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 2013
Level 2
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SECTION A: MULTI CHOICE QUESTIONS
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2
3
4
5
6
7
8
9
10
11
12
13
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15
A
C
A
D
A
C
B
C
B
D
C
B
D
D
C
16
17
18
19
20
21
22
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25
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30
C
C
C
B
B
C
C
C
D
A
B
C
C
C
D
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32
33
34
35
36
37
38
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40
A
D
B
C
D
A
C
D
A
C
(40 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 – Ethics and Professional Standards
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A safe and convenient way to hold securities
Reduces risks involved in holding physical certificates e.g., loss, theft, mutilation,
forgery, etc.
Ensures transfer settlements and reduces delay in registration of shares.
Ensures faster communication to investors
Helps avoid delivery problems due to signature differences, etc
Ensures faster payment on sale of shares
It provides more acceptability and liquidity of securities
(Any 3 points = 3 marks)
Question 3 – Law Relating to Securities and Investments
(3a) Ratio decidendi and Obiter dicta
(1/2 mark each = 1 mark)
(3b)
Right of lien
The right to retain the lawful possession of the property of another until the owner fulfills
a legal duty to the person holding the property, such as the payment of lawful charges
for work done on the property. A mortgage is a common lien.
(2 marks)
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Question 4 – Regulations of Securities and Corporate Finance
Stock FBN Oando Total Stock Julius Berger AIICO Units 100,000 50,000 Purchase Transaction NSE fees Price Total @0.25% Broker's Comm. @1.35% 19.82 1,982,000 17.6 880,000 2,862,000 NIL
Sales Transaction Units Price Total 20,000 53 1,060,000 132,000 0.9 118,800 1,178,800 2,947 38,637 15,914 (Total = 3 marks)
SECTION C: COMPULSORY QUESTIONS
Question 5 – Ethics and Professional Standards
(5a)
Mixing client money with the firm’s own funds is referred to as ‘commingling’.
Securities rules and regulations in Nigeria. SEC Rule 178, NSE Article 13 and NSE
Article 143 clearly prohibit commingling.
(4 marks)
(5b)
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With respect to sales and marketing of the new mutual funds, the following infractions
were committed:
•
Appropriateness of Investment Recommendation
CIS Code and Standards provides that Members and Registered Students shall
assess the appropriateness of an investment recommendation or investment action
for their clients and prospective clients. This was not done with respect to the new
mutual fund, which was recommended to as many existing and prospective clients
as possible
•
Misrepresentation
The expected performance of ‘Treasure Fund’ was misrepresented as the risk-return
profile was not communicated appropriately to the clients. This is contrary to the
CIS Code and Standards on Misrepresentation
•
Rules on Advertisement of Security Offers
SEC Rule 52b prohibits the use of ambiguous and high-sounding words such as ‘top
offer’, ‘superior offer’, ‘brighter future’, ‘invest and haul in future’ etc as was used in
the brochure of ‘Treasure Fund’.
(7 marks)
(5c)
Other infractions at GRA Investments are:
• Conflict of Interest
Management of the firm had put their own self interest (in terms of performance bonus
earnings) above the interest of their clients who could be exposed risk beyond their
capacity.
(4 marks)
(5d)
Sanctions
NSE Article 45 and 153 stipulate that the Council may impose on dealing members found
to have contravened the provisions of the Articles, any or a combination of admonition,
fine, restitution, suspension and expulsion.
Contravention of the CIS Code and Standards by individual members and registered
students also attract similar sanctions.
(3 marks)
(Total = 18 marks)
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Question 6 – Law Relating to Securities and Investments
•
The principle of privity of contract states that only the parties to a contract can
enforce it.
•
The building contract was between Ojo and ABC Bank Plc.
•
Therefore Stella cannot successfully sue the bank.
(Total = 7 marks)
Note: the above points should be well developed and explained within the context of the
case to earn full marks.
6(b)
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Methods of Winding up
By the Federal High Court
Voluntarily by the members or creditors
Under the supervision of the court
Grounds
Special resolution
Default in holding the statutory meeting or in delivering the statutory
report.
