CIS September 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
SECTION A: MULTIPLE CHOICE QUESTIONS
Ethics and Professional Standards (1 – 14)
1.
The M.D of Magichand Securities Ltd., Chidi Merlin, has just recruited three young
graduates to market his firm’s stockbroking services. Chidi instructs the marketer
to promise prospective clients mouth-watering returns on their investments in
line with the strategy of the firm. For instance, Otunba Oloye is assured that if he
invests N10 million, the firm will ensure that his capital does not get depleted and
that at the end of every quarter he is sure of a minimum return of N500,000.
This action ___________
A. Violates NSE prohibition against guarantees.
B. Violates Standard 16(1) preservation of confidentiality.
C. Violates NSE Communication with the public.
D. None of the above.
2.
Albert and Tilde recently started their own investment advisory services. They are
both registered students of the Chartered Institute of Stockbrokers. Albert’s
business card reads Albert J, ACS, while that of Tilde reads, Tilde A, CIS Level III.
According to the CIS Code and Standards ___________
A. Albert has violated the standards but Tilde has not.
B. Tilde has violated the standards but Albert has not.
C. Albert and Tilde have both violated the CIS Code and Standards.
D. Neither Albert nor Tilde has violated the CIS Code and Standards.
3.
James Goodluck, ACS, a research officer with Expertedge Stockbrokers decides to
change his recommendation on the security of Transcorp Plc from “buy” to “sell”.
He mails this change in investment advice to all the firm’s prospective clients. A
day after sending the mail, a client calls with a buy order of 1,000,000 units of
Transcorp Plc. What should Goodluck do to conform with CIS Code and
Standards?
A. Accept the order.
B. Advise the client of the change in recommendation before accepting the
order.
C. Reject the order because it is contrary to the firm’s recommendation.
D. Reject the order until 7 days have elapsed after the communication of change
in recommendation.
4.
Hajia Ahmed, FCS, heads the Internal Control department of a large securities
firm. The firm has many qualified chartered Accountants. If Hajia Ahmed
delegates some internal control duties to her subordinates, which of the following
statements best describes her responsibilities under the CIS Code and Standards?
A.
Hajia Ahmed’s supervisory responsibilities do not apply to those subordinates
who are not subject to the CIS Code and Standards.
B. Hajia Ahmed no longer has supervisory responsibility for those duties
delegated to his subordinates.
C. Hajia Ahmed retains supervisory responsibility for all subordinates despite
delegation of some duties.
D. CIS Code and Standards prevent Hajia Ahmed from delegating supervisory
duties to subordinates.
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5.
Jamiu Bamanga (ACS) recently posted on the internet, comments regarding the
stock of Interglobal Limited, in which he held significant beneficial interest,
without approval from the management of his member firm. Jamiu made a
recommendation to buy the company’s stock in his post without disclosing that he
held large volumes of the company’s stock to sell. According to the CIS Code and
Standards, Jamiu ____________
A. Had violated standards on prohibition against misrepresentation and duties to
clients and prospective clients.
B. Had violated the code on independence and professional competence.
C. Had violated the code on professional misconduct and priority of transactions.
D. Had violated standards on prevention and disclosure of conflicts of interest.
6.
Mr. Tade Bajo, FCS is the managing director of Maneuver Securities Limited, a
medium sized stockbroking firm which has a large client base including civil
servants, retirees, politicians, and institutional investors. Due to the large
numbers of clients that visit the office, the staffs often fail to investigate and
report instances of suspicious activities in customers’ accounts. There are also
lapses in the monitoring of the transmission of customer funds and/or securities
in and out of the firm. One of the clients succeeds in laundering millions of Naira
from illicit drug business through Maneuver Securities Limited.
Which of the following Code and Standards has Tade most likely violated?
A. Standard on independence and objectivity.
B. Standard on competency.
C. Standard on responsibilities to the employer.
D. Standard on monetary compensation or benefits.
7.
Beneficial ownership means which of the following?
I. Direct or indirect pecuniary interest in securities.
II. The power to dispose or direct the disposition of a security.
III. Power to vote or direct the voting of shares.
A.
B.
C.
D.
I only.
I and II only.
I and III only.
All of the above.
8.
Mr. Tunde Oloye (ACS) decided to maintain a personal trading account with his
firm, Darosa Securities Ltd, but the Managing Director, Mrs. Sade
Ajanlekoko(FCS) refused to allow him do so. She was of the opinion that Tunde
should open an account with another stockbroking firm to prevent conflict of
interest. The action of the Managing Director ___________
A. Is in line with SEC Code of Conduct peculiar to employees of Broker/Dealer
firms.
