
D. All of the above.
30.
Determine whether the following statements are true or false in line with SEC
Rule 110 on Insider Dealing.
I. A stockbroker in the normal course of business is an insider.
II. A liquidator, receiver or trustee in bankruptcy in good faith is not an insider.
A.
B.
C.
D.
31.
Statement I
False
True
False
True
Statement II
False
True
True
False
Which of the following are parts of the listing requirements into the Second Tier
Market of the Nigerian Stock Exchange?
I. The company must be a public limited company.
II. The company cannot raise more than N50 million from the stock market.
III. No single shareholder can own more than 20% of the issued share capital of
the company.
IV. It must submit 3-year historical financials.
A.
B.
C.
D.
32.
I and III only.
I and IV only.
I, II and III only.
I, III and IV only.
Which of the following statements is/are correct? NSE article 139 prohibits
dealing members from_____________
I.
Entering into any business relationship with a client premised on a
guaranteed return above 10% of the amount invested.
II. Entering into any business relationship with a client premised on a
guaranteed return above 25% of the amount invested.
III. Guaranteeing, a customer against loss in any account or in any securities
transaction executed by the dealing member.
A.
B.
C.
D.
33.
III only.
I and II only.
I and III only.
None of the above.
According to SEC rule 89, which of the following statements about private
placements is not correct?
A. The offer should be to no more than 50 subscribers.
B. Offer period should not be more than 10 day-subject to extension by the
SEC.
C. An ordinary resolution of the company to approve the offer is required.
D. None of the above.
34.
Determine whether the following statements are true or false in line with SEC
Rule 40 on registerable securities.
I. Rights issues are subject to registration by SEC.
II. States and Local Government bonds need not be registered by SEC.
A.
B.
C.
D.
Statement I
False
True
False
True
Statement II
False
False
True
True
35.
Which of the following statements is/are not correct in respect of current trading
practices on the floor of the Nigerian stock exchange?
A. Only members of CIS in good standing are authorized to trade on the floor.
B. The maximum allowable price movement (up or down) on a daily basis is 5%.
C. The NSE recently launched a new trade notification system, X-Alert, which
provides investors with details of transactions on an investment account via
text messages on mobile phones or via e-mails.
D. (A) and (C) above.
36.
Which of the following is not part of the provisions of NSE Article 163 with respect
to prerequisites to be an authorized dealing clerk?
A. He has passed an appropriate professional examination as prescribed by law.
B. He is registered with the Nigerian Stock Exchange.
C. He is not less than 21 years old.
D. He has 5 years of working experience in financial services.
37.
SEC rule 31 provides for registration of brokers/dealers and jobbers. Which of the
following is not part of the documents required to accompany the application?
A. A copy of form CO7 certified by SEC.
B. Fidelity Bond representing 20% of paid-up capital.
C. Copy of audited accounts for 3 years.
D. A copy of the dealership certificate of the authorized dealing clerk being
sponsored by the applicant.
38.
The Lagos State Government would like to issue a revenue bond on the Nigerian
Stock Exchange to finance infrastructure. Which of the following procedures are
required before the state could issue bonds in Nigeria?
I.
II.
III.
IV.
Approval by the Federal Executive Council.
State law to authorize borrowing from the capital market.
Opening of a domiciliary account with an International Bank.
State Executive Council’s resolution to issue the bond.
A.
B.
C.
D.
I and III only.
II and IV only.
I, II and IV only.
All of the above.
39.
Act 105 of 1991 empowers The Chartered Institute of Stockbrokers to demand
from its members, strict compliance with and maintenance of high standards of
professional conduct through which of the following organs?
I. Investigating Panel.
II. Disciplinary Tribunal.
III. Administrative Proceedings Committee.
A.
B.
C.
D.
40.
I only.
I and II only.
I and III only.
II and III only.
SEC Rules 208 to 222 provide guidelines when a non-Nigerian wants to invest in
the shares of a Nigerian company. Which of the following statements is not
correct? The investor ___________
I.
II.
III.
IV.
Needs to appoint a local stockbroker.
Investor has to agree with a stockbroker to appoint a Nigerian bank.
Has to route funds electronically through the bank (cash is not allowed).
Is issued a Certificate of Capital Importation (CCI) with which to invest in any
company of his choice through the stockbroker.
A.
B.
C.
D.
II only.
III only.
III and IV only.
None of the above.
Total = 40 marks
SECTION B: SHORT ANSWER QUESTIONS
Question 2 – Ethics and Professional Standards
The following unethical practices are observed in capital markets around the globe:
a) Price rigging.
b) Churning.
Clearly explain the above terms to your client who does not understand them.
(4 marks)
Question 3 – Law Relating to Securities and Investments
Charles and David, are identical twins, aged 24 years. By the Will of Young, their
father, who died 10 years ago, John and James, the trustees, were directed to invest
the sum of N10 million and apply the income to the education of Charles and David.
The beneficiaries have now asked the trustees to pay over the N10 million to them.
Explain the duty of the trustee’s in respect of the directive by Charles and David.
(3 marks)
Question 4 – Regulations of Securities and Corporate Finance
In the recent past, right issues appears to be the most popular means of raising funds
in the Nigeria capital market. Several quoted companies including Oando Plc, Sterling
Bank Plc, UBCap, African Prudential have accessed funds through right issues.
