CIS March 2012 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.
Omolayo Adeyi, ACS, intends to leave her current employer and start her own
consulting firm. At the present time, her intentions are confidential and unknown to
either her clients or her firm. However, she expects that a number of her clients are
loyal to her and will follow her to the new affiliation. Under the CIS Code and
Standards on ‘responsibilities to the employer’, would Omolayo be in violation if she
approaches her current customers?
A. By soliciting the employer’s clients while still in employment, she would be
causing harm to the employer.
B. No, as long as Omolayo notifies her supervisor, in writing, of her actions.
C. No, so long as she continues to actively manage those accounts and the firm
continues to draw its quarterly fee.
D. No, since she doesn't have a binding contract and the clients don’t have binding
contracts, then she hasn’t broken any laws.
2.
Gambo Dauud, FCS, was recently hired by the compliance department of a very large
stockbroking firm. Soon after beginning his employment, he discovered that the
heads of the compliance department were consistently being unduly influenced by
the heads of the sales department. In short, compliance procedures were not being
followed. In order not to violate the CIS Code and Standards, Gambo should:
A. Inform the regulatory agencies that govern such matters.
B. Disassociate himself only from the activities which he deems to be in breach of
compliance procedures.
C. Simply have a discussion with his supervisors and point out all the breaches of
the compliance procedures.
D. Ensure that procedures established to detect and prevent violations are adequate
and are properly enforced before accepting any supervisory duties.
3.
Osomo James, a CIS registered student works as a marketing officer for Wealthy
Investment Advisers. On Monday, Wealthy's research department publishes a
negative research report on the Abisco plc. On Tuesday, Osomo’s best customer
calls in an order to buy 500 shares of Abisco plc in an account where the volume of
trading is high. How should Osomo handle this situation?
A. Take the order based on the customer’s verbal authorization.
B. Take the order but first advise the client of the negative research.
C. Refuse to take the order.
D. Take the order only after obtaining a signed written authorization.
4.
Before implementing an investment decision for a client, all of the following are
required except:
A. An inquiry as to what the client's investment horizon is.
B. A disclosure to the client as to how the stock selection criteria is set.
C. A disclosure as to how the firm's model portfolios for each risk classification have
performed.
D. A consideration of the impact that each individual investment will have on the
portfolio as a whole.
5.
Jude Aneke, ACS, recently completed a research report on the Domoline Plc, in which
he concluded that the stock should be avoided for now and that a better buying
opportunity would present itself eventually. At an analyst conference, an old
colleague tells Jude that a secret tender offer for Domoline is in the works, and will
likely be made public within the next month. This colleague urges Jude to buy
Domoline shares immediately "before it's too late". Jude immediately executes an
order for his personal account, then recommends the purchase of the stock to many
of his big clients. Jude has potentially violated all of the following Standards
except:
A. Reasonable basis and fair presentation.
B. Prohibition against the use of material nonpublic information.
C. Responsibilities to the Institute.
D. Priority of transactions.
6.
Which of the following best describes the corporate governance responsibilities
of members of the board of directors?
A. Establish long-term strategic objectives for the company.
B. Ensure that at board meetings no subject cannot be discussed, and dissent
is regarded as an obligation.
C. Ensure that the board negotiates with the company over all matters
such as compensation.
D. Ensure that the operational strategy of the firm is effective.
7.
All of the following are compliance methods designed to prevent insider trading rules
violations except:
A. Review client accounts for any unusual trading activity.
B. Urge issuer to disseminate information if there has been a breach.
C. Prevent employees of an investment banker from becoming directors of
companies that issue securities.
D. Have separate support staff for the retail and corporate finance divisions.
8.
Which of the following ethical responsibilities does the CIS Code and Standards
require?
I. Members must conduct themselves with integrity, competence, diligence, and
respect.
II. Members must use reasonable care and exercise independent professional
judgment.
III. Members must hold themselves out to be associated with the Chartered Institute
of Stockbrokers and thus possess superior ethical standards and investment
knowledge.
