CHARTERED INSTITUTE OF STOCKBROKERS
ANSWERS
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: SOLUTION MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
C
C
C
C
A
D
A
B
C
D
D
A
D
A
D
B
B
B
B
B
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
B
C
D
C
A
B
D
C
A
C
B
A
C
B
B
D
C
B
B
D
(40 marks)
SECTION B: SOLUTION TO SHORT ANSWER QUESTIONS
Solution to Question 2 – Ethics and Professional Standards
Solution 2(a)
Price rigging is an artificial inflation in stock market prices by stock market operators.
It is an act of price manipulation through collusion by buyers to push securities prices up
or collusion by sellers to pull securities prices down for selfish purposes. The intention is
to induce the public to buy at high prices and vice versa.
(2 marks)
Solution 2(b)
Churning is the practice of executing trades for an investment account by a broker in
order to generate commission from the account. It is a breach of securities law in many
jurisdictions, and it is generally actionable by the account holder for the return of the
commissions paid, and any losses occasioned by the broker's choice of stocks.
Critics of the practice of paying brokers’ commissions for managing investment accounts
point to churning as one of the indicators that the brokerage system indirectly
encourages such behaviour by brokers to the detriment of investors.
(2 marks)
Solution to Question 3 – Law Relating to Securities and Investments
Solution 3
The beneficiaries of a trust are entitled to compel a trustee to transfer the trust property
to them once they are no longer minors.
They can sue the trustee for specific performance.
The duty of the trustee is to carry out the specific instructions in the trust instrument,
which includes transferring the sum of N10 million to Charles and David.
(3 marks)
Solution to Question 4 – Regulations of Securities and Corporate Finance
Solution 4
The following factors are considered in fixing the price of a right issue:
i.
The existing market value of shares.
ii. The amount of discounts to be given.
iii. The amount of capital to be raised.
iv. The options for the investors.
v. The theoretical Ex-rights on the old shares.
(3 marks)
SECTION C: SOLUTION TO ESSAY TYPE, CALCULATION AND/OR CASE STUDY QUESTIONS
Solution to Question 5 – Ethics and Professional Standards
Solution 5(a)
Corporate governance is a system of law and sound approaches by which corporations
are directed and controlled focusing on the internal and external corporate structures
with the intention of monitoring the actions of management and directors and thereby
mitigating agency risks which may stem from the misdeeds of corporate officers.
In contemporary business corporations, the main external stakeholder groups are
shareholders, debt holders, trade creditors, suppliers, customers and communities
affected by
the corporation's
activities. Internal
stakeholders
are the board of
directors, executives, and other employees.
In Nigeria, there is in place Securities and Exchange Commission (SEC) Corporate Code
of Corporate Governance.
The roles of Corporate Governance in the effective running of a quoted company include:
i.
Rights and equitable treatment of shareholders: It ensures that organizations
should respect the rights of shareholders and help shareholders to exercise those
rights. It can help shareholders exercise their rights by openly and effectively
communicating information and by encouraging shareholders to participate in
general meetings.
ii.
Interests of other stakeholders: makes organizations recognize that they have
legal, contractual, social, and market driven obligations to non-shareholding
stakeholders, including employees, investors, creditors, suppliers, local communities,
customers, and policy makers.
iii.
Role and responsibilities of the board: Ensure the board reviews and challenges
management performance.
iv.
Integrity and ethical behaviour: Integrity should be a fundamental requirement
in choosing corporate officers and board members. Organizations should develop a
code of conduct for their directors and executives that promotes ethical and
responsible decision making.
v.
Transparency: Ensures organizations clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a level of
accountability, and also implement procedures to independently verify and safeguard
the integrity of the company's financial reporting.
vi.
Disclosure: Ensures timely and balanced disclosure of material matters concerning
the organization to ensure that all investors have access to clear and factual
information.
(7 marks)
Solution 5(b)
This is a case of Infraction and involves the following:
i.
ii.
iii.
Filing of annual reports and accounts containing untrue and misleading
statements.
Manipulation of financial accounts.
Irregularities in operations including existence of undisclosed accounts, nonpayment of declared dividends and preparation of false reports.
In order to prevent infraction in Multiproduct Nigeria Plc, the Board could have done the
following:
i.
Putting in place measures to ensure transparency and implementing procedures
to independently verify and safe guard the integrity of the company’s financial
reports. For instance, through the activities of the Audit Committee.
ii.
Risk management procedures through the Risk Management Committee.
iii.