B. Is in line with trading rules and practices.
C. Violates SEC Code of Conduct peculiar to employees of Broker/Dealer firms.
D. Violates NSE Articles.
9.
A leading and reputable Microfinance Bank, quoted on the Nigerian Stock
Exchange collapsed under the weight of huge non-performing loans. The CEO was
a professional accountant, highly experienced and skilled microfinance operator.
He had attended many courses on business planning, governance, risk
management etc. He had assembled a diverse board comprising of lawyers,
accountants and business people. When the institution collapsed, there were
allegations of impropriety, lack of transparency and fraud.
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With reference to SEC Code of Corporate Governance and the possible reasons for
the collapse of the Microfinance Bank, which of the following is most likely
incorrect?
A. The Company Secretary was not effective.
B. There was conflict of interest in the running of the organization.
C. Whistle-blowing policy was not in place.
D. The risk management structure was weak.
10.
An Abuja based stockbroking firm, just hired Mohammed Foe, ACS, who had
previously worked for another stockbroking firm for six years. When Mohammed
was with his former employer, he had in his laptop a list of clients and their
contact information which he generated in the course of his duties. Upon
resumption at his new job, Mohammed contacts his former clients using the list,
since he knows them well and is certain that many will follow him to his new
employer. Is Mohammed in violation of the CIS Code and Standards?
A. Mohammed is not in violation of the Code and Standards because he
generated the clients list on his own in his former employment, and has the
right to use it.
B. Mohammed is not in violation of the code because he did not sign any noncompete agreement with his former employer.
C. Mohammed is in violation of the code because he resigned to work for a firm
in competition with his former employer.
D. None of the above.
11.
Funmi Awe, ACS, recently completed a research report on Nigerian Wines Plc, in
which she concluded that the stock should be avoided for now and that a better
buying opportunity would present itself in future. At an analyst conference,
colleague tells Funmi that a secret tender offer for Nigerian Wines Plc is in the
works, and will likely be made public within the next month. This colleague urges
Funmi to buy Nigerian Wines shares immediately "before it's too late". Funmi
immediately executes an order for her personal account, and then recommends
the purchase of the stock to many of her big clients. Funmi has potentially
violated all of the following Standards except ___________
A. Prohibition against misrepresentation.
B. Reasonable basis and fair presentation.
C. Prohibition against the use of material nonpublic information.
D. Priority of transactions.
12.
Which of the following does not represent compliance with the CIS Code and
Standards on “independence and objectivity”?
A. Protecting the integrity of opinion.
B. Reporting unethical trading behavior.
C. Use of reasonable care and judgment in the performance of duties.
D. Making fair judgment in dealing with security issuers and other parties.
13.
Ayo, a level 2 student of CIS, has just secured employment with MNO Securities
Ltd. On the first day of resumption, the Human Resource (HR) Manager requested
that he should provide details of his holdings in securities of quoted companies to
the firm. Ayo was displeased as he felt that his investments should be personal
and confidential. But the HR Manger insisted that the Code of Conduct for
Employees of Capital Market Institutions specifically requires this.
Which of the following is/are possible reason(s) for this provision?
A. Conflict of interest.
B. Insider dealing.
C. Plagiarism.
D. (A) and (B) above.
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14.
With respect to trading rules and practices, the CIS Membership Regulation and
Code of Conduct (2005) stipulates that a member should __________
I.
Not practice as a stockbroker unless he is an employee, attaché or agent of a
firm.
II. Not practice as a stockbroker without a currently valid practicing license
issued by the Institute.
III. Never, if in practice, buy or sell securities in the secondary market for his
own account.
IV. Not jeopardize the interest of other members by being a whistle blower.
A.
B.
C.
D.
I and II only.
I and III only.
I, II and III only.
All of the above.
Law Relating to Securities and Investments (15 – 26)
15.
Which of the following are the functions of the Central Bank of Nigeria?
I. To issue legal tender currency in Nigeria.
II. To maintain external reserves to safeguard international value of the legal
tender currency.
III. To act as banker and financial adviser to all the states of the Federation.
IV. To promote monetary stability and a sound financial system in the country.
A.
B.
C.
D.
I and II only.
III and IV only.
I, II and III only.
I, II, and IV only.
16.
What is the legal title of a person who has actually been named in the Will of a
deceased person to administer his Estate after his death?
A. Executor.
B. Administrator.
C. Estate manager.
D. Testator.
17.
