CIS March 2013 Exam Diet
Examination Paper 2.4:
Ethics and Professional Standards
Law relating to Securities and Investments
Regulations of Securities and Corporate Finance
Level 2
Ethics and Professional Standards (1 – 14)
1.
A client, Bai Salami was aggrieved by the action of Carlos Augustine (ACS), who has
been managing his equity portfolio over the years. Mr Salami discovered recently
from his most recent CSCS statement that his broker, Mr. Carlos Augustine had sold
nearly all his stocks without his mandate.
Which of the following is correct? Carlos Augustine had violated the CIS Code and
Standards on:
A. Professional behavior.
B. Competency.
C. Independence and objectivity.
D. Misrepresentation.
2.
Balogun Alawe, ACS, is a financial sector research analyst at Monument Capital Ltd,
who takes investment action on behalf of his clients. Just after buying 50,000 units
of Apex bank shares for his personal account, Alawe learns that his firm is preparing
an investment report with a ‘buy’ recommendation on the stock.
According to CIS Code and Standards, Alawe must:
A. Sell his stock immediately and disclose this action to his firm.
B. Sell his stock within 30 days and disclose this action to his firm.
C. Request that his firm disclose his beneficial ownership in the investment report.
D. Take no action since he had purchased the shares before getting information
about the report.
3.
Ada Martins, ACS, oversees a fund that is required to invest in a minimum of 20 and
a maximum of 30 different issues. She uses a quantitative approach to actively
manage the assets. In the fund’s promotional materials, she states that “the fund will
track the NSE 30, but will receive a return premium of between 5 and 10 percent
according to CAPM risk measures.” This statement is:
A. Not permissible since it misrepresents the investment performance the fund can
reasonably be expected to achieve.
B. Permissible since the assertion is supported by modern portfolio theory and
CAPM.
C. Not permissible since she is not permitted to use promotional materials.
D. Permissible since she has a scientific basis for her assertion.
4.
Kennedy Eze is an Executive Director at Alpha Securities plc. At a director’s meeting,
Kennedy finds out that the company is making payments to foreign and government
officials, politicians, and political parties to obtain or retain business. Kennedy checks
with his firm’s legal counsel and determines that the payments are indeed illegal. At
the next board meeting, Kennedy urges the board to disclose the contributions.
Which of the following is the most appropriate action Kennedy should take? He
should:
A. Protest the board’s actions in writing to the MD/CEO of Alpha Securities plc.
B. Resign from the board, sell any stock he owns in the firm, and issue a press
release explaining his actions.
C. Resign from the board and report to the police.
D. Seek legal counsel, and inform the Chartered Institute of Stockbrokers.
5.
Ayo Abdullahi, ACS, analyzes the Conglomerates Sector of the NSE for a brokerage
company. Extensive study has led Ayo to rate Allproducts Limited as a “hold” largely
because of increasing competition in the industry. At a recent National Workshop
Ayo discusses Allproducts’ prospect with other analysts in attendance. Most of the
analysts appear to hold the view that the company will experience rapid earnings
growth in the near future primarily based on their turnover projections for the 3 new
products just introduced by the company. Ayo had not factored this into his own
analysis.
Immediately after the Conference, Ayo does further research, incorporates a
projection of the impact of the new products on the company’s future results, and
revises his recommendation to “buy”. Has Ayo violated the CIS Code and Standards
in any way?
A. No.
B. Yes, because he copied the opinions of others.
C. Yes, because he did not seek approval of the change from his supervisor.
D. Yes, because he did not have a reasonable and adequate basis for his
recommendation.
6.
Muhammad is an analyst at Bluefin Investments, a Securities and Investment outfit.
After thorough analysis of the Breweries Industry which he covers, he was convinced
that the shares of First Breweries Nigeria would likely experience a fall in price in the
coming months, as the industry in recent times has been faced with increasing
competitive pressure and rising operational costs. He therefore issued a ‘sell’ rating
in his report which would be released next week. However, before the release of the
result, he placed a sell order on the 100,000 units of First Breweries’ shares held by
his son with another stockbroking firm.
Which of the following statements is correct? Muhammad had violated CIS Codes and
Standards on ____________
A. Independence and objectivity.
B. Suitability of investment.
C. Priority of transaction.
D. Misrepresentation.
7.
Henry Sanda, FCS is the Finance Director of ABC Plc, which is in the process of
consummating a merger with XYZ limited. However, Henry has raised an alarm that
false invoices are being used by Management to support the merger proposal. Henry
has just been dismissed by the Management of ABC plc for breach of trust.