IV. Members must encourage fellow investment professionals to conduct themselves
in a professional and ethical manner.
A.
B.
C.
D.
9.
I, II and IV only.
I and IV only.
I and II only.
I, II and III only.
Which of the following statements is (are) true with respect to the provisions of the
CIS Code and Standards?
I. All client activities, legal and illegal, must be kept confidential.
II. Members must disclose to clients any regular compensation arrangements that
they may have with their employer.
III. If there are any referral fees, its terms must be disclosed to clients in writing.
A.
B.
C.
D.
10.
III only.
I and II only.
I and III only.
I , II and III.
Charity Favour, a CIS graduate, writes research reports on small-cap stocks in the
Pharmaceutical sector of the NSE. Most of the companies in Charity's research
list are not widely followed in the stock market. One of his top picks boasts a
potentially "hot" new product, but with inadequate coverage, the stock is languishing
below its IPO price. David attempts to pump up interest in the stock by posting
numerous messages on Internet "blogs", facebook and google chat, claiming that
this stock could easily double or triple in price. Which of the following specific CIS
Standards of Professional Conduct has Charity violated?
A. Reasonable basis.
B. Market manipulation.
C. Misrepresentation.
D. Self dealing.
11.
Jane is a CIS registered student and a broker's assistant at a large stockbroking firm.
She notices that a fellow broker's assistant is committing an act that is unethical, if
not illegal. Which of the following actions should Jane pursue?
I. Bring these acts to the attention of the compliance officer.
II. The Code and Standards would also require Jane to report these acts to the
appropriate regulatory agencies.
III. Association with the guilty party without actual participation in these suspect
activities should be enough to clear Jane of any wrongdoing.
A.
B.
C.
D.
I only.
I and II only.
I and III only.
I, II, and III.
12.
Which of the following best defines the concept of corporate governance?
A. A system for monitoring managers' activities, rewarding performance,
and disciplining misbehavior.
B. Corporate values and governance structures that ensure the business is
conducted in an ethical, competent, fair, and professional manner.
C. A system of principles, policies, and procedures used to manage and
control the activities of a company so as to overcome conflicts of
interest inherent in the corporate form.
D. None of the above.
13.
All of the following are violations of the CIS Code and Standards on
Misrepresentation, except:
A. An analyst attributing a quote to the original source, but omitting the caveats of
the original author, which the analyst deems as irrelevant.
B. Indicating that the trailing P/E ratio on a stock is 20.5 without acknowledging the
source of this figure.
C. Attributing some statements to a "reliable source", without actually stating the
name of the source.
D. Summarizing an original report belonging to someone else, and publishing the
summary as proprietary research.
14.
According to CIS Members’ Regulation and Code of Conduct, a member or registered
student shall, subject to the Charter, bye-laws and regulations, be liable to
disciplinary proceedings if:
I.
In the course of carrying out his professional duties or otherwise, has been guilty
of misconduct.
II. He has been disciplined by any other professional body recognized by statute or
pursuant to some other disciplinary process.
III. He is a sponsored Individual in relation to a corporate body against which a
disciplinary order has been made.
A.
B.
C.
D.
I and II only.
I and III only.
II and III only.
I, II and III
Law Relating to Securities and Investments (15 – 26)
15.
Identify out of the following the matters in respect of which the Federal High Court
has exclusive jurisdiction:
I.
Matters relating to the revenue of state governments, taxation of partnerships
and customs and excise duties.
II. Banking, banks and other financial institutions.
III. Diplomatic, consular and trade representatives.
IV. Murder, rape, treason and treasonable felonies.
A.
B.
C.
D.
16.
I and II only.
II and III only.
III and IV only.
II, III and IV only.
Which of the following are exceptions to the general rule that past consideration is
no consideration?
I. Where the transaction involves a bill of exchange.
II. Where the transaction involves a unilateral promise by only one of the parties.
III. Where the transaction involves a written acknowledgement of a
statute-barred debt.
IV. Where it has been agreed that there would be compensation prior to the
performance.
A.
B.
C.
D.
I, II and III only.