Which of the following are the essential ingredient(s) required for the creation of
a valid trust?
18.
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.
Which of the following statements describe the similarities or differences between
a bill of exchange and a cheque?
I.
A bill of exchange may be drawn on anybody while a cheque may only be
drawn on a banker.
II. Both of them may be made payable either at a fixed or determinable future
time or on demand.
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III. The provisions relating to crossings are applicable to both bills of exchange
and cheques.
IV. The rule relating to acceptance is not applicable to cheques but they are
applicable to bills of exchange.
A.
B.
C.
D.
19.
20.
21.
I and II only.
I and III only.
I and IV only.
I, II and III only.
Which of the following actions can an executor take before he obtains probate
from the appropriate High Court?
I.
II.
III.
IV.
To
To
To
To
collect all the assets of the deceased.
dispose of real estate of the deceased.
receive payments of debts due to the deceased.
carry on the business of the deceased for the purpose of winding it up.
A.
B.
C.
D.
I, II and III only.
I, III and IV only.
II, III and IV only.
All of the above.
Which of the following persons are disqualified from being receivers of a
company?
I.
II.
III.
IV.
An undischarged bankrupt.
A body corporate.
A chartered accountant.
An auditor of the company.
A.
B.
C.
D.
I, II and III only.
I, II and IV only.
II, III and IV only.
All of the above.
Which of the following are the duties of a principal to his agent?
I.
II.
III.
IV.
Duty
Duty
Duty
Duty
to
to
to
of
give loan to the agent.
pay agreed commission.
re-imburse or indemnify.
personal performance.
A.
B.
C.
D.
I and II only.
II and III only.
II, III and IV only.
All of the above.
22.
Actions based on specialty contracts must be brought within which of the
following periods before they become statute barred?
A. 3 years.
B. 6 years.
C. 9 years.
D. 12 years.
23.
Which of the following terms is fundamental to a contract and the breach of which
entitles the wronged party to repudiate the contract?
A. Implied terms.
B. Warranties.
C. Representations.
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D. Conditions.
24.
25.
26.
Which of the following are required for the reduction of the share capital of a
public company?
I.
II.
III.
IV.
Holding of 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.
I and III only.
II and III only.
II and IV only.
Which of the following are the rights of a mortgagor?
I.
II.
III.
IV.
To
To
To
To
enjoy beneficial ownership of the property in his possession.
take action against a trespassing third party.
exercise his right of equity of redemption.
force the mortgagee to release the mortgaged property.
A.
B.
C.
D.
I and II only.
III and IV only.
I, II and III only.
II, III and IV only.
Which of the following circumstances will relieve a banker from his duty of
secrecy which prohibits him from disclosing the details of his customer’s account
to third parties?
I.
II.
III.
IV.
If the banker is compelled by law or court order.
If the banker’s duty to the public justifies the disclosure.
If the disclosure is done with the express or implied consent of the customer.
lf the details of the account of the customer are requested by his creditors.
A.
B.
C.
D.
I and II only.
II and III only.
I, II and III only.
II, III and IV only.
Regulations of Securities and Corporate Finance (27 – 40)
27.
The shares of Alpha Plc have been placed on full suspension by the Nigerian Stock
Exchange. Which of the following are possible reasons for the suspension?
I. A share reconstruction is going on in the company.
II. Allegation of share price manipulation in the company is being investigated
by the NSE.
III. The company is raising additional funds through a rights issue.
A.
B.
C.
D.
28.
I and II only.
I and III only.
II and III only.
All of the above.
An authorized clerk working for a stockbroking firm makes available his password
for remote trading to other staff of the firm when he is too busy to trade. With
reference to relevant securities regulation in Nigeria, who is to be held liable?
I.
The authorized clerk.
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II. The unauthorized user of the pass word.
III. The Dealing firm.
A.
B.
C.
D.
29.
I only.
III only.
II and III only.
All of the above.
According to SEC rule 110, which of these are not ‘insiders’ in relation to a
company?
I. A stockbroker in the normal course of business.
II. A person who deals in good faith, without intending that he or any other
person shall make a profit or loss.
III. A liquidator, receiver or trustee in bankruptcy in good faith.
IV. A trustee or personal representative if advised by an appropriate adviser who
is not in a situation to which the prohibition applies.
A.
B.
C.
D.
30.
I and II only.
I and III only.
III and IV only.
All of the above.
ABC Securities Ltd provided a duly executed ‘indemnity’ to Able Registrars in
respect of a sale transaction of their client, Mr. Yunus, whose signature was
irregular.