Which of the following is correct? Henry________
A. Acted contrary to the CIS Code and Standards as he did not display loyalty to his
employer.
B. Acted in line with the provisions of CIS Code and Standards on cooperation,
support and whistleblowing.
C. Acted contrary to the CIS Code and Standards as he breached his duty and
responsibility to his employer.
D. Acted in line with the provisions of CIS Code and Standards on
misrepresentation.
8.
Joe Momoh, ACS, has been in the employment of Firewall Capital Ltd for about 5
years as a senior analyst. He currently supervises two recently employed, junior
analysts who are fresh university graduates. Joe has been encouraging them to
enroll for the CIS Professional Examination and further develop their skills and
capabilities as securities and investment professionals. One of the junior analysts has
just been found guilty of using non-public, price sensitive information in his analysis.
Investigations show that, generally, the procedure in the firm to detect and prevent
such violations are weak and are not being observed.
Has Joe violated any provision of the CIS Code and Standards?
A. No, as he has done his best to train and guide the analysts.
B. No, because he is not privy to the non-public information.
C. Yes, because he did not ensure that procedures to prevent violation are
adequate and are being observed.
D. Yes, because a staff under his supervision is involved in an infraction.
9.
Jimoh Orlando, ACS is a research analyst with a stockbroking firm. He decides to
change his recommendation on the shares of CCNN from “buy” to “sell”. He faxes
this change in investment advice to all his current customers. The next day, a new
customer calls with a “buy” order for 500 units of CCNN.
According to CIS Standards of Professional Conduct, Jimoh:
A. Should accept the order since it is what the customer wants.
B. Should advise the customer of the change in recommendation before accepting
the order.
C. Should simply reject the order.
D. Should only accept the order if the customer specifies in writing that he was
notified of the change in recommendation.
10. Alhaji Maikudi Jubril is one of the high networth individual of Goldworth investments,
where you are the Chief Operating Officer. You just received a letter from the Federal
High Court to send details of the capital market transaction history of Alhaji Maikudi
with your firm in the last three years as part of evidence required by the EFCC to
prosecute a case of money laundering against him.
Which of the following is correct with respect to the provisions of the CIS Code and
Standards?
A. You cannot give the information so as not to breach the duty of confidentiality to
the client.
B. You cannot give the information unless Alhaji Maikudi Jubril consents in writing.
C. You cannot give the information unless you obtain evidence that he actually
committed the offence of money laundering.
D. You are required by law to send the information to the court.
11. Williams Ajagbe, ACS, has just resigned his appointment with Top Stockbrokers
Limited, giving a months’ notice as stipulated by his contract of employment.
However he has been giving a gentle hint to his clients about his impending move to
Newhope Limited, a firm that, according to him ‘promises better quality services and
superior returns on investment ’.
Has Williams violated CIS Code and Standards in any way?
A.
No.
B.
Yes, by resigning his employment with Top Stockbrokers.
C.
Yes, by canvassing for Top Stockbrokers clients, although indirectly.
D.
Yes, by violating of contract of employment.
12. Fola Akubiojo, FCS is a research officer with EquitiesWatch Limited. He prepares and
circulates a monthly newsletter to his clients on the potentials in the equities market.
He uses a lot of information from the National Bureau of Statistics, the agency that
prepares macroeconomic statistics on the Nigerian economy, as well as from
BAAEconomic brief, a private monthly report on the Nigerian economy prepared by a
Management and Finance Consultancy firm. While Fola acknowledges the information
from BAAEconomic brief, he does not acknowledge National Bureau of Statistics.
Which of the following statements is correct?
A. Fola has violated the CIS Code and Standards on plagiarism by not
acknowledging National Bureau of Statistics.
B. Fola has not violated the Code and Standard on plagiarism since he duly
acknowledges BAAEconomic brief.
C. Fola has not violated the Code and Standards on plagiarism since he distributes
his report free to clients.
D. Fola has violated the CIS Code and Standards on plagiarism by using ‘a lot’ of
information from both sources.
13. Which of the following statements is not correct? CIS members and registered
students are not permitted to___________
A. Communicate material, non–public information to others.
B. Use material, non–public information for trading.
C. Use material, non–public information in investment analysis.
D. Be in possession of material non–public information.
14. What does beneficial ownership of shares mean? Having access to:
I. Direct pecuniary interest in a security.
II. Indirect pecuniary interest in a security.
III. Power to dispose or direct the disposition of a security.
A.
