CIS September 2011 Exam Diet
Examination Paper 2.4:
Ethics and Professional Standards
Law relating to Securities and Investments
Regulations of Securities and Corporate Finance
Level 2
Ethics and Professional Standards (1 – 14)
1.
Which of the following describes what an employee behind a firewall should first do
if he or she needs to share confidential information about an issue with someone on
the other side of the wall?
A. Determine if the sharing of the information will significantly alter the mix of total
information currently available.
B. Determine if the information about to be shared concerns a security on which
restrictions have been placed.
C. Consult a designated compliance officer to determine if sharing the information is
necessary.
D. Make sure that no previous trading violations have been filed against the person on
the other side of the wall.
2.
Ada Mohammed, a member of CIS is in the employment of First Securities Limited in
Abuja. When preparing the monthly newsletter to her clients she writes about the
likelihood of rising interest rates due to the recent fall in the unemployment rate. Her
report fails to cite the National Bureau of Statistics, the agency that prepares
unemployment statistics for the Nigerian economy.
Which of the following statements about Ada’s actions is consistent with the Codes and
Standards?
A. Ada violated the standards by failing to acknowledge the National Bureau of
Statistics.
B. Ada violated the Codes and Standards by misrepresenting the services of the firm
to current and prospective clients.
C. There is no violation, because the National Bureau of Statistics is a recognized
statistical reporting service.
D. There is no violation, because the statement in the newsletter represents Ada’s
opinion (not a fact) about the direction of future interest rates.
3.
The decision of NAFDAC not to approve the marketing of Megaplus Plc’s new drug was
both unexpected and bad news for Megaplus. The news was received from NAFDAC late
Friday after the close of trading. Over the weekend Megaplus' Chairman leaked the
news to a select few family and friends. One of those friends, Joshua John, called his
broker, Dayo on Sunday to describe the situation and to instruct him to sell all his
Megaplus shares. Megaplus Plc is listed on the Nigerian Stock Exchange.
Which of the following describes Dayo’s behavior with respect to the CIS Code and
Standards?
A. There is no violation as Dayo owes no duty to Megaplus shareholders.
B. There is no violation since Dayo is a Stockbroker.
C. Dayo violated the Code and Standards because he placed a trade without first
consulting his other clients.
D. Dayo violated the Code and Standards by initiating the transaction to sell shares
based upon material nonpublic information.
4.
Which of the following is most likely not a violation of the Codes and Standards?
An analyst:
A. Trades for her own account before her firm announces a change in a
recommendation.
B. Trades for her son’s trust account, which is not a firm account, on the day after her
firm changes its buy/sell recommendation
C. Takes a position for her own account in a stock one week after she published a buy
recommendation for the stock.
D. Trades for, and gives priority to her employer’s transaction ahead of her client’s
transaction.
5.
Which of the following is most consistent with ensuring ‘fair dealing’ of all clients and
prospective clients of a stockbroking firm?
A. Develop written procedures for trade allocation.
B. Disseminate initial recommendations to all clients.
C. Review accounts systematically to ensure that no client is given preferred
treatment.
D. Ensure that clients account statements are sent to them as and when due.
6.
Ken Wawa, ACS, is a marketing officer at Great House Securities. His firm is the
stockbroker to the issue for an IPO just concluded by Synergy Limited. In the course of
marketing the IPO, Ken issued statements to the effect that Synergy had cash flow,
financial resources and growth prospect that were better than is the case in reality. This
action is a violation of the Codes and Standards dealing with:
A. Fair dealing.
B. Fiduciary duty.
C. Misrepresentation.
D. Non-public information
7.
Based on the CIS Code and Standards, which of the following statements are correct? A
stockbroker is required to:
I. Report to his employer the receipt of gifts and additional compensation from
clients.
II. Disclose the value of consideration to be received for referrals only when the
amount involved is substantial.
III. Report illegal conduct to an appropriate authority in accordance with the law.
A.
B.
C.
D.
I and II only
I and III only
I, II and III only
None of the above.
8.