What is the most likely implication of providing an indemnity in case the
transaction turns out to be fraudulent?
A. ABC Securities Ltd will make up the loss.
B. Able Registrar will make up the loss.
C. ABC Securities Ltd and Able Registrars are jointly and severally liable.
D. The Stock Exchange remains liable in all cases of such irregularities.
31.
You work in a stockbroking firm. One of your firm’s clients dies and your firm is
notified. The member firm should ___________
I. Get the names and addresses of all beneficiaries of the Estate.
II. Cancel all open orders for the account.
III. Freeze the account until the required documents are received.
A.
B.
C.
D.
32.
I only.
II and III only.
I and III only.
All of the above.
A customer had acquired 100,000 units of XYZ over many years. The company
recently declared a dividend of N2 per share. Which of the following is correct?
I. Withholding tax on the dividend is N10,000
II. Gross dividend amount is N200,000
III. The sum of N20,000 is deductable when computing the customer’s personal
income tax.
A.
B.
C.
D.
33.
I only.
II only.
I and III only.
All of the above.
Which of the following is a fiduciary?
I.
Guardian.
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II. Trustee.
III. Administrator of an Estate.
IV. Executor of an Estate.
A.
B.
C.
D.
I and II only.
III and IV only.
I, II and IV only.
All of the above.
34.
Which of the following is not correct about the provisions of NSE Articles?
A. Article 2 is on the duty of members to observe and report breaches.
B. Dealing members are expected to submit their financial statements half
yearly.
C. Dealing members are expected to remit within 30 days from the beginning of
each month, the total transaction fees due.
D. Contract notes should be issued to clients by dealing members within 3 days
of the transaction.
35.
A customer transacts the following equity trades on the NSE:
Stock
Purchase
(N)
Sale
(N)
W
-
260,000
X
80,000
-
Y
800,000
-
Z
-
400,000
Which of the following is correct in respect of the transaction costs?
A. NSE fees is N1,980
B. SEC fees is N4,620
C. CSCS fees is N9,240
D. (A) and (B) above.
36.
The Investment and Securities Act (ISA) 2007 regulates __________
I. OTC market and Stock Exchanges.
II. Broker/dealer and their associated persons.
III. Commodities Exchanges.
A.
B.
C.
D.
I only.
II only.
I and II only.
All of the above.
37.
A dealing member of the Exchange shall remit within ________ from the
beginning of each month the total transaction fee due whether or not it receives a
demand note from the Exchange.
A. 20 days.
B. 30 days.
C. 15 days.
D. 7 days.
38.
An
A.
B.
C.
underwriter can perform any of the following functions except ___________
Pricing new issues.
Selling new issues.
Formulating the method used to issue the securities.
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D. Sponsoring quotation of shares to the Exchange.
39.
40.
Which of the following statements is/are true concerning the Nigerian securities
industry regulation and practice?
I.
II.
III.
IV.
Under T+3, trades are irrevocable.
SEC provides regulatory oversight on all SRO’s in the securities industry.
Value of issue on shelf registration cannot be more than N2 billion.
Payment for sale or purchase of shares can only be done through cheques
and bank drafts.
A.
B.
C.
D.
I only.
I and II only.
II and III only.
I and IV only.
A registrar for a security __________
I.
II.
III.
IV.
Cancels old certificates of the seller.
Issues new certificates to the buyer.
Maintains records of shareholders.
Protects customers against loss on a security purchase.
A.
B.
C.
D.
I only.
II only.
I, II and III only.
All of the above.
Total = 40 marks
SECTION B: SHORT ANSWER QUESTIONS
Question 2 – Ethics and Professional Standards
A stockbroker Mr. Dapo originated a rumour that ABC Ltd, a quoted company in which
he holds 1 million units of ordinary shares, is planning to issue a bonus share of 1 for
1. His aim for doing this is to push up the share price and realize capital gain on his
investment.
Has Mr. Dapo committed any market infraction? Justify.
(4 marks)
Question 3 – Law Relating to Securities and Investments
Mention and describe two ways in which a Will made by Yemi who is a lecturer of Bam
Bam University may be expressly revoked.
(3 marks)
Question 4 – Regulations of Securities and Corporate Finance
List three benefits of trade alert in the Nigerian Stock Market.
(3 marks)
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SECTION C: ESSAY TYPE, CALCULATION AND/OR CASE STUDY QUESTIONS
Question 5 – Ethics and Professional Standards
Olu Audu, a graduate of CIS worked for Metro Bank after graduating from university.
