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 2012
Level 2
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
A
D
B
C
C
C
C
A
A
B
B
C
B
A
B
16 B,C
C
17
C
18
C
19
B
20
D
21
A
22
C
23
A
24
C
25
C
26
D
27
D
28
A
29
B
30
31
32
33
34
35
36
37
38
39
40
D
A
D
B
A
C
D
D
A
B
(40 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 – Ethics and Professional Standards
Integrity means behaving in accordance with high standard of behavior and a strict
moral or ethical code of conduct. CIS members are expected to act with integrity,
being honest and acting in line with their professional code of ethics.
If shareholders in a company suspect that the Directors are not acting with integrity,
there can be no trust.
Trust
Generally, trust means reliance or confidence in the integrity, strength, ability e.t.c of
a person or thing. From the standpoint of a client- Stockbroker relationship, it implies
that a Stockbroker should behave in a professional manner, such that he can earn the
trust of his clients. He should always demonstrate competence, sound judgement and
integrity in his business relationships.
(2 marks each= 4 marks)
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Question 3 – Law Relating to Securities and Investments
(3a)
Actual undue influence.
(1 mark)
(3b)
This is the right which entitles a person to retain the possession of the property of
another person until the payment of a debt or the satisfaction of an obligation but which
does not give him the right to use or sell the property.
(2 marks)
Total = 3 marks
Question 4 – Regulations of Securities and Corporate Finance
(4a)
Pegging occurs when the price of a security is fixed at a certain amount either by
agreement, or intervention in the market. Market operators are prohibited from
engaging in trades or activities aimed at pegging of securities prices, as it is an illegal
market conduct.
(2 marks)
(4b)
Market manipulation is a deliberate attempt to interfere with the free and fair operation
of the market and create artificial, false or misleading appearances with respect to the
price of, or market for a security. Transactions which create an artificial price or maintain
an artificial price for a tradeable security are also called market manipulation. Market
manipulation is prohibited in the Nigeria capital market.
(2 marks)
(Total = 4 marks)
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SECTION C: COMPULSORY QUESTIONS
Question 5 – Ethics and Professional Standards
(5a)
Changes to governance structure will emerge from failures manifest in current
operations. Whilst Marina Heights is a successful company there is no assurance that this
will continue. The concerns of institutional investors must be addressed since the
company is their company and what they want is what the firm must deliver.
i.
Lack of separation between CEO and Chairman
The first concerns the lack of separation between CEO and Chairman. This NSE Code of
Corporate Governance in Nigeria is unequivocal in its recommendation that both
functions should be performed by separate individuals. It is the role of the Chairman to
represent shareholders and the role of the CEO to run the company. It would appear
that, at present, the CEO/Chairman is more interested in the latter and ignoring
shareholders concerns.
ii.
Balance of Non –Executives to Executives in the Board
The Code states that for Nigerian companies, the Board should comprise a mix of non
executives and executives, and that majority of Board members should be non-executive
directors. The current number of NED’s in Marina Heights is not in compliance with this
requirement.
iii.
Board Committees
The Board may need to establish, in addition to an audit committee required by law,
other committees as deemed appropriate. Currently, Marina Heights does not even have
in place an audit committee, which is a contravention of the Companies and Aied Matters
Act. In addition, in view of growing concerns about risks and risk management, it may
be necessary for the Board of Marina Height to establish a risk management committee.
iv.
Lack of appropriate skills on the board
A subtle point mentioned in the scenario is the lack of appropriate skills on the board
and, in particular, in relation to the non-executives. Recently, the nature of the company
has changed dramatically and there is clearly a need for expertise in relation to its new
business ventures in order to reduce the inherent risk and advise management
accordingly. Orientation and training should become part of governance operations at
Marina Heights, as provided by the Code.
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v.