Reduction of members below two
Inability to pay debts
If it is just and equitable to do so
Question 7 – Regulations of Securities and Corporate Finance
(7a1)
Market Making
• Market making refers to the system of providing liquidity to securities through
provision of bid and offer prices in the trading system of a stock exchange. A
member of the exchange that undertakes the function of market making, is called
a market maker.
•
The NSE introduced the market making initiative on September 18, 2012 with an
initial portfolio of 16 stocks.
•
A primary market maker is regarded as the foremost liquidity provider of a
particular security, while the supplemental market maker acts as a
supplementary liquidity provider.
•
NSE appointed 10 stockbrokers as primary market makers. They include Stanbic
IBTC Stockbrokers, Renaissance Capital, Future View Securities, Vetiva Capital,
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ESS/DunnLoren Merrifield, WSTC Financial Services, Capital Bancorp, FBN
Securities, Greenwich Securities and CSL Stockbrokers.f
•
Under the operating rules, stocks in the market making basket are allowed to
witness maximum daily change of 10 per cent as against the maximum daily
allowable percentage change of five per cent for the general market.
•
From the initial 16 stocks that started the programme, NSE has continuously
added new stocks in line with the overall intention to roll stocks trading above
nominal value into the market making programme within six months.
•
The introduction of market making was a major landmark aimed at bringing back
liquidity and depth into the market and has helped to doubled daily trading band
at the capital market.
•
Adequate liquidity would ensure that stocks are priced appropriately, thereby
increasing competitiveness and efficiency of the stock market.
(7a2)
Circuit Breaker
•
Factors like market speculations force stock prices or indices to fluctuate widely.
Such a condition is beyond the control of regulatory authorities. Hence they use
the circuit breaker to curb such market situations.
•
Circuit breaker, simply put, is a set of rules formed and issued by the Exchange
in order to bring back normalcy in the stock market in the event an index or stock
enters a circuit. Usually there are different circuit breakers for indices and for
stocks.
•
In Nigeria stocks under the market making programme have a trading band of
10%, while other stocks have a trading band of 5%.
(7b1)
Regulatory Approval
The following are the major transactions at this stage:
• Application to SEC by issuing house.
Some of the documents needed include :Form SEC 6, Resolution by the Gen meeting
authorizing issue, 2 copies MEMART, Cert of Incorporation, 5-year signed audited
account/ audited statement of affairs, 2 copies draft prospectus and abridged
prospectus, 2 copies draft trust deed, 2 copies underwriting agreement and subunderwriting agreement e.t.c
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• Application to NSE submitted by stockbroker.
The following documents are required: Cert of Incorporation, MEMART, 5 year audited
accounts, Board Resolution authorizing issue, Shareholders resolution, Draft prospectus,
Reporting accountants’ report, Draft vending agreement, 2 year profit/dividend forecast,
Schedule of pending litigations, Application fees, CSCS eligibility.
• Vetting and approval by quotation Committee of NSE.
9 Application to the NSE Quotation Committee
9 Compliance with the NSE listing requirements.
(7b2)
Completion Board Meeting
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•
•
•
This is the meeting of the board of directors of a company making a security
offering with all the parties to the issue such as issuing house, solicitors,
accountants and registrars.
It is during this meeting that all documents relating to the issue are signed by the
directors and the parties.
It is only after the completion board meeting and the lodgement of copies of the
signed documents with the SEC that the securities can be distributed to the public.
Documents required include: SEC approval of offer, NSE approval of offer,
Certificate of exemption, Vending agreement, Copies of prospectus, Specimen
share certificate, Specimen poster, Specimen print of Newspaper advert,
Verification questionnaire
(7c)
Rating Agencies
•
These are firms that render professional opinion about a stock or security, to
guide investor decision. They are not connected to the company or security on
which they provide rating.
•
Benefits of rating include:
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Credit ratings are an important tool for borrowers to gain access to loans and
debt. Good credit ratings allow borrowers to easily borrow money from financial
institutions or public debt markets.
At the corporate level, it is usually in the best interest of a company to look for a
credit rating agency to rate their debt. Investors often times base part of their
decision to buy bonds, or even the stock, on the credit rating of the company's
debt.
It guides investors with respect to where to invest their funds. Usually, investors
will look at the credit rating given by credit rating agencies before deciding to
invest.
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