CIS September 2012 Exam Diet
Examination Paper 2.4:
Ethics and Professional Standards
Law relating to Securities and Investments
Regulations of Securities and Corporate Finance
Ethics and Professional Standards (1 – 14)
1.
Abdullahi Yusuf is a portfolio manager. One of his firm’s clients has told Abdullahi
that he will compensate him beyond that provided by his firm on the basis of the
capital appreciation of his portfolio each year. Abdullahi should:
A. Turn down the additional compensation because it will result in conflict of
interest with other clients accounts.
B. Receive permission from CIS to accept the compensation arrangement.
C. Turn down the additional compensation because it will create undue pressure on
him to achieve strong short-term performance.
D. Obtain permission from his employer and clients prior to accepting the
compensation arrangement.
2.
Chukwuma Okeke, ACS, obtained a copy of computerized stock selection model
designed by a friend who is working with a firm in Kenya. After spending some time
reviewing the program and making some adjustments, Chukwuma showed the new
model to his supervisor. His supervisor commended him for doing a great job and
told him to incorporate the new model in his next industry review.
He called his friend for permission, and he told him to go ahead and use the model,
which he did without reference to the source. Chukwuma has:
A. Violated CIS Code and Standards on Misrepresentation.
B. Violated CIS Code and Standards on Preservation of confidentiality.
C. Violated CIS Code and Standards on Independence and Objectivity.
D. Not violated CIS Code and Standards in any way.
3.
Iyabo Dada is meeting with a new client for the first time. At this meeting, she will
be gathering information about the client in order to assess the client’s objectives
and constraints as she normally does for all her clients. Iyabo will then prepare a
written investment policy statement for the client.
According to the recommended procedures for complying with CIS Code and
Standards on Suitability, which of the following is false?
A. An Investment Policy Statement should include personal as well as financial
data.
B. An Investment Policy Statement should describe the roles and responsibilities of
the adviser and client.
C. A member or candidate is not responsible for financial information withheld by
the client.
D. A client’s Investment Policy Statement should be updated at least annually to
reflect any change in their investment profile.
4.
James Iyame, ACS, is a research analyst for a large Investment company in Nigeria
where he follows the pharmaceutical industry. While a large pharmaceutical
convention is going on in town, James happens to be in a restaurant where several
analysts he has never met before are discussing their investment recommendations.
James overhears the analysts agree that Capsules Medical Plc is a strong “buy,” but
cannot hear the details of why they are recommending the stock. The next day,
James changes his “sell” recommendation on Capsules Medical to “buy” based solely
on the conversation he overheard between the analysts the night before.
Which CIS Standard did James violate?
A. The Standard on Misrepresentation.
B. The Standard on Preservation of Client Confidentiality.
C. The Standard on Duties to Clients and Prospective Clients.
D. The Standard on Fiduciary duties.
5.
Kayode Oriowo believes that reports published by his firm and used as part of
presentation materials contain sections that are in violation of the CIS Code and
Standards. He has brought the conduct to the attention of the firm’s legal counsel,
whose opinion is that the reports can be presented because they are not in violation
of any law. He has brought this to the attention of the firm’s compliance officer,
whose recommendation is to trust the opinion of legal counsel. He has taken his
concerns to his supervisor, who also concludes that there is nothing to be concerned
about, given the counsel’s advice.
According to the CIS Code and Standards, what is the most appropriate action
Kayode should take? He should:
A. Maintain current files for protection in the event of a formal complaint.
B. Dissociate from the conduct through whatever means necessary.
C. Stay informed about changes in the law, in case the advice from legal counsel is
no longer valid.
D. Communicate the Code and Standards to each of his supervisors with a specific
reference to the violations so that his actions are on file.
6.
Danjuma Ali is a security analyst who places trades through a number of stock
broking firms. Danjuma is a Graduate Member of CIS. The President of one particular
brokerage firm is appreciative of Danjuma’s business and offers to fund his 2-week
vacation to the U.K. Danjuma accepts this offer.