Lack of regular Board meetings
Finally, the lack of regular board meetings is of some concern. The Code provides for
regular meetings of the Board, at least once every quarter to effectively perform its
oversight function and monitor management’s performance. Currently, the Board of
Marina Heights meets only twice a year.
(3 marks for each well-developed point)
(Maximum 14 marks)
(5b)
The roe of the risk management committee if established would include the following:
i. Review and approval of the company’s risk management policy including risk appetite
and risk strategy.
ii. Review of the adequacy and effectiveness of risk management and controls.
iii. Oversight of management process for the identification of significant risk across the
company and adequacy of prevention, detection and reporting mechanisms.
iv. Assess risks of any new ventures, products and services.
v. Periodic review of changes in the economic and business environment, including
emerging trends and other factors relevant to the company’s risk profile.
vi. Review of the company’s compliance level regarding risk management policies,
statutory and regulatory requirements and financial reporting standards.
vii. Make recommendations to the full board on all significant matters relating to risk
strategy and policies.
(1 mark for each point = 4 marks)
(Total = 18 marks)
Question 6 – Law Relating to Securities and Investments
(6a)
A Will is automatically revoked by a subsequent marriage of the testator; this also
revokes all codicils to the will: S.18 wills Act 1837. In the instant case, Ajelogo’s will,
dated 2003 and codical dated 2005, are revoked by his marriage to Miss Ibadiaran in
2007. At his death in 2010, he had died intestates, and since he had divorced Miss
Ibadiaran, before his death, both Jaguda and Ibadiaran, are not entitled to any part of
his estate upon his intestacy only his children are entitled.
(7 marks)
5
(6bi)
Although a minor is disqualified from joining in the formation of a company, he may do
so if two or more adults are involved. In this case, there are two adults and the number
of minors is irrelevant.
(3 marks)
(6bii)
Only two persons are required by the CAMA to form a company whether private or
public.
(3 marks)
The CAC is therefore wrong on both grounds.
(1 mark)
(Total = 14 marks)
Question 7 – Regulations of Securities and Corporate Finance
The question raised legal and ethical issues with regard to the impartiality of investment
research, the management of conflicts of interests and possible insider trading and
market abuse.
(7a)
The key issue raised was concerning:
i.
Reasonable basis for investment research, recommendation and in investment
management or action which should be supported by thorough and diligent research
and analysis (Section 8.2, CIS Code and Standards)
ii.
Prohibition against the use of material non-public information (Section 20.1, CIS
Code and Standards ; Code of Conduct for Employees of Capital Market Operators;
NSE Article 108)
(4 marks)
(7b)
The indirect nature of the disclosure and lack of original request would not have affected
the application of any of the statutory offences of insider trading, market abuse or
market manipulation. This is also irrelevant to any ethical issue arising from the case.
(4 marks)
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(7c)
Passing the information on would constitute disclosing inside information under Section
20.1, CIS Code and Standards; Code of Conduct for Employees of Capital Market
Operators ; NSE Article 108 and ISA(2007), Sections 111-115.
Disclosure may only be made in accordance with the relevant compliance requirements.
(4 marks)
(7d)
NSE Article 102 and Article 143 clearly provides that a dealing member firm shall not
accept or operate a share trading account or otherwise deal on behalf of any other
person unless it has taken reasonable steps to establish the true identity of that person
incusing his address, occupation, date of birth, mother’s maiden name e.t.c.
Similar provisions of CIS Code of Standard with respect to dealing with unnamed/
unidentified principal also apply (Section 15.0).
The most appropriate action to take in this case is to ensure proper disclosure of
relevant information about the principal as required by the KYC requirement. If this is
not done the account should not be opened.
Further, in line with SEC Rule 100, there must be in place a duly executed power of
attorney for Yemi to act on behalf of his uncle in the purchase and sale of securities.
Again, as the principal in this case could be a politically exposed person, further
procedures should be complied with which includes approval of the opening of the
account by senior management and verification of the source of the funds.
(6 marks)
(Total 18 marks)
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