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
September 2013
Level 2
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SECTION A: MULTI CHOICE QUESTIONS
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SECTION B: SHORT ANSWER QUESTIONS
Question 2 – Ethics and Professional Standards
Mr. Dapo has committed a market Infraction by the circulation of false information.
According to NSE Rules and Regulations Article 105 (a) No broker should circulate or
disseminate any information to the effect that the price of any securities will or is likely to
rise or fall when to his knowledge, the rises or falls or likely rises or falls are attributed to
any action which, if done by a Dealing member would be in contravention of Trading Rules.
Question 3 – Law Relating to Securities and Investments
A will may be revoked expressly by the testator, in 2ways
i.
By burning, tearing or destruction of the will provided he has Animus
revocandi
ii.
By executing another will or codicil which expressly revokes the former will
C.I.S Manual L.R.S.I pg 166
Question 4 – Regulations of Securities and Corporate Finance
1. It promotes Transparency in the Nigerian stock market
2. It boosts Investor’s confidence in the market
3. It provides an opportunity for the Investor to confirm, independently the price at which
the transaction was done.
4. It enables the Investor to raise alarm if his stocks are sold without his authority
5. It makes the Investors to be carried along in stock market transactions concerning
them.
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SECTION C: ESSAY TYPE, CALCULATION AND/OR CASE STUDY QUESTIONS
Question 5 – Ethics and Professional Standards
Q5(a):
The following are corporate Governance and Ethical issues arising from the passage:
I.
Olu Audu was given absolute freedom to open accounts for clients and operate them
as a proxy. This is unethical as most of the clients are politically exposed individuals
who may use the account for money laundering.
II.
Olu Audu was just a Graduate of C.I.S. But he was allowed to Trade remotely even
without a practicing license. It is unethical to practice without a practicing license.
III.
Olu Audu with Limited Trading experience was allowed to supervise Trading and back
office functions. Hence he eliminated the necessary controls usually practiced in
stock broking firms.
IV.
It is unethical and against good corporate Governance for Olu not to be monitored
directly in view of his lack of skill and experience. The company under-estimated the
risks involved with Trading and therefore allowed Olu to do as he liked without any
control. This made him to abandon the conservative Trading strategy the company
intended him to pursue.
V.
Olu was involved in unethical practice of unauthorized speculations in penny stock
and directional bets on the market. This is risky as it could lead to devastating losses
for the company.
VI.
Olu does not do stock analysis for his trading activities. This is against C.I.S code of
Ethics (8.0). He rather relies on unsubstantiated information which could turn out to
be false.
VII.
Olu uses unpublished price sensitive information (Insider Dealing). His Trading on
the information involving the takeover of Network Telecoms by Elephant Telecoms is
a good example. This is against C.I.S code of Ethics (20.1). NSE Rules and
Regulations Article 108.
VIII.
Olu opened a special account which he was using for hiding his losses. It was the
lack of control and corporate Governance that allowed this to go on undiscovered. It
is unethical for Olu to do this.
IX.
Weak risk management structure at Swift Investment Bank.
Q5(b):
(any 7 correct answers for 2 marks each)
I.
There are bound to be losses which may lead to the eventual collapse of stock
broking firms and systemic distress in the market
II.
There is bound to be lots of substandard, unethical and poor financial services in the
capital market. This will lead to service failures.
III.
This could lead to fraud and many unethical practices like unauthorized sale in the
market. Hence Investors may lose their stocks.
IV.
There will be erosion of public confidence in the market as a result of unethical
practices.
V.
The Integrity of the market will be destroyed.
VI.
The interest of Investors will not be protected as a result of lack of corporate
Governance.
VII.
It could lead to the eventual collapse of the market if it is not arrested.
(Any four correct answers for 1 mark each)
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Question 6 – Law Relating to Securities and Investments
Q6(a):
Dividends mean a part of the profit of a company paid to shareholders as returns on
their investment in the company
Dividends are payable when recommended by the directors and declared by the
shareholders in general meeting
A shareholder cannot compel his company to pay dividends. However, he can always
sell his shares if he is not happy with the situation.