Which of the following statements regarding Danjuma Ali’s actions is consistent with
the CIS Code and Standards?
A. There is no violation because Danjuma did not collect any monetary gift.
B. There is no violation because the CIS Code and Standards do not preclude gifts
relating to vacation and travelling.
C. There is no violation because Danjuma did not solicit for any gift.
D. Danjuma Ali violated the CIS Code and Standards by the acceptance of a gift
that could compromise his independence and objectivity.
7.
Josephine Okoye is a research analyst for a mutual fund. She learns that a portion of
the firm’s research, prepared by another department, includes survivorship bias such
that some of the firm’s performance is exaggerated. Josephine presents the report to
prospective clients in order to solicit new business, but steers clear of any reference
to the exaggerated performance.
Which of the following describes Joanna’s behaviour with respect to the CIS Code
and Standards?
A. Joanna violated the Code and Standards, because the report was prepared by
multiple sources, and she failed to explicitly acknowledge those sources.
B. Joanna did not violate the Code and Standards because she did not include the
biased data in her presentation.
C. Joanna violated the Code and Standards because the report misrepresents
performance.
D. Joanna did not violate the Code and Standards because she has never included
such a bias in her own research.
8.
Tola Yaro, FCS has terminated her professional relationship with Top Dollars
Investments and has started her own portfolio management firm. Tola had served as
an independent contractor for Top Dollars Investments (working from her home) and
had no agreement with the firm with regard to solicitation of clients or retention of
client information. After leaving Top Dollars Investments, Tola called several of its
clients using the contact information sent to her by Top Dollars Investments and
saved on her home computer.
According to the CIS Code and Standards, which of the following statements best
summarises Tola duties to Top Dollars Investments?
A. Since Tola Yaro was an independent contractor, not an employee, she is not
subject to the “Duties to Employers” section of the CIS Code and Standards.
B. Tola Yaro is subject to all of the provisions of the “Duties to Employers” but like
an employee is free to use the client contact information after leaving the firm.
C. Tola Yaro violated the standards by not erasing all client contact information
from her home computer when the relationship was terminated.
D. None of the above.
9.
ABC stockbrokers, a subsidiary of an investment bank whose shares are quoted on
the Nigerian Stock Exchange often receives non-public information considered to be
material and could have considerable value if used in advising the firm’s clients. You
have been asked to choose one of the following as the best options for the firm to
conform to CIS Code and standards?
A. Ensure appropriate monitoring of the exchange of information between the Bank
and its stock broking subsidiary.
B. Advise all clients of the firms to sell of their current holdings in the bank.
C. The firm should never issue a sell or buy recommendation of the stocks of the
bank.
D. Establish Chinese walls within the group to prevent the exchange of such
information between the Bank and its subsidiary brokerage firm.
10. John Joseph, ACS works for a medium-sized stockbroking firm which provides
investment advisory services for clients. Charity is new client who had obtained
investment advice from another firm in the past few years. She has just transferred
her account to John’s firm, and is meeting with John for the very first time. John
spends a few minutes with Charity and explains to her that he has just discovered a
highly undervalued insurance stock that offers large potential returns. John therefore
recommends the insurance stock to Charity.
Which of the following best describes the action John should have taken in the first
instance?
A. He should have determined the client’s needs objectives and tolerance for risk
before making a recommendation for any type of security.
B. He should have taking the clients to the Head Office of that insurance company.
C. He should have asked for the reasons for changing firms and report the reason
to the Council of the Institute.
D. He should have explained his qualifications, education training and experience.
11. With respect to trading rules and practices, the CIS Membership Regulation and Code
of Conduct (2005) stipulate 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. Not, if in practice, buy or sell securities, in the secondary market, for his own
account.
IV. Not, if in practice, buy or sell securities in the secondary market, for the account
of his spouse or children except with the written consent of his employer.
A.
B.
C.
