PAPER 2.4
QUESTIONS AND SOLUTIONS
SEPTEMBER 2014 DIET
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Question 2 – Ethics and Professional Standards
An authorized dealing clerk who trades on the NSE has been alleged to be involved in
“front-running”. What does this mean? Give an example.
(4 marks)
Solution 2
Front-running is the unethical practice of a stockbroker, trading shares for his own
account while taking advantage of advance knowledge of pending orders from his
customers. It is also known as forward trading
For example, a stockbroker is aware of an order to purchase 10 million units of the shares
of ABC Limited by one of his firm’s large clients. Knowing that this large order will push up
the price of the stock, the stockbroker purchases 1,000 units of ABC Limited’s shares for
his own account hoping to profit from the price increase.
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Question 3 – Law Relating to Securities and Investments
X-Ray Limited accessed funds through the primary market. The company issued a
prospectus in respect of the offering, giving details about the capital base, financial
position and future growth prospects of the company. You relied on the information
contained in the prospectus issued and made substantial investment in the shares of
the company.
Recently, it was discovered that most of the financial information contained in the
prospectus were untrue.
Required:
What are the remedies available to you?
(3 marks)
Solution 3
This remedy is available to an aggrieved shareholder who can show the court that
there was a misstatement made either innocently or fraudulently in the prospectus.
The shareholder can bring an action against the company if the prospective
contained statement, promises or forecasts which was false, deceptive or misleading;
or did not contain a statement, report or account required to be contained.
The plaintiff must also prove that he relied on the false statement to subscribe for the
shares and that the statement was material to him in taking the investment decision he
took.
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Question 4 – Regulations of Securities and Corporate Finance
The Central Securities Clearing System (CSCS) Limited was established to facilitate
settlement and delivery of securities in the stock market. Explain the following within the
context of CSCS:
Question 4(a)
E-bonus.
(11/2 marks)
Solution 4(a)
This is electronic form of bonus shares whereby when a company declares a script or
bonus issue, rather than issue a physical bonus certificate to the investor, it is converted
to electronic form and credited to the investor’s account in CSCS depository under the
investor’s stockbroking firm’s account with CSCS.
Question 4(b)
Short-Selling.
(11/2 marks)
Solution 4(b)
Short-selling means selling stock not owned by the investor with the aim of borrowing
such stock and returning to the owner in future.
Generally, short-selling is not allowed under the existing CSCS arrangement. However,
when securities lending takes off fully is will become a normal part of stock trading for
operators and investors.
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Question 5 – Ethics and Professional Standards
Please refer to all relevant Securities law, Regulations and Code of Ethics in Nigeria as
you analyze the cases below:
5(a) You are a compliance officer in one of the top stockbroking firms. You become
aware that your firm’s Head of Research, Angela Jones, ACS has been approached
by a salesman from an investment bank, who is seeking collaboration and support
with respect to recommendations to be issued to the public on a forthcoming public
offer to be made by Pinnacle Plc, a listed manufacturing company.
Although, you have not been approached for advice as to the possible impact that
these discussions could have on Angela’s research reports and recommendations to
clients, a number of concerns spring to your mind.
Required:
What might these concerns be and why?
(5 marks)
Solution 5(a)
The concern might relate to any of these:
i) Independence and objectivity.
ii) Conflict of interest.
iii) Breach of duty to clients and prospective client.
(Note: brief explanation required)
Question 5(b)
You discuss these concerns with your boss who says that he will have a word with
Angela. As a result of this, you are approached by Angela, who tells you that he has
had close relationship with the senior management of the investment bank for some
time, and they regularly advise on his research reports before they are made public.
He feels that there is no reason why he should not continue to engage with them in
this manner.
Required:
What advice would you give and why?
(5 marks)
Solution 5(b)
In order not to breach the Codes and Professional Conduct of CIS and other regulations in
the market, he has to desist from actions that would put a question mark on his integrity,
work independence and objectivity, and avoid conflict of interest.
The current situation may put him in a position where these ethical values are breached.
Question 5(c)
A series of TV, newspaper and journal promotions have been prepared for the
purpose of marketing the Pinnacle Plc offer with follow-up information packs being
sent out to interested parties.
Required:
What basic controls apply with regard to the issuance of promotional material for
new issues in Nigeria?
(5 marks)
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Solution 5(c)
Based on SEC rule 52B, advertisement should conform with certain requirements:
Advertisement on the Issue of Securities:
i) Issuer or issuing house should not publish any information about a public offer
without the prior approval of the SEC.
ii) Advert should be truthful and not misleading; not selective.
iii) Avoid the use of extensive technical legal terminologies or complex language.
iv) No ambiguous and high-sounding words- ‘top offer’, ‘superior offer’, ‘brighter future’,
‘invest and haul in future.
v) No statement that guarantees or promises rapid increase in profits.
vi) Models, celebrities, fictional characters, landmarks or caricatures should not be
displayed on or form part of the advertisement.
vii) No slogans or brand names for the offer - except the usual name of the company or
brand.
viii) Not more than 5 years historical financials as in the offer document.
Question 5(d)
Shortly after your conversation with Angela, Pinnacle Plc issues the securities, and as
a result of the ‘strong buy’ recommendation issued by Angela, your firm earns
substantial commission on trades on Pinnacle shares both on the new securities offer
and the secondary market. Nevertheless, you remain concerned at the position in
which Angela may have placed both himself and the firm.
Required:
Explain what further issues may arise and their possible regulatory consequences.