B.
C.
D.
I and II only.
II and III only.
I and III only.
All of the above.
Law Relating to Securities and Investments (15 – 26)
15. Which of the following will discharge a bill of exchange?
I.
II.
III.
IV.
Payment in due course by the drawee or acceptor.
Death of an endorser.
Material alteration of the bill.
Loss and replacement by another.
A.
B.
C.
D.
I, and II only
I, II and III only
I, III and IV only
II, III and IV only.
16. Which of the following persons is not disqualified from being a receiver or manager
of a company?
A. A body corporate.
B. An infant.
C. A spouse of one of the major shareholders.
D. A director of the company.
17. Which of the following are required for the reduction of the share capital of a public
company?
I.
II.
III.
IV.
Holding of a 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.
II and III only.
I and III only.
I and IV only.
18. Which of the following are legally regarded as the personal representatives of a
deceased person?
A. Wife and children.
B. Testator and testatrix.
C. Executor and administrator.
D. The entire family left behind by the deceased.
19. 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 obligations 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.
20. Which of the following statements is the exception to the rule that trustees must act
jointly?
A. Where the trust instrument authorities individual action.
B. Where the trustee in question is the eldest of the trustees.
C. Where certain acts have been delegated to one trustee by his co-trustees.
D. Where one trustee has often has the power to give good receipts for income.
21. Which of the following are the parties to a mortgage?
A. The mortgagor and the guarantor.
B. The mortgagor and the indemnifier.
C. The mortgagee and the mortgagor.
D. The mortgaged property, the mortgagor and the mortgagee.
22. Under the Third Schedule of the Investment and Securities Act 2007, which of the
following matters must be contained in a prospectus through which securities are
offered to the public?
I.
II.
III.
IV.
The number of founders or management or deferred shares.
The total amount which the company has in its bank accounts.
The names, descriptions and addresses of the directors or proposed directors.
The number of shares (if any) fixed by the company’s articles as the qualification
of a director.
A.
B.
C.
D.
I and II only.
I, II and III only.
I, III and IV only.
II, III and IV only.
23. Which of the following courts have coordinate jurisdiction?
I.
II.
III.
IV.
The
The
The
The
Federal High Court.
Court of Appeal.
High Court of Federal Capital Territory, Abuja.
Sharia Court of Appeal of a State.
A.
B.
C.
D.
I and II only.
I, II and III only.
I, III and IV only.
II, III and IV only.
24. Which of the following general defences are available to a person who has been sued
in tort?
I.
II.
III.
IV.
Justification or self defence.
Specific performance.
Volenti non fit injuria.
Inevitable accident.
A.
B.
C.
D.
I and II only.
II and III only.
I, II and III only.
I, II and IV only.
25. An
A.
B.
C.
D.
arrangement or compromise is made within or between _______
One company.
Two companies.
Many companies.
National and multi-national companies.
26. Which of the following terms is subsidiary to the main purpose of a contract and the
breach of which entitles the wronged party to damages only?
A. Implied terms.
B. Warranties.
C. Representations.
D. Conditions.
Regulations of Securities and Corporate Finance (27 – 40)
27. Which of the following statements are true in respect of provisions of NSE rule 109
on share buy-back?
I.
50% or less of the issued share capital of a company could be bought back in a
year.
II. Share repurchase should be financed only from accumulated profits otherwise
available for dividend.
III. Self-tender offer is one of the methods allowed for share buy-back.
A.
B.
C.
D.
I and II only.
I and III only.
III only.
All of the above.
28. On the sell side of an equities transaction on the Nigerian Stock Exchange, which of
the following fees is not applicable?
A. NSE fees.
B. CSCS fees.
C. SEC fees.
D. None of the above.
29. Which of the following statements is/are incorrect about the Administrative
Proceeding Committee (APC)?
I. It is an internal administrative committee of the Nigerian Stock Exchange.
II. It has jurisdiction over any dispute between SEC and the Stock Exchange or
Capital Trade Point.
III. The decision of the APC could include restitution and recommendation for
criminal prosecution.
IV. A party who is dissatisfied with the decisions of APC could seek redress at the
Federal High Court.
A.
B.
C.
D.
II and III only.
I, II and III only.
I and IV only.
IV only.
30. Which of the following professionals whose opinion impact directly on capital market
transactions are subject to registration by SEC?