II, III and IV only.
II, III and IV only.
I, II, III and IV.
17.
John went to a car dealer on Ikorodu Road, Lagos and negotiated to buy a Jeep SUV.
He paid the agreed price of N2.5 million and arranged that one of the drivers of the
car dealer accompanied by his own Personal Assistant should drive the car to his
office at Allen Avenue, Ikeja. On the way, the driver drove recklessly and hit another
vehicle as a result of which the passenger-side mirror was broken. The replacement
cost of the side mirror is N20,000.00. Which of the following is true of the scenario?
A. It is a fundamental breach which entitles John to repudiate the contract.
B. It is a dereliction of duty which entitles the car dealer to dismiss the driver
summarily.
C. It is a breach of warranty which entitles John to claim damages only.
D. It is a breach of contract which makes the contract voidable at the option of
either party.
18.
Generally, an employer is not liable for the torts of an independent contractor.
Identify out of the following the exceptions to this principle:
I. Where there is strict liability for the tort.
II. Where the employer is himself qualified to carry out the assignment given to the
independent contractor.
III. Where the employer refuses to authorize or ratify the action of the contractor.
IV. Where the employer is negligent himself by employing an incompetent
contractor.
A.
B.
C.
D.
I and II only.
I and III only.
I and IV only.
I, II and IV only.
19.
20.
21.
With regard to the duties of an agent, which of the following are exceptions to
the delegatus non potet delegare rule?
I.
II.
III.
IV.
Where the principal permits delegation.
Where the agent is used to delegation from his former principals.
Where the authority to delegate is derived from a statute.
Where the function of the agent is merely ministerial and does not require any
particular skill or discretion.
A.
B.
C.
D.
I,
I,
I,
I,
II and III only.
II and IV only.
III and IV only.
II, III and IV.
Identify out of the following the circumstances which will relieve a banker from his
duty to honour his customer’s cheques:
I.
II.
III.
IV.
If
If
If
If
the
the
the
the
customer is convicted of an offence and sentenced to life imprisonment.
customer countermands payment.
customer is dead to the knowledge of the banker.
account of the customer is frozen by his creditors.
A.
B.
C.
D.
I and II only.
II and III only.
III and IV only.
II, III and IV only.
Which of the following grounds will make a director vacate his office as a director?
I.
If he does not pay for his qualification shares (if any) within one month of his
becoming a director.
II. If he resigns his office by oral or written notice to the company.
III. If he becomes bankrupt or makes any arrangement or composition with his
creditors.
IV. If he becomes of unsound mind.
A.
B.
C.
D.
22.
I and II only.
II and III only.
II and IV only.
III and IV only.
Which of the following are not rules that guide the declaration and payment of
dividends?
I.
A shareholder who has not been paid dividends for many years can apply to the
court to compel his company to pay him dividends.
II. Dividends can be paid out of profits or capital.
III. The shareholders in general meeting have the power to decrease the amount of
dividends recommended by the directors but not the power to increase it.
IV. Dividends cannot be paid if this would result in the company being unable to pay
its debts as they fall due.
A.
B.
C.
D.
I and II only.
II and III only.
III and IV only.
II, III and IV only.
23.
Identify out of the following the effects of a winding-up order being made against a
company by the Federal High Court:
I. The order operates in favour of all the creditors only.
II. The liquidator may commence or defend a court action in the name of the
company suo moto.
III. The powers of management of the company by the directors automatically
cease.
IV. The employees or servants of the company are automatically dismissed.
A.
B.
C.
D.
24.
25.
26.
I and II only.
II and III only.
III and IV only.
II, III and IV only.
Identify out of the following the actions which an executor cannot take before he
obtains probate from the appropriate High Court:
I.
II.
III.
IV.
Sale or transfer of any security belonging to the deceased.
Disposition of real estate of the deceased.
Withdrawal of money from the account of the deceased.
Collection of all the assets of the deceased.
A.
B.
C.
D.
I, II and III only.
I, II and IV only.
II, III and IV only.
I, II, III and IV.