Q6(b):
(a)
A will is automatically revoked by the subsequent marriage of a testator S.18
Wills Act 1830. Any codicil to the will is also revoked.
In the instant case Jide’s marriage in 2007 to Ibadiaran, revokes both the will
made in 2003, and the codicil made in 2005, consequently if Jide did not
leave another will or revive the previous will, he had died intestate, the
solicitor has no claim to the N5,000,000.
Jide’s, estate shall be distributed under the applicable rules of instestacy.’
(b)
Generally, an infant cannot make a valid will. But under S.11 Wills Act 1830
Any will made by an infant, who is a member of the armed forces, in a state
of war shall be valid as a privileged will for the duration of the war.
Question 7 – Regulations of Securities and Corporate Finance
7(a):
Money laundering is the act of “washing” dirty money to make it clean by processing though
third party business.
Here Mr. Bongo, a director of ultima Co. Ltd, embezzled a corporate fund which is a criminal
Act. The money he got from the embezzlement is a “dirty money”. With this embezzled
fund, he uses the account of unspecified persons (Third Parties) to manipulate market price.
This is pure money laundering. The money laundering Act made it compulsory for stock
broking firms to trade only on the Account of “persons” that are identified and their
particulars verified.
(4 marks)
7(b):
I.
Manipulation of market price [CIS membership Regulations and code of conduct 5
(xii & xxiv) ]
II. Trading in the name of unspecified clients
III. Executing false trading orders. C.I.S code of Ethics (20.2)
IV. Front Running (NSE Rules and Regulations Article 105 (b) )
V. Embezzlement of corporate funds deposited as payment for shares.
Stock broking firms are not allowed to manipulate market price of stocks and shares as
this brings distortions in the market. They are also not allowed to make unauthorized
sale of customers stocks or to embezzle funds deposited for payment for shares. They
are also not allowed to trade ahead of customers in the direction of their orders before
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the said customers have executed their orders which may result in the stock broking
firm profiting from and illegally taking advantage of the customers.
The following Regulatory sanctions are imposed for the above Infractions:
1. Admonition
2. Fine
3. Restitution
4. Suspension
5. Expulsion
7(c):
I.
Financial Institutions are under obligation to report within 7 days to SEC/CBN of any
single Transaction, lodgment or Transfer of funds in Excess of :
1. N5 Million or its equivalent for Individual
2. N10 Million of its equivalent for body corporate.
II.
They are to make a report within 7 days to SEC/CBN of any International Transfer of
funds or securities where such Transfer is in excess of US$10,000
They are to immediately report any suspicious transaction to the EFCC. The report
shall include all relevant information on the transaction.
III.
7(d):
Stock broking firms are required by the money laundering (prohibition) Act 2011 to identify
their prospective customers before opening account for them. They are also expected to
verify the identity of these customers using reliable independent source documents and
update all relevant information on these customers regularly.
To open a new account, a prospective client is expected to prove their identity and prove
their address by bringing the following documents:
I.
Individual Clients:
 Passport photographs
 Officially Recognized Identity card (original to be sighted).
 Utility bills paid within the previous three months
ii. Corporate Bodies
I.
Certificate of Incorporation (original to be sighted)
II.
Memorandum and Articles of Association (certified true copy)
III.
Signatories to the account to provide documents specified in item (i) above
Stock broking firms are required to visit the clients in the respective addresses to confirm
the correctness of the address. They are also expected to do a search in corporate Affairs
Commission (CAC) to confirm the authenticity of the Certificate of Incorporation of the
corporate clients.
Besides stock broking firms are required by the Money laundering (prohibition) Act 2011 to
scrutinize all on-going transactions that they undertake on behalf of their clients by ensuring
that their customers’ transactions are consistent with the business and risk profile of the
customers.
Where the customer is a public officer, the stock broking firm is expected by law to put in
place an appropriate Risk Management system for such a customer. This is additional to
obtain senior management approval to maintain any business relationship with the public
officer.
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