I.
II.
III.
IV.
Legal practitioners.
Accountants.
Engineers.
Estate valuer.
A.
B.
C.
D.
I and II only.
I, II and IV only.
II only.
All of the above.
31. According to SEC rule 73, except otherwise prescribed by the Commission, the total
cost of issue of securities shall not exceed _________
A. 7% of the gross total proceeds from the issue.
B. 10% of the gross total proceeds from the issue.
C. 15% of the gross total proceeds from the issue.
D. 20% of the gross total proceeds from the issue.
32. According to Investment and Securities Act, 2007, the Investment and Securities
Tribunal is empowered to exercise jurisdiction, to hear and determine any question
of law or dispute between which of these parties?
A. Between capital market operators.
B. Between capital market operators and their clients.
C. Between an investor and a securities exchange or capital trade point or clearing
and settlement agency.
D. All of the above.
33. Which of the following is not an obligation of Market Makers as provided by SEC rule
182C?
A. Have enough buffer stock at all times.
B. Have the capacity for continuous 2-way quotes on all the stocks in the market
throughout the trading session.
C. Have the capacity to deliver and settle transactions within the prescribed
settlement cycle.
D. Have capacity to lend and borrow the designated securities at any time with a
view to ensuring stability in the market.
34. 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.
35. In line with the provisions of ISA, 2007, the criminal liability for a convicted
individual in respect of insider dealing includes imprisonment for up to how many
years?
A. 2 years.
B. 3 years.
C. 5 years.
D. 7 years.
36. NSE Article 163 stipulates the requisite conditions to be an authorized dealing clerk.
Which of the following is not part of the provisions?
A. He has gone through the necessary screening with SEC including thumb printing
at the Police HQ.
B. He has passed an appropriate professional examination as prescribed by the law.
C. He is registered with the Nigerian Stock Exchange.
D. He is not less than 21 years old.
37. Greenland Capital Ltd would like to be registered as a market maker for equity on
the Nigerian Stock Exchange. Which of the following conditions must be fulfilled? The
company __________
I.
Must be a licensed Broker-Dealer of the Nigerian Stock Exchange and have a
subsisting registration with Securities and Exchange Commission.
II. Have a subsisting registration with the Central Securities Clearing System.
III. Have and maintain the minimum paid up capital requirement as determined by
NSE from time to time and also maintain Fidelity bond.
IV. Have at least 10 personnel who are Authorized Clerks and have core
stockbroking experience of not less than 5 years.
A.
B.
C.
D.
I and III only.
II and IV only.
I, II and III above.
I, II and IV above.
38. Mr. Ajibade Femi is a stockbroking client of Windowfall Securities Ltd, a dealing
member of the Exchange. Femi mandated his stockbroker to sell 500,000 units of
FPH from his portfolio account. The stock was eventually sold at N40.00 per unit on
the floor of the Exchange. The MD/CEO of Windowfall Securities instructed the
company’s accountant to effect the payment of the net sales proceed to Femi in
cash. Windowfall Securities most likely had violated which of the following
regulations?
A. NSE rules and regulations on payment to client.
B. CIS Code and Standards.
C. SEC rules and regulations on payment to client.
D. (A) and (C) above.
39. Article 57 of the NSE spells out the effects of suspension of a dealing member.
Which of the following is not true of a suspended member?
A. The suspension shall operate so as to avoid or affect the validity or enforceability
of all agreement, transaction or agreement in relation to dealing members
transaction prior to suspension.
B. All monies due to the Exchange including replenishment of the Investor
Protection Fund, Trade Guarantee Fund, etc shall nevertheless remain due and
payable.
C. The dealing member’s right to a seat shall remain suspended.
D. The dealing member shall do everything possible to ensure that his innocent
clients do not suffer any loss or embarrassment as a result of the suspension.
40. Which of the following statements is (are) correct? NSE article 139 prohibits dealing
members from?
I.
Guaranteeing, a customer against loss in any account or in any securities
transaction executed by the dealing member.
II. Entering into any business relationship with a client premised on a guaranteed
return of less than 10% of the amount invested.
III. Using the name of The Exchange or the privilege of membership of The
Exchange in activities that have no bearing with the activities of The Exchange.
A.
B.
C.
D.
I only.
I and II only.
I and III only.
None of the above.
Total = 40 marks
Question 2 – Ethics and Professional Standards
List and briefly explain the benefits of full dematerialization in the equities market to an
investor.