Identify out of the following the circumstances which may lead to the renewal or
discharge of a trustee:
I.
II.
III.
IV.
By
By
By
By
disclaimer at any time after acceptance of the trust.
release and replacement.
removal by the court under its inherent power to protect the beneficiaries.
retirement of the trustee.
A.
B.
C.
D.
I, II and III only.
I, II and IV only.
II, III and IV only.
I, II and IV only.
Identify out of the following the rights of a mortgagee:
I.
II.
III.
IV.
To
To
To
To
demand to be paid his money on the due date.
seize any property of the mortgagor and sell it to recover his money.
apply to the court for an order of foreclosure within a period of fifteen years.
sue the mortgagor for the principal and interest.
A.
B.
C.
D.
I and II only.
I and II only.
I and IV only.
I, II and IV only.
Regulations of Securities and Corporate Finance (27 – 40)
27.
Which of the following are prohibited practices as detailed in NSE Article 142?
I.
Disclosing customer’s information in a way that would harm the customer or any
other party.
II. Establishing fictitious accounts to execute some transaction.
III. Commingling the firm’s cash account with that of customers
IV. Opening of client’s account after observing the know-your-client procedure.
A.
B.
C.
D.
28.
I and II only.
II and III only.
II and IV only.
I, II and III only.
NSE Article 15 requires the setting up of an effective supervision and internal control
procedures in the day-to-day operations of members. Good internal control
procedures and practices are illustrated by which of the following:
I.
Comprehensive manuals and procedures covering all key operations and
functions.
II. Minimizing the scrutiny of regulators through effective ‘public relations’.
III. Proper authorization and review procedures.
IV. Sufficient control and supervision of staff dealings.
29.
A. I and IV only.
B. II and III only.
C. I, II and III only.
D. I, III and IV only.
Your firm has been contacted to work with one of the governments in respect of the
issuance of revenue bonds for the state. Which of the following procedures/
document are required before a state could issue bonds in Nigeria?
I.
II.
III.
IV.
Approval by two thirds of the Local Government Chairmen in the state.
Executive Council resolution to issue the bond.
State law to authorize borrowing from the capital market.
An irrevocable standing payment order.
A.
B.
C.
D.
III and IV only.
II and III only.
I, II and IV only.
I, II, III and IV.
30.
According to SEC Rule 110, which of the following parties is an ‘insider’ in relation to
a company?
A. A person who deals in good faith, without intending that he or any other person
shall make a profit or loss.
B. A shareholder who holds 6% of the shares of company.
C. A stockbroker in the normal course of business.
D. A trustee or personal representative if advised by an appropriate adviser who is
not in a situation to which the prohibition applies.
31.
To be listed in the Second Tier Market of the Nigerian Stock Exchange, a company
must satisfy which of the following conditions?
I. At least 10% of nominal capital to be offered to the public.
II. The company cannot raise more than N100 million from the Stock Market.
III. No single shareholder can own more than 75% of the issued share capital of the
company.
A.
B.
C.
D.
I and II only.
I and III only.
II and III only.
I, II and III only.
32.
According to SEC Rule, which of the following statements about private placements is
correct?
A. A special resolution of the company to approve the offer is required.
B. It should be offered to no more than 500 subscribers.
C. A public limited company can offer not more than 50% of its current issued and
paid up capital.
D. Offer period should not be more than 30 days – subject to extension by the SEC.
33.
Which of the following statements about the Administrative Proceedings Committee
of SEC is not correct?
A. It is a quasi-judicial body established pursuant to the Investments and Securities
Act 1999.
B. The Committee has jurisdiction over suspension of registration of securities.
C. The Committee has the power to sanction operators in the capital market by
cancelling their certificate of registration.
D. Any party not satisfied with the decision of the Committee as confirmed by the
commission may appeal to the Federal Court of Appeal.
34.
Which of the following is not a registration requirement for a receiving bank to an
issue according to SEC Rule 33?
A. A copy of Memorandum and Articles of Association of the applicant certified by
the Corporate Affairs Commission.