(5 marks)
Solution 5(d)
The firm may be found guilty of unethical and unprofessional behavior.
i) Breach of duty to client.
ii) Churning.
iii) Unfair dealing with clients.
iv) Breach of fiduciary duties.
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Question 6 – Law Relating to Securities and Investments
Chief Moneybags is a well-known building contractor. Late in 2012, he was awarded a
contract by the Lagos State Government to build a twelve-storey complex. The contract
price was N500 million, out of which he was paid an advance of N400 million. Just as he
completed the job (but before the payment of the balance), he fell ill and had to be flown
abroad for treatment.
However, before travelling out, he decided to “put his house in order”. First, he wrote a
letter to the Lagos State Government to pay the balance of his contract money to his
wife, Mrs. Moneybags. He also gave his wife a letter of authority to collect the money on
his behalf.
Further, he decided to write a Will. After the Will was drafted by his lawyer, he invited
Abraham and Elijah to be his witnesses. Abraham arrived first, signed his own portion
and left. When Elijah arrived, Chief Moneybags signed the Will. Thereafter, Elijah also
signed it.
Recent update is that the Lagos State Government has refused to pay the balance of the
contract money to Mrs. Moneybags. Apart from this, Chief Moneybags’ lawyer has raised
concerns about the validity of the Will executed.
Question 6(a)
Advise Mrs. Moneybags as to whether or not she can institute any action against the Lagos
State Government.
(6 marks)
Solution 6(a)
– Privity of contract
-
Only the parties to a contract can enforce it
-
Chief (Mrs.) Moneybag was not party to the contract
-
She cannot institute any action against the State Government
Question 6(b)
Determine the validity of this Will.
(6 marks)
Solution 6(b)
- The execution of a Will must follow precise procedure
-
Testator must sign the Will
-
He must do so in the presence of the two witnesses
-
The witnesses must sign in the presence of the testator and of each others
-
This will is therefore not valid.
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Question 7 – Regulations of Securities and Corporate Finance
Question 7
You have just resumed work in one of the large investment firm as MD/CEO.
One of the recently acquired clients of your firm, a Senator of the Federal
Republic, has just been arrested on suspicion of tax evasion. He is also a subject
of an on-going investigation regarding a kick-back scandal involving a
multinational oil firm.
A day before his arrest, he had dropped a signed letter with your firm, giving
written permission for his consultancy firm and his wife to instruct your firm about
the management and distribution of his investments which included the realization
of part of the fund up to the sum of N1.5 billion with total current value of N5
billion.
The day after his arrest, your firm receives two e-mails, one from the consultancy
firm and one from the client's wife both requesting that some of his shares be
realized and part of the monies transferred to the consultancy firm's bank account
held at a UK retail bank and the balance to the client's wife's private bank account
in New York. Other e-mails from the client's wife request that the funds are
transferred immediately to allow her pay her husband's legal fees, pay a sum of
money into court to secure her husband's release on bail, and pay other
outstanding medical bills.
On reviewing the file, you note that there is very little client identification material
on record. You ask the account officer Jerry, about this and he replies that as the
client had been referred by his former employer, and since he was a Senator, he
had not sought client identification when he opened the client's account.
According to Jerry, his team leader when he resumed had told him that, given his
seniority, he would be solely responsible for opening and approving his own
clients’ accounts.
With reference to relevant Securities laws, Regulations and Code of Ethics in
Nigeria, you are asked to consider the following.
Question 7(a)
What are your immediate concerns regarding Jerry’s client?
(4 marks)
Solution 7(a)
A number of issues come to mind:
i) The client is a politically exposed person. His account opening therefore
requires approval by the top management.
ii) He may be involved in money laundering or terrorist financing.
iii) Poor documentation of the clients information and identification can result in
the firm being liable to serious securities market infractions.
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Question 7(b)
What steps would you take regarding the request for the sale of shares and release
of funds from the portfolio and what specific advice can you give Jerry?
(3 marks)
Solution 7(b)
i) Since the client had given written information to sell some of his shares, the
instruction should be honoured.
ii) However, the funds should only be transferred to his account after meeting
all relevant documentation requirements. A cheque can also be issued in his
name.
iii) The request by his wife and consultancy firm to transfer funds to the UK
should not be honoured as they do not have the authority to give
instructions on the account.
Question 7(c)
Identify the main money laundering and know-your-customer offences that may
arise in this situation and the responsibilities of your firm.
(8 marks)
Solution 7(c)
A number of offences may arise:
i) Failure to report transfer of funds exceeding N5, 000,000 (individual) or
N10,000,000 (corporate) to CBN, SEC and EFCC.
ii) Failure to verify the identity of the client through know-your-client (KYC).
 Drivers License
 International Passport
 Utility Bills
 Passport Photograph
iii) Failure to file return on suspicious transactions within 7 days of said
transaction.
iv) Failure to appoint designated money laundering compliance officers as well
as establish internal audit unit to monitor compliance.
v) Failure to take reasonable measures to establish the source of wealth and
the sources of funds of client and report all anomalies to SEC and Nigerian
Financial Intelligence Unit (NFIU).
Money laundering offences may carry penalty upon conviction of up to 10 years
improvement.
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Question 7(d)
As MD/CEO, what roles are you expected to play in this circumstance?
(3 marks)
Solution 7(d)
The MD/CEO has the overall responsibility that all the required laws and regulation
are observed. These include:
i)
Putting in place procedures for compliance with KYC rules.
ii)
Ensuring suspicious transactions are identified and reported.
iii) Ensuring adequate training of staff to carry out their functions and comply with
money laundering rules.
iv) Ensure transactions above stipulated thresholds are reported as/and when due.
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