Ayo Ayodele, ACS, is an employee of Evergreen Limited, and manages the portfolio of
Alhaji Garba, a very wealthy man. Alhaji Garba’s portfolio is well diversified with the
objective of capital appreciation. Alhaji Garba’s bossom friend Alahji Yaya, recently
became a client of Evergreen securities upon referrals by Alhaji Garba. Ayo proceeds to
invest Alhaji Yaya’s portfolio in a similar manner to Alhaji Garba’s portfolio since the two
of them have a similar lifestyle and do most things in common. Which of the following
statements is most likely correct?
Ayo Ayodele:
A. Violated the Codes and Standards by knowingly creating a conflict of interest
between Alhaji Garba and Alhaji Yaya’s portfolios.
B. Violated the Codes and Standards by failing to determine Alhaji Yaya’s objectives
and constraints prior to investing his portfolio.
C. Violated the Code and Standards by not informing Alhaji Garba about his plan to
replicate his portfolio.
D. Did not violate the Codes and Standards.
9.
With respect to trading rules and practices, the CIS Membership Regulation and Code of
Conduct (2005) stipulates that a member should:
I. Not practise 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 licence issued by
the Institute.
III. Not, if in practice, buy or sell securities, in the secondary market, for his own
account except with the written consent of his firm (employer).
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
I and III
I, II and III
All of the above.
10.
According to CIS Code and Standards, what is the first step that a member should
follow if he or she has grounds to believe that ongoing employer activities are illegal or
unethical?
A.
Maintain a file of the activity or activities with proper documentation such that
adequate evidence will be available when needed.
B. Report the conduct to an appropriate authority in accordance with the law, where
their disclosure is protected by law.
C. Move to establish a formal written policy of violations and penalties within the firm.
D. Maintain confidentiality in order to preserve the integrity of the firm.
11 to 14 are based on the case below:
Babayaro, ACS, is a General Manager at HighNetWorth Limited (HNW). He joined the
company just over a year ago and now realizes he has made a mistake joining the firm. He
believes that HNW has not paid him adequately for the work he has done to expand their
business. After a major argument with management about his contribution to HNW, Babayaro
decides that he will set up his own investment advisory firm.
Babayaro is from a wealthy family and got a number of his clients through family
connections. When he joined HNW, Babayaro decided to continue to provide advisory
services to his closest clients independently of HNW. He did not notify HNW of this
arrangement.
Babayaro hands in his resignation notice to HNW and is disappointed to find that HNW
expects him to continue working throughout his three months' notice period. In the
meantime, he decides to proceed with setting up his own firm and he promptly calls his
clients and notifies them that he will be leaving to establish his own firm. He explains that
they will receive a higher level of service and lower fees from his new firm.
11.
12.
13.
Babayaro continued to advice clients outside of HNW when he joined HNW.
Which of the following statements is correct? Babayaro:
A. Has not violated the CIS Code and Standards as long as he advises the clients
outside HNW's office hours.
B. Has not violated the CIS Code and Standards as long as he maintains an advisory
relationship with the clients, and did not execute transactions on their behalf.
C. Has not violated the CIS Code and Standards, as long as he received permission
from his clients to work for HNW whilst he is providing them with advice.
D. Violated the CIS Code and Standards by not notifying his employer or receiving
HNW's permission to maintain an independent business.
Babayaro contacts his clients at HNW to tell them he is leaving and asks them to
consider moving their accounts to his firm. Which of the following is the most
accurate statement?
A. Babayaro is not violating the CIS Code and Standards if he does not contact
the clients in working hours.
B. Babayaro is not violating the CIS Code and Standards if he only contacts
clients once he has handed in his notice.
C. Babayaro is violating the CIS Code and Standards; he must not solicit his
employer’s clients whilst he is still in the employment of HNW.
D. Under the CIS Code and Standards, Babayaro can only solicit clients that he
introduced to the firm or are family members whilst he is still in the
employment of HNW.
Babayaro has violated the CIS Code and Standards by taking which of the
following with him when he leaves HNW?
A. HNW's client lists.
B. HNW’s research model used for stock selection.
C. Printed marketing brochures that Babayaro designed when employed by HNW.
D. All of the above.
14.