D.
I and II only.
I and III only.
I, II and IV only.
All of the above.
12. Bassey Ekpe, FCS, a financial analyst, works in an African country where there are
no securities laws or regulations. According to CIS Code and Standards, Bassey
Ekpe:
A. Must adhere to the CIS Code and Standards.
B. Must adhere to the standards as defined in a neighbouring country that has the
strictest laws and regulations.
C. Need not concern herself with ethics, codes and standards.
D. Must adhere to the standards as defined in a neighbouring country that has the
least strict laws and regulations.
13. Charlie, a graduate member of CIS, works as a marketing officer for Wonders
Investment Advisers. On Monday, Wonders’ research department publishes a
negative research report on XYZ Limited. On Tuesday, Charlie's best customer sends
in an order to buy 10,000 shares of XYZ in an account where the volume of trading is
high. How should Charlie 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. Take the order only after obtaining a signed written authorization.
D. Refuse to take the order since there is a negative research report on the stock.
14. Ado Sule, a CIS member is excited about the recent recovery on the Nigerian Stock
Exchange in the last few weeks. He is confident that, based on his analysis and
projections, the stock market would record a minimum return of 30% in the next 6
months. Based on this, he has been giving conservative assurances and guarantees
to his clients that their portfolios would yield at least 20% in the next 6 months.
According to the CIS Code and Standards, Ado Sule:
A. Had not violated the code because there was no monetary reward associated
with the guarantees.
B. Had violated the code because his supervisor was not aware that he gave
guarantees to clients.
C. Had violated the Code and Standards by giving guarantees to clients.
D. Had done nothing wrong since he did not take a bet on the market.
Law Relating to Securities and Investments (15 – 26)
15. Which of the following is an incompletely constituted trust?
A. A trust created in favour of a legally disqualified person.
B. A trust in which something remains to be done before the trust can come into
effect.
C. A trust which lacks certainty of domicile.
D. A trust which is created for outsiders rather than the immediate or extended
family of the settler.
16. Which of the following will qualify as frustration for the purpose of discharging a
contract?
I.
II.
III.
IV.
Material alteration of the contract by agreement of both parties.
Supervening illegally after conclusion of the contract but before performance.
Dependence upon the existence of a certain thing which ceases to exist.
Travelling abroad of one of the parties without informing the other party.
A.
B.
C.
D.
I and II only.
II and III only.
III and IV only.
All of the above.
17. A tripartite transaction among A, B and C in which the original liability of A is
discharged in consideration of B’s promise to perform the obligation to C is called:
A. Accord and satisfaction
B. Novation.
C. Frustration.
D. Condonation.
18. ________is the release from an obligation, arising from a contract by means of any
valuable consideration which is the partial performance of the obligation, it usually
takes the form of compromise.
A. Doctrine of estoppels.
B. Uberrimae Fidel.
C. Accord and satisfaction.
D. Quantum Meruit.
19. What does the doctrine of Quantum Meruit mean?
A. Payment of an amount higher in value of the conferred benefit.
B. Payment of an amount lower in value of the conferred benefit.
C. Payment of an amount equivalent to the value of the conferred benefit.
D. Latin phrase for consideration.
20. With respect to the liability of a company and its directors, which of the following
statements is correct?
A. The liability of the company and its shareholders is limited, but the directors are
fully liable for the company’s debt.
B. The liability of the company, its directors and shareholders is limited.
C. The liability of the directors and shareholders is limited but the company is fully
liable for its debts.
D. The liability of the company and its directors is limited.
21. A trustee may be removed from the office in all of the following ways except.
A. Under an express power contained in the deed.
B. By the beneficiaries.
C. Under a statutory power.
D. By the courts.
22. With respect to floating charges, which of these statements is incorrect?
A. Crystallization occurs when the company defaults on the debenture agreement.
B. Crystallization occurs only when winding up is ordered by the court.
C. Crystallization occurs when the company ceases business.
D. Crystallization occurs when winding up commences.
23. Which of the following is not an automatic means of terminating a trustee’s
appointment?
