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 2010
Level 1
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SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
D
D
D
D
A
A
B
C
D
D
C
D
C
D
A
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
D
B
D
C
D
A
D
A
C
C
D
A
B
B
D
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
C
D
B
B
D
C
B
A
D
A
D
D
A
D
A
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
D
D
C
B
A
A
C
C
B
C
D
D
B
A
B
(60 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 - Ethics and Professional Standards
2(a) CIS Members and Registered Students owe the following duties to their
employers:
i.
ii.
iii.
iv.
v.
To comply with the lawful directions, policies and procedures of their employers
To act for the benefit of their employers
Not to deprive their employers of the advantage of their skills and abilities
Not to divulge confidential information
Not to cause harm to their employers
½ mark for each point
(Maximum 1 mark)
2(b) The following are unethical practices in the Nigerian capital market:
i.
ii.
iii.
iv.
v.
vi.
vii.
Share price manipulation.
Stock brokers trading on the floor of the NSE without being duly licensed.
Unauthorized sale of customers’ shares.
Giving guaranteed return on investment to clients.
Window dressing of accounts/ reports by listed companies.
Insider dealing.
Issuing dud cheques to clients.
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viii.
ix.
x.
xi.
xii.
xiii.
xiv.
Purchase of shares with clients’ funds in a Stock broking firm’s name and not in
the names of the client.
Non-crediting of clients’ shares to their CSCS accounts.
Diversion of clients’ funds provided for the purchase of shares to other
unauthorized uses.
The use of clients’ funds as lien using fake seals and letter heads of the clients
to procure facilities.
Non-verification of shares certificates of clients’ accounts.
Listed banks granting loans to buy the bank’s equities.
Making investment recommendation to a client that is not consistent with the
client's circumstances and/or investment objectives just to earn a commission.
½ mark for each point
(Maximum 2 marks)
Question 3 – Law Relating to Securities and Investments
3(a) The doctrine of privity of contract is that, as a general rule, at common law a
contract cannot confer rights or impose obligations on strangers to it; that is,
persons who are not parties to it.
The parties to a contract are those persons who reach agreement.
(1½ marks)
3(b)
A "tort" is a civil wrong. Such wrongs include negligence, nuisance and
defamation (libel and slander).
The law of torts represents the means whereby individuals may protect their
private interests and obtain compensation from those who violate them.
(1½ marks)
Question 4 – Regulations of Securities and Corporate Finance
4(a) The role of SEC in the Nigerian capital market include the following:
i.
ii.
iii.
iv.
v.
Register and regulate securities exchange; capital trade points; futures, options
and derivatives exchanges; commodity exchanges and any other recognized
investment exchange.
Prepare adequate guidelines, organize training programmes and disseminate
information necessary for the establishment of securities exchange and capital
trade points.
Register funds, capital trade points, futures, options and derivatives as well as
other intermediaries and self-regulatory organizations in the securities industry.
Keep and maintain separate registers of foreign direct investment and foreign
portfolio investments.
Promote investors’ education and the training of categories of intermediaries in
the security industry.
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vi.
vii.
Establish specialized departments to regulate collective investments including all
collective investment schemes such as unit trusts, esusu schemes, pension
funds and other such schemes;
Regulate mergers, acquisitions, take-over and other forms of business
combinations.
½ mark for each point
(Maximum 2 marks)
4(b) An SRO is a non-governmental organization that has the power to create and
enforce industry regulations and standards. The priority is to protect investors
through the establishment of rules that promote ethics and equality.
The NSE is a typical example. The implication is that members regulate
themselves. This is why the exchange emphasises the duty of all members to
observe and report breaches of NSE rules.
(1 mark)
SECTION C: COMPLUSORY QUESTIONS
Question 5 - Ethics and Professional Standards
5(a) Ethical practices are the foundation upon which the success of the financial
system is based. It brings much goodwill to the system as a whole that will in the
long run translate into tangible benefits.
Some of the benefits that accrue when ethically sound business values are upheld
are as follows:
i.
Investors’ confidence in the system
The financial system exists and survives simply because individuals trust the
system enough to stake their resources in it. The negative impact of erosion of
confidence through unethical practices was driven home to market
participants globally in the recent economic meltdown.
ii.
Profitability
Market operators that base their operations on sound business value are more
likely to be profitable in the long run than those operating on corrupt
practices.
iii.