Babayaro is redesigning the marketing materials that he developed at HNW for
use in his own company. He has changed the layout and appearance of the
material but kept much of the written content the same. He decides not to tell
HNW that he is using the material since they would certainly not be happy with
his conduct. He starts distributing the marketing materials but then becomes
concerned that he has violated the CIS Code and Standards.
The position is:
A. Babayaro has violated the CIS Code and Standards.
B. Babayaro has not violated the Standard since the CIS Code and Standards
only refers to plagiarism of research and investment reports.
C. If Babayaro had notified HNW that he was using the material he would not
have violated the CIS Code and Standards
D. Babayaro has not violated the Standard since the CIS Code and Standards
refers to plagiarism of materials that are not in the public domain.
Law Relating to Securities and Investments (15 – 26)
15.
Agoro instructed Dogo, his Estate Agent to sell one of his houses in Kano for N16
million. Dogo was able to sell the house for N18 million. He paid N16 million to Agoro,
collected his commission and kept the extra N2 million for himself. Dogo’s action can be
regarded as a breach of:
A. Religious Duty.
B. Statutory Duty.
C. Duty of Care.
D. Fiduciary Duty.
16.
Which of the following grounds can lead to the winding-up of a company by the Federal
High Court?
I.
II.
III.
IV.
Ordinary resolution by the company.
In liability to pay dividends to shareholders.
Reduction of members below two.
Default in respect of holding of statutory meeting or delivering the statutory report.
A.
B.
C.
D.
I and II
II and III
III and IV
II, III and IV
17.
Under the Investments and Securities Act 2007, which of the following persons is not
liable to pay compensation for mis-statements contained in a prospectus?
A. A director of the company at the time of the issue of the prospectus.
B. A creditor of the company at the time of the issue of the prospectus.
C. A promoter of the company.
D. A person who has authorized the issue of the prospectus.
18.
Which of the following powers can a liquidator exercise Suo moto, that is, on his own
motion?
I.
II.
III.
IV.
Commencement or defense of action in the name of the company.
Sale of properties of the company.
Appointment of Legal Practitioner.
Drawing, accepting or endorsing any bill of exchange, cheque or promissory note in
the name of the company.
A.
B.
C.
D.
I and II
II and III
II and IV
III and IV
19.
Hammer Plc declared dividends in 2009 but up till now, Eso, a shareholder of the
company has not been paid even though the company has his correct address. What
type of debt do the dividends constitute against the company, and within which period
may Eso claim the dividends?
A. Simple debt; 6 years.
B. Accumulated debt; 12 years.
C. Originating debt; 12 years.
D. Specialty debt; 12 years.
20.
One of the documents which must be submitted to the Securities and Exchange
Commission with the application for approval of a merger is:
A. Two years audited account of all the enterprises involved.
B. Three years audited accounts of all the enterprises involved.
C. Five years audited accounts of all the enterprises involved.
D. Ten years audited accounts of all the enterprises involved.
21.
The manager-company of a Collective Investment Scheme has no power to do the
following:
I.
Borrow money on behalf of the scheme for the purpose of acquiring securities of
the scheme.
II. Lend money of the scheme to a person to enable him acquire units of the Scheme.
III. Pay interest to the investors out of the profits made from the operations of the
Scheme.
IV. Mortgage or charge any securities or property of the Scheme.
A.
B.
C.
D.
I and II
I, II and III
I, II and IV
II, III and IV
22.
Which of the following statements is correct in respect of provisions of Foreign
Exchange (Monitoring and Miscellaneous Provision) Act 1995:
A. No person shall be required to declare at the port of entry into Nigeria any foreign
currency unless its value is in excess of US $50,000 or its equivalent.
B. Any foreign currency purchased from the market may be repatriated from Nigeria
and shall not be subject to any further approval.
C. The importation and exportation of the Naira is permitted as provided by the Act.
D. To invest in any Nigerian enterprise or security with foreign currency or capital, the
prospective investor must be a national of a country approved and listed by the
Federal Ministry of Finance.