A. Death.
B. Disclaimer by deed.
C. Retirement.
D. Bankruptcy.
24. Which of the following are not functions of the National Pension Commission?
I.
II.
III.
IV.
To
To
To
To
regulate and supervise the Contributory Pension Scheme.
act as Pension Fund Administrators.
ensure the maintenance of a National Data Bank on all pension matters.
attend to complaints of unpaid pensioners.
A.
B.
C.
D.
I and II only.
I and III only.
II and IV only.
I, III and IV only.
25. Which of the following can enforce the fiduciary duties owed by a director?
I. The majority shareholders.
II. The company.
III. Individual directors.
A.
B.
C.
D.
I and II only.
II only.
II and III only.
III only.
26. Which part of a case decided by courts is binding on lower courts dealing with the
same material facts?
A. Obitar dicta.
B. The decision of the judge.
C. Stare decisis.
D. Ratio decidendi.
Regulations of Securities and Corporate Finance (27 – 40)
27. Oke Odo State Government would like to issue a revenue bond on the Nigerian Stock
Exchange to finance infrastructure. Which of the following procedures are required
before the state could issue bonds in Nigeria?
I.
II.
III.
IV.
Approval by the Federal Executive Council.
State law to authorize borrowing from the capital market.
Opening of a domiciliary account with an International Bank.
State Executive Council resolution to issue the bond.
A.
B.
C.
D.
I and III only.
II and IV only.
I, II and IV only.
All of the above.
28. Which of the following statements is/are incorrect about the Administrative
Proceeding Committee (APC)?
I. It is an internal administrative committee of the Nigerian Stock Exchange.
II. It has jurisdiction over any dispute between SEC and the Stock Exchange or
Capital Trade Point.
III. The decision of the APC could include restitution and recommendation for
criminal prosecution.
IV. A party who is dissatisfied with the decisions of APC could seek redress at the
Federal High Court.
A.
B.
C.
D.
I and IV only.
II and III only.
I, II and III only.
All of the above.
29. Bella and Bello have been close friends and joint account holders for many years.
They also jointly owned some assets. Bella died recently and the status of their joint
account and assets is being discussed. Which of the following statements is correct?
A. An administrator would be appointed at the discretion of the court.
B. The executor appointed in Bella’s Will would administer the estate.
C. Title to the joint assets is automatically vested in Bello.
D. None of the above.
30. According to SEC rule 40 on book building, which of the following statements are
true:
I.
In the book building process for equities, a minimum of 20% of the offer shall be
reserved for retail investors.
II. For fixed income securities, 50 percent shall be offered to qualified
institutional/high net worth investors.
III. The option of book building in the issuance of securities shall be available to
public companies with minimum capitalization above N500 million.
IV. A public company may offer securities by way of book building process, but with
the prior approval of the Commission.
A.
B.
C.
D.
I and II only.
I and IV only.
I, III and IV only.
All of the above.
31. Which of the following are parts of the listing requirements into the Second Tier
Market of the Nigerian Stock Exchange?
I.
II.
III.
IV.
The company must be a public limited company.
It must submit 5-year historical financials.
The company can raise not more than N500 million from the Stock Market.
No single shareholder can own more than 30% of the issued share capital of the
company.
A.
B.
C.
D.
I only.
I and II only.
I, III and IV only.
All of the above.
32. 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
33. Which of the following statements is/are true in respect of provisions of NSE rule 109
on share buy-back?
I.
50% or less of the issued share capital of a company could be bought back in a
year.
II. Share repurchase should not be financed from share premium account.
III. Only open market or self-tender offers are allowed.
A.
B.
C.
D.
III only.
I and III only.
II and III only.
All of the above.
34. Which of the following parties does not have a part to play in the transmission of
share certificates?
I. The Stockbroker.
II. The Registrar.
III. The Executors of a Will.
A.