What factors are considered by issuers and issuing Houses in fixing the price of a Right
issue?
(3 marks)
SECTION C: ESSAY TYPE, CALCULATION AND/OR CASE STUDY QUESTIONS
Question 5 – Ethics and Professional Standards
Multiproduct Nigeria plc was founded in 1970 as a subsidiary of a major global player,
which operates in 120 countries and employs 30,000 employees. It engages in the
manufacture and sale of a wide range of household products and food beverages in
Nigeria.
The company had operated successfully for many years, and was regarded as one of
the most successful companies listed on the Nigerian Stock Exchange. However, in
2013, Multiproduct was involved in a huge scandal, widely referred to as the Nigerian
version of Enron Corporation scandal.
A comprehensive investigation into the scandal revealed that the company, through its
Chairman, CEO, senior financial accountant, and head of internal audit, had for several
years filed with the Securities and Exchange Commission (SEC) its annual report and
accounts containing untrue and misleading statements. The CEO with the support of
other key staffs had connived to overstate the company’s financial position for several
years, to the tune of about N15 billion.
Using various accounting scams including false share buy backs, over/under
provisioning, misrepresentation of sales figures, issuing false suppliers’ certificates, and
profit smoothing, among others, the company manipulated its financial accounts that
were issued to the public and filed with SEC.
Indeed, a lot of other irregularities were discovered in the company’s operations
including the existence of an undisclosed remuneration account for Directors, nonpayment of declared dividends to shareholders, preparation of false reports and
generation of untrue data, especially from the sales and accounts departments.
Within four weeks that the scandal became public knowledge, the company’s share
lost about 40% of its value. Once again, after all said and done, it is the shareholders
that are left holding the bag!
Required
5(a) Briefly explain your understanding of Corporate Governance and its role in the
effective running of a quoted company.
(7 marks)
5(b) With reference to the Securities and Exchange Commission’s Code of Corporate
Governance in Nigeria, in what ways could the Board of Directors have helped to
prevent the scandal in Multiproduct Nigeria?
(7 marks)
5(c) Discuss the possible regulatory sanctions the Directors and Staff of Multiproduct
Nigeria could face if found guilty of the infractions committed.
(4 marks)
zQuestion 6 – Law Relating to Securities and Investments
Amechi, Jang and Rabiu, are postgraduate students in New City University. Amechi is a
stockbroker and he manages Jang’s Portfolio.
The three students recently met at City Club, Lagos, where Amechi, informed Jang of
an initial public offer by Ajax Plc. He convinced Jang to invest in it as it is “a very
attractive investment opportunity”. Meanwhile, Rabiu did not participate in the
discussion, although he overheard everything said by Amechi, and even picked up a
copy of the prospectus of the company brought along by Amechi.
Subsequently, Jang bought 5,000 units of shares of Ajax Plc at N10.00 each while
Rabiu bought 100,000 units. It was later discovered that information in the prospectus
was not true. Ajax Plc went into liquidation 6 months later, resulting in a huge loss to
both Jang and Rabiu.
The aggrieved parties have decided to sue Amechi for damages on the grounds that he
deceived them into buying the shares.
6(a)
Advice Jang as to his chances of success.
(6 marks)
6(b)
Advice Rabiu as to his chances of success.
(6 marks)
Question 7 – Regulations of Securities and Corporate Finance
Integrity Bank plc is preparing for a public offer cum rights issue to shore up its
capital base in response to dynamic changes in the banking industry. In spite of the
fact that the operating environment has become more competitive, there is ample
opportunity for growth for operators that are strategically positioned to exploit them.
However, the Group Managing Director of the bank, Anthony Lafia, is concerned that
the bank’s shares have been trading within the band of N15 to N18 in the last six
months, which he considers low. The Chief Operating Officer of one of the bank’s
subsidiaries comes up with a fantastic strategy to shore up the share price. First,
Integrity Bank obtains foreign loans to the tune of N20 billion and engages a
stockbroking firm, Emerald Limited, to trade on the bank’s shares.
Over a period of six months, Emerald Limited persistently creates strong demand for
the shares of Integrity bank by mopping up available units as much as possible.
Within this period, Emerald carries out over 100,000 transactions with respect to
Integrity Bank shares alone, driving up the share price from a low of N25 at the
beginning of the year to N78 at year end, a price appreciation of 312%.
Once the shares are ‘appropriately’ priced, Integrity Bank goes ahead with its planned
public offer. To guarantee that the offer succeeds, management employs another
ingenious strategy. Loans to the tune of N5 billion are disbursed to a number of high
net worth customers of Integrity Bank for them to participate fully in the offer.
It does not come as a surprise that the public offer is a huge success, with an oversubscription of 60%. Anthony Lafia is widely applauded for his dynamic and focused
leadership at Integrity Bank.
Required:
7(a) Discuss the regulatory and ethical issues in this case, with reference to relevant
rules, regulations and ethical codes in the Nigerian securities market.
(10 marks)
7(b) What are the implications of the issues identified in 7(a) above on the growth and
development of the Nigerian capital market?
(5 marks)
7(c) Discuss the role the Quotation Committee of the Nigerian Stock Exchange is
expected to play in the approval of the public offer of Integrity Bank.
(5 marks)