(3 marks)
Question 3 – Law Relating to Securities and Investments
3(a) State the two major components of Judicial Precedent.
(1 mark)
3(b) State and explain the right of a person which allows him to hold on to the property of
another person until the payment of a debt or performance of an obligation.
(2 marks)
Question 4 – Regulations of Securities and Corporate Finance
Compute the NSE fees and the broker’s commission on the following transactions:
Purchase
100,000 units of FBN holdings @ N19.82
50,000 units of Oando @ N17.60
Sale
20,000 units of Julius Berger @ N53.00
132,000 units of AIICO @ N0.90
(4 marks)
Question 5 – Ethics and Professional Standards
GRA Investments is a firm into securities and investment business. Apart from its
stockbroking business, GRA Investments has a number of mutual fund products which are
among the best performing in the market.
The firm is undergoing rapid changes at this time. In the first place, it is changing its
banking arrangements, and Management has decided that, for convenience during the
transition period, the client money accounts would not be separated from the firm’s own
funds.
In addition, the company is about to introduce a new mutual fund product into the market
called ‘Treasure Fund’. By design, this is a more aggressive fund that is heavily weighted
towards equities and derivative products. It is therefore relatively riskier and best suited to
high net worth individuals with greater risk appetite.
However, in view of the fact that staff end of year bonus is tied to declared profit,
Management instructs the sales and marketing team to recommend Treasure Fund to as
many existing and prospective clients as possible. After all, they reason, the current
situation in the market suggests bright future prospects as a result of growing investors’
confidence.
The marketing brochure for Treasure Fund indicates that it will generate the highest return
of all the funds that the company manages. In fact, at a recent investors’ forum, the MD
describes the product as a , ‘spectacular money spinner’. According to him, ‘‘with Treasure
Fund, you can eat your cake and have it!’’
Required:
With reference to relevant SEC rules, NSE articles and CIS Code and Standards discuss the
issues below:
5(a) Do you think that the firm’s actions in connection with the new banking arrangement
were acceptable?
(4 marks)
5(b) Is there any violation with respect to the sale and marketing of the new mutual
fund?
(7 marks)
5(c) Identify and discuss any other infractions by GRA Investments.
(4 marks)
5(d) What are the potential regulatory sanctions that may apply to the identified issues?
(3 marks)
Question 6 – Law Relating to Securities and Investments
Ojo was awarded a building contract by ABC Bank Plc for the sum of N20 million. He was
paid an advance of N15 million. On completion of the project but before the payment of
the balance, Ojo fell sick and had to be rushed abroad for treatment. He instructed the
bank to pay the balance to Stella, his wife and the bank agreed. However, despite several
demands by Stella, the bank has refused to pay her the money. Stella has decided to sue
the bank for breach of contract.
Required:
6(a) Advise Stella.
(7 marks)
6(b) State and briefly discuss the methods of winding-up of a company and the grounds
upon which the Federal High Court may wind-up a company under the Companies
and Allied Matters Act 2004.
(7 marks)
Question 7 – Regulations of Securities and Corporate Finance
The recent recovery of the secondary market of the Nigerian Stock Exchange has been
attributed to several factors, among which is the introduction of market-making. Market
analysts also believe that the planned removal of the ‘circuit breaker’ will further generate
interest in the market and revitalize it. This renewed confidence has started impacting on
the primary market as well, since the two markets are complementary.
It is on this basis that plans are now in top gear at ABX Premium Limited for the company
to raise N2 billion through an IPO during the second quarter of 2013, ultimately
culminating in its public quotation. The MD/CEO of the company, Anne Okoh, has therefore
contacted you to give her detailed information about the process of getting a company
listed on the NSE. She would like to work with your Stockbroking firm to achieve this goal.
In addition, one of the directors of ABX Premium Limited, in a recent discussion had
mentioned the importance of ‘rating’ for listed securities. Anne Okoh wants you to explain
what this means.
Required
7(a) Explain with practical examples, the following, with emphasis on their impact on the
Nigerian equities market at this time:
7a1) Market making.
(3 marks)
7a2) Removal of ‘circuit breaker’.
(3 marks)
7(b) Discuss in detail the following stages of public quotation, and the required
documentation:
7c)
7b1) Regulatory approval.
(4 marks)
7b2) Completion Board Meeting.
(4 marks)
Explain to the MD/CEO of ABX Premium limited the role rating agencies play in the
capital market.
(4 marks)