23.
According to the Securities and Investment Act 2007, which of the following statements
are correct? A listed public company shall:
I.
Within 20 working days prior to the commencement of a quarter disclose to the
relevant securities exchange its quarterly earnings forecast.
II. File with SEC on a periodic or annual basis, its audited financial statements and
such other returns as may be prescribed by the Commission from time to time.
III. If it violates any of its corporate responsibilities, be liable to a penalty of not less
than N1,000,000 and a further penalty of N25,000 per day for the period the
violation continues.
A.
B.
C.
D.
I and II
II and III
I and III
All of the above.
24.
DXS Plc, a listed company would like to reduce its share capital. What type of resolution
of members is required for this transaction?
A. Special resolution with Ordinary notice.
B. Special resolution with Special notice.
C. Extra ordinary resolution.
D. Ordinary resolution with Special notice.
25.
A banker owes his customer a duty of confidentiality. Which of the following are
exceptions to the rule that a banker must not disclose the state of his customer’s
account to third parties?
I.
Where the banker discloses the information to the immediate family of the
customer.
II. Where the banker’s duty to the public justifies the disclosure.
III. Where there is an express or implied consent of the customer.
IV. Where the customer has become insane.
A.
B.
C.
D.
26.
I and II
II and III
III and IV
I, II and IV
Mayowa hires Daniel to paint his portrait. Daniel begins the portrait but becomes upset
with Mayowa and refuses to finish it. If Mayowa sues Daniel to require him to finish the
portrait, it will be a suit for:
A. An injunction.
B. Reformation.
C. Specific performance.
D. Restitution.
Regulations of Securities and Corporate Finance (27 – 40)
27.
In line with the provisions of NSE Articles, which of the following statements are
correct?
I.
Any dealing member being aware of any breach on the part of another dealing
member and failing to report the same shall receive a stern warning from the
Council of the Exchange.
II. It is the duty of every dealing member to report any breach of the articles or rules
and regulations by any other dealing member in writing to the Council of the
Exchange.
III. No dealing member shall carry on business for a client who is in default to another
dealing member.
IV. No dealing member shall carry on any other business save that of dealing in
securities and those activities which are ancillary thereto.
A.
B.
C.
D.
28.
I, II and III only
I, II,III and IV
I,III and IV only
II, III and IV only
Which of the following transaction does not require the prior consent of the exchange?
A. Establishing or maintaining any branch office.
B. Any change in the control or shareholding structure.
C. Publication, circulation or distribution by any means whatsoever any invitation or
advertisement.
D. None of the above.
29.
Toyo and Tete have been joint account holders for many years. They also jointly owned
some assets. Toyo 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. Tete automatically becomes administrator of the joint estate.
C. The executor appointed in Toyo’s Will would administer the estate.
D. Title to the joint assets is automatically vested in Tete.
30.
One of the old customers of your stock broking firm is deceased, which of the following
documents is/are not required to facilitate the transmission of his shares to his
beneficiaries?
I.
II.
III.
IV.
Copies of the death certificate.
Letter of verification from the Registrar.
Letter of administration or Will.
The Administrator’s banker’s confirmation.
A.
B.
C.
D.
I only
II only
II and IV
I, II and III
31.
A market maker is expected to satisfy several conditions before registration. Which of
the following is not correct?
A. It should be duly registered by Corporate Affairs Commission.
B. It requires minimum paid up capital of N2 billion.
C. It must have sufficient liquidity, with a minimum float of N15 billion at any point in
time
D. Its memorandum and articles of association must state clearly that it can deal with
securities in the capital market
32.
What is the implication of demutualising an exchange?
A. It transforms into a limited liability.
B. It transforms into a limited liability company but could be quoted on the floor of
other exchanges only.
C. It no longer regulates the exchange as it is now like any other company.
D. Ownership is now vested solely in the government.
33.
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?
A. Between capital market operators.
B. Between capital market operators and their clients.
C. Between an investor and a securities exchange or capital trade point or clearing
and settlement agency.
D. All of the above.
34.
