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 2012
Level 2
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
D
A
D
C
B
D
C
A
D
A
C
A
B
C
B
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
B
B
C
C
C
B
B
D
C
B
D
B
A
D
B
31
32
33
34
35
36
37
38
39
40
A
B
A
D
C
B
B
C
B
D
(40 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 – Ethics and Professional Standards
i.
Members and registered students with supervisory responsibilities shall exercise
reasonable supervision over those subject to their authority to prevent and detect
any violation of relevant laws, rules and codes of practice.
ii.
In doing this, they are entitled to rely on reasonable procedures established to
prevent and detect violations.
iii.
They shall ensure that give proper guidance, supervision and training to other
investment professionals subject to their supervision and help them maintain and
develop their competence.
(Any 2 points = 4 marks)
2
Question 3 – Law Relating to Securities and Investments
i.
Entering into any transaction which is illegal or ultra vires
ii.
Purporting to do by ordinary resolution an act which the Articles or CAMA is
required to be done by special resolution.
iii.
Any act affecting the applicant’s personal rights as a member.
iv.
Where the act amounts to a fraud on either the company or the minority
shareholders and the directors fail to take appropriate action to redress the
wrong.
v.
Where a company meeting cannot be called in time to be of practical use in
redressing a wrong done to the company or to minority shareholders.
vi.
Where the directors are likely to have profited or benefited from their
negligence or breach of duty.
vii.
Relief on grounds of unfairly prejudicial or oppressive conduct. See S. 310 (1)
and 311 CAMA.
(Any 3 points = 3 marks)
Question 4 – Regulations of Securities and Corporate Finance
(4a)
Withholding tax is payment of tax on account, to be applied as tax credit against the
income tax liability relating to the year in which the income is earned.
This deduction is at the point of payment or when credit is taken, whichever comes
earlier.
(1 marks)
(4b)
Withholding tax is deducted at source at the rate of 10% on both dividend income and
interest income of individual investors. This deduction is treated as payment on account
(or as a tax credit). At the end of the year, when the personal income tax liability of the
investor is computed as appropriate, the total amount of withholding tax earlier
deducted is used to reduce the investor’s total tax liability and to determine the final tax
payable.
(2 marks)
(Total = 3 marks)
3
SECTION C: COMPULSORY QUESTIONS
Question 5 – Ethics and Professional Standards
(5a1)
Paul Samanja used material non-public information as a basis for trading on Worldwide
International Bank shares in his company’s portfolio. This is clear violation of several
securities and investment rules in Nigeria.
The following regulations clearly identify and prohibit insider trading and the use of
material non-public information:

Investment and Securities Act, 2007 (sections 111 and 112)

NSE Article 108

SEC Rule 110

CIS Code and Standards (section 20.1)

Code of conduct of employees of capital market institutions
(5 marks)
(5a2)
It does appear that Jummy Dodan, in line with the provisions of CIS Code and
Standards, maintains reasonable care, judgement and competence in making investment
recommendations. It is acknowledged that she does ‘thorough analyses’ before giving a
buy rating, and investors have come to recognise her recommendations as having sound
and reasonable basis. Paul Samanja observed that her forecasts and summaries are well
crafted.
However, the CIS Code and Standards provides that members should not obtain gifts or
other benefits from companies for which they provide services, which could impair their
independence and objectivity.
While as a self-employed analyst Jummy Dodan is not prohibited from accepting
compensation from an issuer in exchange for research, such an arrangement should be
disclosed in plain language as provided by the Standard on Monetary Compensation or
Benefit.
(5 marks)
4
(5a3)
The use by Paul Samanja of Jummy Dodan’s summaries and forecasts word for word
without attribution is against CIS Code and Standards. The fact that Paul Samanja
obtained written permission does not absolve him of his responsibility to acknowledge
his source.
Specifically, the CIS Code and Standards prohibits member from the use ‘in substantially
the same form as the original, material that has been prepared by another without
acknowledging and identifying the name of the author, publisher, or source of such
material.’
(4 marks)
(5b)
Ethical values and legal principles are usually closely related, but ethical obligations
typically exceed legal duties. In some cases, the law mandates ethical conduct.
Examples of the application of law or policy to ethics include employment law, federal
regulations, and codes of ethics.
Though law often embodies ethical principles, law and ethics are far from co-extensive.
The law does not prohibit many acts that would be widely condemned as unethical. And
the contrary is true as well. The law also prohibits acts that some groups would perceive
as ethical. For example lying or betraying the confidence of a friend is not illegal, but
most people would consider it unethical. Yet, speeding is illegal, but many people do not
have an ethical conflict with exceeding the speed limit.
Therefore, what is legal is not necessarily ethical.
(4 marks)
(Total = 18 marks)
5
Question 6 – Law Relating to Securities and Investments
(6a1)
Alex is liable in respect of the bill as a drawer.
(3 marks)
(6a2)
Musa, is not liable because he has not accepted the bill.
(3 marks)
(6a3)
Jide did not sign the bill, because it is a bearer bill, he is not liable.
(3 marks)
(6a4)
Innocent has no liability because he did not sign the bill.
(2 marks)
(6b1)
Jide is a mere holder.
(1 mark)
(6b2)
Innocent is a holder for value, he took it for valuable consideration.
(1 mark)
(6b3)
Femi is a holder for value, because it was given to him by a holder for value. (1 mark)
(Total = 14 marks)
Note: the above points should be well developed and explained within the context of the
case to earn full marks.
Question 7 – Regulations of Securities and Corporate Finance
(7a)
The Nig Invest Promotion Act No 16, 1995 and SEC Rule 208 to 222 provide as follows:

A non-Nig may invest in, and a foreign enterprise may buy the share of a Nigerian
company in any convertible currency through the NSE.

The Act protects foreign investments from forced acquisition or nationalisation by
any government of the Federation.

Procedures to be observed by Frank Stone for foreign investment in Nigeria
 He needs to appoint a local stockbroker.
 Agree with stockbroker and appoint a Nigerian bank.
 Inform the Bank about the amount to be invested.
 Route funds electronically through the bank (cash is not allowed).
 The Bank issues Certificate of Capital Importation (CCI) to the investor.
 With the CCI, Frank Stone can invest in any company of his choice through the
stockbroker.
 Investor can repatriate capital or income (net of taxes) abroad through the
appointed bank
(2 marks for each well-developed point)
(Maximum 12 marks)
6
(7b)
The relevant issues are as follows:

The death of a customer terminates his mandate.

Therefore, existing and incoming mandates are cancelled.

You are to deal with the estate of Alhaji Baba Ahmed henceforth.

Proceeds of sales of the stocks disposed should therefore be handed over to the
estate.

This is upon presentation of a probate letter or letter of administration.

Transmission of Alhaji Baba Ahmed’s shares is to be done on the remaining
shares as authorized by the probate or letter of administration
(1 mark for each well-explained point = 6 marks)
(Total 18 marks)
7