B.
C.
D.
II only.
IV only.
III and IV only.
None of the above.
35. SEC rule 231 outlines the procedures required for companies to obtain approval for
mergers. Which of the following stages are required?
I.
II.
III.
IV.
Application to the Ministry of Finance for approval.
Filing of pre-merger notice with SEC.
Filing of draft scheme of arrangement for clearance.
Application to the Federal High Court seeking an order to convene a courtordered meeting.
A.
B.
C.
D.
I and II only.
II and III only.
II, III and IV only.
All of the above.
36. Which of the following statements is/are not in line with the provisions of SEC Rule
202 in respect of the handling of return monies by a Registrar?
I. Generally, return monies shall be paid by special crossed cheque.
II. A subscriber can request in writing to be paid by cash.
III. Return monies shall be returned by registered post or through a reputable
courier service.
A.
B.
C.
D.
I only.
II only.
I and III only.
II and III only.
37. Which of the following statement is incorrect with respect of provision of NSE
Articles?
A. A dealing member should not voluntarily appear in Court as a witness against a
client or former client or The Exchange unless served with a subpoena or any
other form of witness summons.
B. Where an investor is buying securities of a company for the first time, the
dealing member shall lodge a transfer form with the Registrar of that company
within 30 working days of the transaction.
C. A dealing member is obliged to disclose to the Exchange any share purchases for
a client which is 5% and above the share capital of the company.
D. Where a prima facie case of professional misconduct has been established
against a dealing member, such a member shall be immediately suspended.
38. According to NSE Article 166, which of the following provisions shall apply if an
Authorized Clerk leaves the employment of a dealing member to become an
Authorized Clerk of another member?
I.
He must have spent at least one year in the employment of the first dealing
member.
II. He must have obtained the prior written consent of the first dealing member.
III. Where the required consent from the first dealing member is withheld for more
than two (2) weeks, without any proven justifiable reason acceptable to The
Exchange, The Exchange shall be free to authorize such transfer.
A.
B.
C.
D.
I and II only.
I and III only.
II and III only.
All of the above.
39. SEC Rule 65 provides that the issuing house shall file with the Securities and
Exchange Commission a summary report about the security issue within how many
days of approval of allotment?
A. 14 working days.
B. 21 working days.
C. 30 working days.
D. 45 working days.
40. According to Investment and Securities Act, 2007, the Investment and securities
Tribunal is empowered to exercise jurisdiction, to hear and determine any question
of law or dispute between which of these parties?
I.
II.
III.
IV.
A stockbroking firm and NSE.
An investor and NSE.
An issuing house and SEC.
An investor and CSCS.
A.
B.
C.
D.
I and II only.
I, II and III only.
II, III and IV only.
All of the above.
Total = 40 marks
Question 2 – Ethics and Professional Standards
Briefly discuss the responsibilities of CIS members and registered students with
supervisory responsibilities as stipulated by the CIS Codes and Standards.
(4 marks)
Question 3 – Law Relating to Securities and Investments
List and briefly discuss two (2) instances where a minority shareholder may be granted
relief by the court.
(3 marks)
Question 4 – Regulations of Securities and Corporate Finance
4(a) What do you understand by “Withholding tax”?
4(a)
(1 mark)
Briefly explain how withholding taxes on dividend income and interest income are
treated in the computation of personal income tax of individual investors in Nigeria.
(2 marks)
Question 5 – Ethics and Professional Standards
Paul Samanja, ACS, is an investment analyst and portfolio manager at Apex Investments,
a small investment firm. On July 15, a friend who works for the Central Bank of Nigeria
(CBN) mentions to Paul that Worldwide International Bank is carrying huge amount of
undisclosed toxic assets, following the preliminary report of an ongoing investigation being
carried out by the CBN on several banks. This information is not in public domain.