Which of the following accounts may be opened without power of attorney?
A. A husband opening an account for his spouse.
B. An aunt opening an account for a minor.
C. An individual opening an account for his partner.
D. None of the above.
35.
Which of the following statements is/are correct about the Administrative Proceeding
Committee?
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
Investments and Securities Tribunal.
A.
B.
C.
D.
I, II and III only.
II, III and IV only.
I, II and III only.
I, II, III and IV.
36.
Which of the following is not an exemption to the duty of confidentiality of client
information?
A. Suspicion of treason, money laundering terrorist financing, drug trafficking, and
other felonies.
B. Protection of the interest of dealing member, to enable it collect brokerage fees, or
to defend an action instituted against it.
C. In case of share purchase by a client which is 5% and above of the share capital of
the company.
D. Compliance with special requirement in respect of the accounts of public officers.
37.
NSE Article 15 states that a dealing member shall at all times maintain a liquidity
margin of:
A. Not less than 10% of total capital.
B. Not less than 15% of total capital.
C. Not less that 10% of shareholders’ fund.
D. Not less than 15 % of shareholders’ fund.
38.
Which of the following penalties may be imposed on a capital market operator by SEC
for not keeping adequate transaction records?
A. A fine of N1,000 per day.
B. A fine of N5,000 per day.
C. A one-off fine of N100,000
D. Suspension from operations.
39.
Which of the following procedures are required before a state could issue bonds in
Nigeria?
I.
II.
III.
IV.
State Executive Council resolution to issue the bond.
Approval from the Federal Executive Council.
State law to authorize borrowing from the capital market.
An irrevocable standing payment order.
A.
B.
C.
D.
I,
I,
I,
I,
II, and III only
II and IV only
III and IV only
II, III and IV
40.
Which of the following statements are correct in respect of the general code of conduct
for employees of capital market institutions (operators)”?
I.
An employee must disclose to his employer transactions in securities by himself,
spouse, dependent children and relatives.
II. All new employees must at the time of assumption of duty lodge details of their
holding in long-term securities of government and public companies with their
employers.
III. Employees are prohibited from investing in securities of private companies.
IV. Information on client accounts can be disclosed to all other employees of the firm.
A.
B.
C.
D.
I and II only
I and IV only
III and IV only
I, II, III and IV
Total = 40 marks
Question 2 – Ethics and Professional Standards
Nancy, a stockbroker informed Audu and Michael who were also stockbrokers that he was
buying the stocks of Interpharma Limited because the company would be issuing a bonus of
one-for-one.
Michael is not a specialist in Pharmaceutical stocks; therefore he did not act on the
information provided by Nancy. However, based on the rumour, Audu recommended that his
client, Ade should buy the Interpharma’s shares.
Two months later, it was confirmed that Interpharma Limited would issue a bonus of one-forone and, pay a dividend of 30 kobo per share.
Identify the ethical issues that should be of concern to you.
(4 marks)
Question 3 – Law Relating to Securities and Investments
One of the oldest and most fundamental doctrines in company law is that of ’’preservation of
capital’’.
Mention and briefly explain three basic provisions of company law in Nigeria aimed at
ensuring the preservation of capital of companies, thereby protecting stakeholders.
(3 marks)
Question 4 – Regulations of Securities and Corporate Finance
Several investors have complained to you that the Nigerian capital market does not in any
way protect investors, many of whom had lost their investment in the capital market in the
recent market meltdown.
Identify three provisions in securities law and regulations meant to protect investors.
(3 marks)
Question 5 – Ethics and Professional Standards
You have recently started work as the Compliance Officer of a small city firm which has three
different business units: Research, Stockbroking Operations and Corporate Finance.
After carrying out a review of the firm’s business practices during your first couple of weeks
you are now ready to present your findings to the Chief Executive and there are a number of
matters that you wish to bring to his attention. Specifically, you are concerned about the
following observations.
The Head of Research appears to report to the Head of Stockbroking Operations, although
you cannot find a formal staff organisational chart to confirm this. You have also been told
that in the interests of transparency, all of the Stockbroking Operations team attend the
weekly Research team meeting in which the head of Research discuss the companies that
they are currently covering, the views they have on them and the nature of the reports that
will be issued the following week.