B. Fidelity Bond representing 20% of the paid-up capital of the bank.
C. A copy of form C.O. 7 certified by the Corporate Affairs Commission.
D. Evidence of compliance with the minimum paid-up capital as stipulated by the
Central Bank of Nigeria.
35.
Which of the following statements are correct in respect of the general code of
conduct for employees of capital market institutions (operators)?
I.
An employee must disclose to his employer transactions in securities by himself,
spouse, dependent children and relatives.
II. All new employees must at the time of assumption of duty lodge details of their
holding in long-term securities of government and public companies with their
employers.
III. Employees are prohibited from investing in securities of private companies.
IV. Information on client accounts can be disclosed to all other employees of the
firm.
A.
B.
C.
D.
36.
I and II only.
I and IV only.
III and IV only.
I, II, III and IV.
Which of the following is not correct in connection with the Annual General Meeting
of public companies?
A. SEC should be officially invited.
B. The notice of such meeting shall reach SEC not later than 21 days before the
date of the meeting.
C. SEC shall send four representatives to the meeting.
D. The representative of SEC may intervene at the meeting to make clarifications
on regulatory issues and matters touching the Act and the Rules and
Regulations.
37.
Contract notes should be:
A. Duty stamped.
B. Sent to the client not later than 72 hours after trading.
C. Contain details name of customer, units of shares bought or sold, transaction
fees and other details.
D. (A) and (C) only.
38.
Which of the following is the single most important factor that has hindered the
growth of the Nigerian stock market in the last one year?
A. Economic downturn.
B. Political instability.
C. Regulatory reforms.
D. Investors’ confidence.
39.
Which of the following NSE Articles emphasise the duty of members to observe &
report breaches of other members in order to maintain market integrity? NSE
Article number:
A. 2
B. 3
C. 4
D. 6
40.
SEC’s Code of Corporate Governance recommends that the Board of Directors of
quoted companies should not exceed __________or be less than___________
persons respectively:
A. 20 and 10
B. 15 and 5
C. 15 and 3
D. 10 and 3
Total = 40 marks
Question 2 – Ethics and Professional Standards
Explain with examples, the meaning of ‘Trust’ and ‘Integrity’ which are core ethical
principles of the Chartered Institute of Stockbrokers.
(4 marks)
Question 3 – Law Relating to Securities and Investments
3(a)
State the type of undue influence which is exercised when there is no special
relationship between the parties and which involves overt or open acts of improper
pressure or coercion.
(1 mark)
3(b)
Briefly explain the following legal term, ‘right of lien’.
(2 marks)
Question 4 – Regulations of Securities and Corporate Finance
Briefly explain your understanding of the following market infractions listed in NSE
Article 104 -108:
4(i)
Pegging of securities.
(2 marks)
4(ii)
Price manipulation.
(2 marks)
Question 5 – Ethics and Professional Standards
Alhaji Ahmed Maikudi retired as the Chairman/ Chief Executive Officer of Marina Heights
Plc in 2008, having served in the combined role for over ten years of his twenty five years
of service in the company. Succession was not an issue, as his first son, Tahir Maikudi who
had been operating as second in command for several years, stepped into his father’s
shoes immediately.
The performance of Marina Heights has been nothing short of spectacular since Tahir took
over. The share price has experienced unprecedented rise. A combination of aggressive
acquisition and expansion into new markets has made profits to grow in leaps and bounds.
As expected, the board of directors are pleased with their new Chairman’s performance
and the fact that they are part of his transformational team. Seven out of the ten board
members are company executives, while the remaining three were drafted in by the ex
Chairman/CEO due to their experience in the company’s traditional markets. None have
regular contacts with shareholders. The board meets biannually to basically review current
performance. Tahir Maikudi, having demonstrated unusual capacity and competence has
complete freedom to act, and this is widely seen as the reason for the company’s positive
growth.
Shareholders are also pleased with the company’s performance. However some
institutional investors have expressed concern as to the sustainability of the current
strategy, whether finances exist within the company to support it, and whether the
company is over exposed to risks associated with the rapid growth and new markets. They
also feel the board should take steps to put in place a risk committee and audit committee
as soon as possible to assist in addressing some of these concerns.