Shortly after, he joined Swift Investment Bank, which was struggling to return back to
profitability after several years of accumulating losses. Olu made the best of this
opportunity to enhance his reputation within Swift Bank. He succeeded in mobilizing
over N1 billion within the first year, mostly from his father’s associates who were top
political office holders. Olu was given almost absolute freedom to open the clients’
accounts and operate them as a proxy, since most of the clients wanted to remain
anonymous.
Excited that he had finally succeeded in hiring a whiz kid, the CEO of Swift Bank knew
that Olu was the right person to take the bank to the next level.
In 2008 after his initial success, Olu was promoted to the post of general manager,
with the authority to hire traders and back office staff. Olu’s experience with trading
was limited, but he made an ‘arrangement’ to enable him trade remotely on the
Nigerian Stock Exchange alongside his traders. Olu had not been admitted as an
Associate of CIS and was therefore not qualified to obtain a practice license.
As a general manager, Olu oversaw both trading and back office functions, eliminating
the necessary checks and balances usually found within trading organizations. In
addition, Swift Bank senior management came from a merchant banking background,
causing them to underestimate the risks involved with trading, while not providing
any individual who was directly responsible for monitoring Olu’s trading activities.
Olu’s main trading approach was based on unauthorized speculations in penny stock
on the NSE. These trades were outright trades or directional bets on the market. This
strategy can provide fantastic gains or utterly devastating losses – a stark contrast to
the relatively conservative trading strategy that Swift Bank had intended for Olu to
pursue. He also relied on ‘superior’ information from some top executives of quoted
companies, who were paid handsomely for their support.
Olu believed that stock analysis was merely theoretical and did not work. Recently,
Olu reliably got information about a proposed takeover of Network Telecoms by
Elephant Telecoms. Trading on this information while it was not in public domain, he
was able to realize huge returns for his employers.
Olu opened a special trading account to facilitate his trading. He lost money from the
beginning. Increasing his bets only made him lose more money. By the end of 2010,
the special account had accumulated about N12.5 billion losses. Swift bank remained
unaware of this situation.
All along, Olu effectively managed to avert suspicion from senior management
through his use of the special account for hiding losses, while he posted profits in
other trading accounts, securing his reputation as a high flyer and gaining good
bonuses for Swift Bank’s employees.
Requirements of question 5:
5(a)
From the above case, identify and discuss various corporate governance and
ethical issues arising.
(14 marks)
5(b)
Based on the issues identified in 5(a) above, discuss the possible consequences
of the behavior of Olu and others like him, on the capital market.
(4 marks)
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Question 6 – Law Relating to Securities and Investments
6(a)
Smith bought 100,000 ordinary shares of N1.00 each from XYZ Plc ten years
ago and fully paid for the shares. However, since then the company had not
declared any dividend or issued any bonus shares. He has therefore decided to
sue the company for an order compelling the company to pay him dividends or
issue bonus shares to him.
Required:
Advise Smith.
6(b)
(6 marks)
Jide a widower with two children Wale and Kemi, made a Will in 2003 leaving his
whole estate to be divided equally on his death between his two children. In
2005 at the suggestion of his rascally solicitor under whose influence he had
fallen, Jide made a codicil to his will leaving N5 million to the solicitor. In 2007,
Jide married Ibadiaran his girlfriend of many years. Jide died in July 2008.
The solicitor has demanded the sum of N5 million from the executors.
Required:
Advise the executors and the children, as to the relevant laws applicable.
(6 marks)
Question 7 – Regulations of Securities and Corporate Finance
Mr. Bongo, a company director of Ultima Co. Ltd, embezzled corporate funds deposited
as payment for shares and was manipulating the market price with the embezzled
funds using a securities account in the name of unspecified persons.
Two non-executive directors of Ultima Co. Ltd and a branch manager of the
stockbroking firm, conspired to manipulate the share price more than 10 times through
false stock trading orders and front running with embezzled money thereby gained
proceeds worth N30 billion. As a result, private investors were severely hurt.
7(a)
Justify from the case above whether any of the parties was involved in money
laundering or not.
(4 marks)
7(b)
Identify and explain the market infractions in the above scenario. What are the
regulatory sanctions for these infractions as provided by relevant securities rules
and regulations?
(6 marks)
7(c)
What are the mandatory reporting requirements for financial institutions as
provided by the Money Laundering (Prohibition) Act (2011)?
(4 marks)
7(d)
State clearly the ‘know your customer’ requirement for a stock broking firm in
line with the Money Laundering (Prohibition) Act (2011).
(4 marks)
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