As a result of these close links between Stockbroking Operations and Research, it is possible
for the Research staff to be remunerated in accordance with the number of transactions that
are generated from their research reports. Considerable emphasis is placed on this direct link
between research reports and customer transactions and as a result, the heads of the two
departments have agreed that the most active customers of the previous six months should
receive research reports a couple of hours before other clients, to give them time to react to
it before the market changes.
The Head of Research has explained to you that in order to fully monitor the impact of
research reports on customer transactions it is necessary for the Stockbroking Operations
and Research teams to sit next to each other.
You also have some concerns about the Corporate Finance department. It appears to be very
successful and has recently expanded to take on two new trainees who you are told have
been such quick learners that they have already been able to give some sound advice to
customers despite the fact that they have not yet had the time to sit their CIS exams and
that the Head of Department has been too busy to give them much attention as he is busy
working on an IPO for UPG Limited.
When you asked the Head of Corporate Finance more about the IPO mandate that is keeping
him busy, he explained that apart from the imminent IPO, he regularly offered consultancy
services to UPG Limited in view of the long standing relationship with the Managing Director,
who was his bosom friend. He was working round the clock to conclude the most recent
assignment he got from the company.
Comment briefly on the soundness of the regulatory control infrastructure within this firm
with special reference to:
5(a) Any practices you consider to be unethical that violate CIS Code and Standards.
(8 marks)
5(b) Any controls that you consider should be implemented or strengthened.
(5 marks)
5(c) Any rule breaches that you think might have taken place and the potential
consequences of any rule breaches you have identified.
(5 marks)
Question 6 – Law Relating to Securities and Investments
Jubril, Kanu and Lawal operated a partnership for some 13 years before converting it into a
private limited company six years ago. The capital of the company is divided as follows:
Jubril has 35,000 shares
Kanu has 35,000 shares
Lawal has 35,000 shares
All three originally were directors of the company and received salaries as well as dividends.
Unfortunately there has been a major disagreement between Lawal and the other two and
some events have taken place.
Advise Lawal as to any possible action he can take as a minority shareholder in the company,
in relation to the following actions and proposals:
6(a) Jubril and Kanu have removed Lawal from the board of directors.
(4 marks)
6(b) Jubril and Kanu have transferred some of the company’s assets to a separate company
owned by them both.
(4 marks)
6(c) Jubril and Kanu propose to issue 100,000 new shares to be split equally between
themselves.
(3 marks)
6(b2) Jubril and Kanu also propose to stop making dividend payments and to use the profit
saved to increase the amount of directors’ salaries.
(3 marks)
Question 7 – Regulations of Securities and Corporate Finance
Mike Uche is a businessman who sells computer accessories in Ikeja. Over the years his
business has grown steadily; he now needs additional working capital to finance his fastgrowing business. In the course of his recent discussion with Charles, one of his relatives, he
mentioned the funding challenge he was facing in his business.
Charles, a relationship manager in one of the new generation banks enquired whether Mike
had any assets, including shares of quoted companies, which he could use as collateral to
obtain bank loans. Mike confirmed that he had several share certificates (representing
allotment from public offers and bonuses) of a number of blue-chip companies that he bought
years back on the advice of one of his friends who is in the employment of a stockbroking
firm.
Unfortunately, since he did not know their importance, Mike routinely dumps the annual
reports and dividend warrants he receives from the companies in which he had
shareholdings, in his store. This has been going on for about fifteen years.
Upon his friend’s advice, Mike collated his shares certificates. The current market value of the
shares was estimated at about N8 million.
Required:
7(a) Outline the procedures Mike would need to follow to claim his outstanding unclaimed
dividends. Are there any restrictions as to the dividends he could claim?
(6 marks)
7(b) Mike has decided to use his shareholdings as collateral for a loan which the bank has
agreed to grant him. Explain in details the procedures involved (note that he has the
physical share certificates).
(12 marks)