At a recent board meeting, Tahir Maikudi brushed aside any criticism, stating that he was
committed to taking the firm to greater heights. His pronouncement was applauded loudly
by all those in attendance.
As an investment analyst interested in researching Marina Heights Limited, you feel there
are corporate governance issues that need to be addressed by the company.
Required:
5(a)
With reference to the scenario and SEC’s Code of Corporate Governance in Nigeria,
discuss changes to the corporate governance structure that you would recommend
for this company.
(14 marks)
5(b)
What would be the role of the Risk Committee of Marina Heights Limited when it is
put in place?
(4 marks)
Question 6 – Law Relating to Securities and Investments
6(a)
Ajelogo, a widower with two children, made his will in 2003 leaving his whole estate
to be divided equally on his death between his two children. In 2005 at the
suggestion of James, a solicitor under whose influence he had fallen, Ajelogo made
a codicil to his will leaving a sum of N500,000.00 to James. In 2007 Ajelogo
married Miss Ibadiaran but the marriage was short-lived, he divorced her in 2009,
but died in July 2010. The 2 children, Kudi and Gbemi have approached you for
your advice because both James and Ibadiaran, are making claims against Ajelogo
estate as beneficiaries.
You are required to advise the parties.
6(b)
(7 marks)
John (16 years), Mary (19 years), Janet (25 years), Joseph (12 years), Samuel (17
years) and Udoh (14 years) decided to form a public company. The Corporate
Affairs Commission has refused to register the company on the following grounds:
I. That there are too many minors.
II. That the minimum number of seven persons required to form a public company
is not complete.
You are required to advise the incorporators.
(7 marks)
Question 7 – Regulations of Securities and Corporate Finance
You work as a company analyst in the Research Department of one of the large
stockbroking firms in Lagos. You were at the Ikeja Capitalist Club to meet one of your high
networth clients to discuss his investment plans in company of your friend Yemi, who does
not work in the financial services industry.
While waiting for your client, you sat near a group of obviously “professional” people who
were having a loud discussion. Yemi appeared to have paid attention to their discussions.
On your way home, your friend told you that it seemed the group, apparently oblivious of
the presence of the other people, were discussing their final plans for MABC International
Bank Plc making a formal offer shortly, to purchase Integrity Bank Plc. Although your
friend does not work in financial services, he is a professional who seemed to have heard
the conversation quite clearly, while not appreciating its full significance or the potential
issues that this information may pose for you.
You have been working on the final stages of a major piece of research on Integrity Bank
Plc which, it appears, may be about to become the subject of a bid by another company.
Your own research, which is about to be published, will give a very favourable view of
Integrity Bank Plc. Although, your initial reaction was that this may be useful information,
as the evening wears on, you began to have more concerns with regard to its validity and
the extent to which you could properly rely on it for regulatory reasons.
The next morning, while still reflecting on the events of last night, Yemi came in. He had
with him a cheque for N20m in the name of your firm to open a stock account for his
uncle, a well-known politician who lives in Abuja. The account was to be run by Yemi on
behalf of the principal, who wanted to remain anonymous. You are certain that with the
current state of the market, it would not be difficult to convince your CEO to approve the
opening of the account.
Required
With reference to relevant SEC Rules, NSE Articles and CIS Code of Ethics and Standards
of Professional Conduct, you are required to answer the following questions.
7(a)
If you think that your friend understood what was being said and overheard the
names correctly, explain the possible consequences for your research.
(4 marks)
7(b)
Does it make any difference to your possible courses of action that it was your
friend who overheard the conversation or that you did not ask for or expect to
receive the information?
(4 marks)
7(c)
Can you pass the information on to anyone else in your firm or otherwise make use
of it?
(4 marks)
7(d)
If you opened the new account for Yemi’s uncle, would you have contravened any
provisions of securities and investment regulations in Nigeria? What is the most
appropriate action to take?
(6 marks)