Putting in place Code of Conduct for Directors and Executives to promote ethical
and responsible decision making.
iv.
Through adequate whistle blowing policy mechanism.
(7 marks)
Solution 5(c)
The regulatory authorities could sanction the Directors and Staff of Multiproduct Nigeria
Plc in the following ways:
i.
Pay fines.
ii.
Barred from public and private positions.
iii.
Prevent from seeking jobs within the industry.
(4 marks)
Solution to Question 6 – Law Relating to Securities and Investments
Solution 6(a)
A stockbroker is an agent of his client, and owes him a fiduciary duty. He is liable to his
client for a negligent misrepresentation, where the client relies on his advice, to invest
in any security and suffers loss, if he did not exercise due care and skill in giving such
advise.
i.
Jang can sue Amechi successfully for a breach of contract, that is, negligent
misrepresentation. This is because Amechi owes him a duty of care.
(6 marks)
Solution 6(b)
ii.
Rabiu cannot sue Amechi successfully, because;
a.
There is no privity of contract between Rabiu and Amechi; Amechi does not owe
him a fiduciary duty.
b.
Rabiu did not buy the shares from Amechi, he bought them from Ajax Company
Plc that issued the prospectus.
(6 marks)
Solution to Question 7 – Regulations of Securities and Corporate Finance
Solution to Q7(a)
1. In shoring up the market price of its shares, which had been between N15 to N18, Integrity
Bank Plc was involved in False Trading and market Manipulation. It fictitiously inflated the
market price of its shares, driving it from a low of N25 at the beginning of the year to N78 at
the end of the year (a false price appreciation of 312%).
Section 81 of the Investment and Securities Act (ISA) expressly forbids False trading in
securities. Section 82(1) prohibits a person from carrying on two or more transactions in the
share of a company which are likely to have the effect of raising the market price with a view
to inducing other persons to buy or subscribe for those securities or a related company.
Integrated Bank Plc artificially influenced the market price of its share and deliberately
interfered with the free play of demand in the stock market. This practice is unethical as it
distorted the configuration of market forces and presents a fictitious valuation of the worth of
the shares of Integrated Bank Plc
(CIS Membership Regulations and Code of Conduct 5(xii) )
By giving a loan of N5 billion to some of its high Net worth customers for them to participate
fully in the offer and ensure that the offer succeeds, the company violated section 159(1) & (2)
of the Company and Allied Matters Act (CAMA) 1990 which prohibits financial assistance by
company for acquisition of its shares. This reduces the Net Assets of the company.
(10 marks)
Solution to Q7(b)
As a result of the unlawful and unethical issues raised in Q7(a) above:
1. Shareholders will eventually dump the shares of Integrity Bank Plc as the stock is highly
overvalued.
2. The Debtor-clients of Integrity Bank who borrowed N5 billion from the bank to buy the share
at overvalued price may not be able to repay the money since the stock will nose-dive and go
into offer.
3. Integrity Bank may not be able to pay back the N20 billion loan it collected to execute the
various strategies it employed.
4. The cumulative interest of the loan may lead to the distress of Integrity Bank Plc.
5. This may have a systemic effect on the entire capital market.
6. Public confidence in the market will be eroded as people incur losses resulting from the price
manipulation of Integrity Bank plc shares.
7. This could lead to the collapse of the entire capital market.
(5 marks)
Solution to Q7(c)
The Quotation Committee of the Nigerian Stock Exchange performs a critical role in the approval of
the Public Offer of Integrity Bank Plc thus:
The Stockbroker to the issue submits the Application for the Public Quotation, on behalf of Integrity
Bank Plc., to the Nigerian Stock Exchange (NSE).
The matter is referred to the Quotation Committee of the NSE which appraises the application to
ensure that Integrity Bank complies with the necessary requirement and standard of the NSE. In this
process, the Quotation Committee raises queries for parties to the Issue to address.
The stockbroker to the Issue leads the delegation to the Quotation Committee meetings to defend the
application.
It is the duty of the Quotation Committee to ensure that the listing Requirements of the NSE are met
by Integrity Bank Plc.
The Quotation Committee will make a recommendation to the management of the NSE after very
stringent scrutiny of the application of Integrity Bank.
If the application is successful, Integrity Bank Plc will be given approval letter from the NSE and if the
offer is unsuccessful, they will be informed of the reason(s) for the rejection. The Quotation
Committee may also suggest ways of repackaging the application to meet the expectations of the
NSE.
(5 marks)