Worldwide Bank shares happen to be in Apex Investment’s portfolio. Paul, aware of the
potential impact this would have on the share price of Worldwide Bank quickly trades the
shares of Apex Investments portfolio on July 18. Information on the status of the risk
assets of Worldwide Bank and ten other banks is released on NTA Network News by the
CBN Governor on July 24.
In conducting equity research, Paul spends time on the internet. One of his favourite
sources of information is the blog site of Jummy Dodan, FCS, a self-employed analyst.
Prior to writing each report, Jummy is paid a fee by the companies whose stocks she
researches, but she does not reveal this fact to readers of her reports. She produces
reports only for those companies whose stocks she can legitimately give “buy”
recommendations after conducting a thorough analysis. Otherwise, she returns the fee.
Investors have come to recognize all her “buy” ratings as having a sound and reasonable
basis. Paul considers Jummy’s summaries and forecasts to be very well-crafted. Jummy
has given Paul written permission to use her summaries and forecasts, word for word and
without attribution, in his own equity analysis reports. On occasions, Paul has done so.
Apex Investments occasionally organizes seminars on different aspects of Securities &
Investment. In the most recent seminar, the main speaker made statements about the
relationship between ethics and the law. The seminar speaker made a statement to the
effect that, ‘‘an illegal action is unethical, and actions that are legal are ethically sound”.
5(a) With reference to relevant CIS Code and Standards, NSE Articles and SEC Rules,
discuss any violation of Investment and Securities regulations in respect of the
following issues, and the appropriate action expected of the party involved as a CIS
member:
5a1)
Paul Samanja’s trading on Worldwide International Bank shares.
(5 marks)
5a2)
5a3)
Jummy Dodan’s production and dissemination of her equity reports. (5 marks)
The use of Jummy Dodan’s summaries and forecasts by Paul Samanja.
(4 marks)
5(b)
Comment on the statement credited to the seminar speaker that ‘‘an illegal
action is unethical, and actions that are legal are ethically sound’’. (4 marks)
Question 6 – Law Relating to Securities and Investments
On 20th January 2010, Alex drew a bill of Exchange for N500, 000 on Musa, payable to
bearer three months from date. Whilst being sent to Musa, the bill was amongst items of
mail stolen by thieves who threw it away. It was found by Jide who passed it to Innocent
in settlement of goods supplied to him. Innocent gave the bill to Femi his junior brother as
a birthday gift and Femi presented the bill on maturity to Musa for payment; but it was
dishonoured.
Required:
6(a) Advise Femi as to his legal rights if any against the following:
6a1)
Alex.
(3 marks)
6a2)
Musa.
(3 marks)
6a3)
Jide.
(3 marks)
6a4)
Innocent.
(2 marks)
6(b) From the above, what type of holder is:
6b1)
Jide.
(1 mark)
6b2)
Innocent.
(1 mark)
6b3)
Femi.
(1 mark)
Question 7 – Regulations of Securities and Corporate Finance
7(a) Frank Stone, an investment analyst based in the United States but who specializes in
the Emerging Markets has recently developed more interest in the Nigerian capital
markets. His analysis revealed the enormous potentials of both the Nigerian
economy and the capital markets.
You just received an email from Frank Stone, seeking more information about the
Nigerian Stock Exchange (NSE) on how to invest in the stock market.
You are required to identify and discuss in detail the procedures to be observed by
Frank Stone for foreign investment on the NSE as provided by the Nigerian
Investment Promotion Act No 16, 1995, and Securities & Exchange Commission’s
Rule 208 to 222.
(12 marks)
7(b) You received a letter from a firm of solicitors advising you of the death of your client,
Alhaji Baba Ahmed. This morning, Aminu Ahmed walks in with a sales mandate
prepared and signed by his father last month for stocks valued over N15 million.
Also, a cheque for the proceeds of some stocks sold by Alhaji Baba Ahmed last week
is lying fallow in your accounts department. Explain, with reference to relevant rules
and procedures how you would professionally handle the issues.
(6 marks)