CHARTERED INSTITUTE OF
STOCKBROKERS
ANSWERS
Examination Paper 1.4
Ethics and Professional Standards
Law relating to Securities and Investments
Regulations of Securities and Corporate Finance
Professional Examination
September 2011
Level 1
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
B
D
A
C
C
B
A
D
A
D
D
C
D
D
B
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
D
D
D
A
D
C
C
D
C
C
B
D
A
D
A
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
D
A
D
C
B
D
B
B
C
D
D
A
D
C
B
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
B
D
B
D
C
C
C
D
C
B
D
B
A
C
C
(60 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 - Ethics and Professional Standards
An employee shall:
i.
At all times conduct himself with integrity and display high level of
professionalism.
ii.
Not engage in any act that would adversely affect the general investing public’s
image of, and confidence in the capital market.
iii.
Not discriminate or give preferential treatment to any client in the conduct of his
professional business.
iv.
Comply with all existing securities laws, rules and regulations relevant to capital
market operations.
(1 mark each = 4 marks)
Question 3 – Law Relating to Securities and Investments
A trustee may be entitled to remuneration in any of the following instances.
i.
Where the trust instrument expressly authorizes the trustee to charge
professional fees.
ii.
Where the Trustee is a trust corporation
iii.
Where the public Trustee is appointed to act.
iv.
Where all the beneficiaries are sui juries and agree to remunerate the trustee.
(1 mark each = 3 marks)
2
Question 4 – Regulations of Securities and Corporate Finance
Buying on margin is buying securities with cash borrowed from a broker, using other
securities as collateral. This has the effect of magnifying any profit or loss made on the
securities. The securities serve as collateral for the loan. The net value, i.e. the
difference between the value of the securities and the loan, is initially equal to the
amount of one's own cash used. This difference has to stay above a minimum margin
requirement, the purpose of which is to protect the broker against a fall in the value of
the securities to the point that the investor can no longer cover the loan.
The following risks are associated with buying on margin:
i.
ii.
Risk of margin call.
Risk of loss of investment.
Total = 3 marks
SECTION C: COMPLUSORY QUESTIONS
Question 5 - Ethics and Professional Standards
5(a)
i.
ii.
iii.
Competency
Members and registered students must take reasonable care to ensure they have
adequate knowledge of securities and investment practice and relevant rules,
codes and regulations.
They must be competent, conscientious, efficient and effective on the job.
They must not represent without merit that they are competent.
(1 mark each = 3 marks)
5(b) Fiduciary duties
i.
ii.
Members and registered students must discharge their duties solely in the best
interest of their clients and other parties with which they have fiduciary duties.
They must perform their duties with care, skill, prudence and diligence that is
expected of a professional expert.
(2 marks each = 4 marks)
5(c) Responsibility of supervisors
i.
ii.
iii.
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.
In doing this, they are entitled to rely on reasonable procedures established to
prevent and detect violations.
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)
Total = 11 marks
3
Question 6 - Law Relating to Securities and Investments
6(a)
Lifting the veil of incorporation is the process whereby the court will disregard the
corporate existence of the company by holding its officers responsible for culpable
actions.
Usually a corporation is treated as a separate legal person, which is solely responsible
for the debts it incurs and the sole beneficiary of the credit it is owed. Common law
countries usually uphold this principle of separate personhood, but in exceptional
situations may "lift" the corporate veil. This means the court would look beyond the legal
fiction to the reality of the situation.
(3 marks)
6(b)
A director occupies a fiduciary position, that is, a position of trust. One of his duties is
not to make secret profit without disclosure to the appropriate organs of the company.
John has committed a breach of this duty and the company is entitled to recover the
N100,000 from him.
(6 marks)
Total = 9 marks
Question 7 - Regulations of Securities and Corporate Finance
7(a)
i.
Notify the registrar of the death on time in order to avert illegal or unauthorized
transfer of the shares.
ii.
If a Will was prepared by the deceased before his death, an executor would have
been appointed in the Will to administer the assets.
iii.
In case the deceased left no valid Will, the children or family members would
need to go to court and obtain a letter of administration.
iv.
The following documents are required for the transmission process:
• Death certificate of the deceased.
• Letter of administration or Will.
• Banker’s letter of confirmation of administrator’s signature.
v.
These would be presented to the registrar for necessary changes in the register of
shareholders.
vi.
An account would be opened in the name of the administrators with any bank of
their choice to enable them pay in dividends.
vii.
viii.
After these procedures, the administrator can now approach any stock broking
firm for the verification of shares certificates or outright sales if in the CSCS
system.
Payment must be made into the account newly opened in the name of the
administrator(s).
(6 marks)
4
7(b)
Parties involved and their roles:
i.
The Court – issues probate or Letter of administration as the case may be.
ii.
The Registrar – effects the necessary change in the register of members.
iii.
Administrator’s Banker – opening of bank account for the administrator and/or
confirmation of the Administrator’s signature.
iv.
Stock broking firm – processing of verification of shares certificate and sale of
shares.
(1 mark for each participant and
explanation of their role= 4 marks)
Total = 10 marks
5