Sustainability
Without sustainability, investments will simply not yield fruit. And without
sound ethical values, sustainability will not be achieved in businesses and
investments.
iv.
Going concern is assured
Being profitable will ensure that the company be around for at least the next
twelve months. It is the desire of every business entity to be around for a
longer time. Ethical business practice is the way to go if the investment
profession truly values going concern.
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v.
Competitive edge
Customers and other stakeholders in the business community will naturally
come to love and appreciate a company and its product/ service if they
discover that sound ethical practices are upheld by the business.
vi.
Wealth building and growth of financial markets
Part of business ethics is responsibility to the investor. For that reason the
financial system tends to attract more investment from people that are new
into the market, when the system runs on sound ethical practices.
Any 4 points (Maximum 4 marks)
5(b)
i.
Duty to adhere to law, rules, regulations and Code of Ethics and
Standards of professional conduct:
• It is the responsibility of members to be up-to-date, and comply, with all
applicable laws governing the investment profession where they operate.
• They shall not knowingly violate any rules, regulations and procedures that
regulate the profession, and their conduct.
• In case of a conflict, Members and Registered Students must comply with
the more strict law, rule, regulation, code or standard.
ii.
Proper use of professional qualification:
• Members are expected to use their professional designations with care to
enhance the standing of and confidence in the qualifications of the
Institute.
• Members are only allowed to use applicable designations (ACS and FCS)
when they have satisfied all requirements to do so.
iii.
Professional Conduct
• Members should not engage in any illegal, fraudulent, deceitful or misleading
professional conduct that could put their name or the name of the Institute
into disrepute
• They should not engage in any conduct that could compromise the integrity of
the professional designations of the Institute, the CIS professional
examination or any other examinations supervised or conducted by the
Institute on behalf of another Institute
iv.
Cooperation , support and whistle-blowing
Members have a responsibility to cooperate with the Institute by sending
information, reports or documents required from them promptly accurately
and timely
• Members must cooperate to address wrong doing and incompetency in the
profession.
• They have a responsibility to report illegal conduct to the appropriate
authorities where their disclosure is protected by law; and also report
breaches of the Codes and Standards to CIS.
•
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•
Members should not discriminate or take any adverse action against a person
who discloses illegal activities or reports a breach of the Code and Standards
Note:
Any three of the above (1 mark each) -3 marks
Explanations - 3 ½ marks
Total
6½ marks
Question 6 - Law Relating to Securities and Investments
6(a) A contract may be discharged in one of the following ways:
6(b)
i.
Performance - Where a contract is one where the price is payable on
completion, then completion is generally required in order to discharge the
contract. This is often expressed in the terms of being a condition precedent.
ii.
Breach - Where there exists a breach of condition (as oppose to breach of
warranty) this will enable the innocent party the right to repudiate the
contract (bring the contract to an end) in addition to claiming damages.
iii.
Agreement - For a contract to be discharged through agreement there
must be Accord & Satisfaction. The parties must agree to end the contract.
The agreement must be freely given. Both parties must also provide
consideration. If both parties have continuing obligations then generally the
consideration will be simply each of them giving up their rights under the
contract.
iv.
Frustration - A contract may be frustrated where there exists a change in
circumstances which is not the fault of either of the parties which renders
the contract either impossible to perform or deprives the contract of its
commercial purpose. For example where there is destruction of the subject
matter.
(4 marks)
i.
Duty to exercise due care, skill and diligence – This is the primary duty of a
Director of a company. He is expected to discharge his or her duties as a
reasonable and prudent Director would exercise such duties in comparable
circumstances. The failure by a Director to exercise reasonable care could be a
ground for an action in negligence and breach of fiduciary duty of care owed by
such a Director to the company.
ii.
Duty of utmost good faith, i.e. fiduciary duty of care- A company Director
also owes the company a fiduciary duty of care. As a fiduciary of the company,
her must not place himself in a position where there is a conflict of interest
between his duties to the company and his personal interest. Thus, any secret
profits made by a Director of a company from the company are accountable to
the company.
iii.
Duty to attend meetings -The Director of a company also owes the duty to
attend the board of directors and shareholders’ meetings of the company
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iv.
Duty of disclosure of interest -The Director has a duty of disclosure of his
direct or indirect equity interest in the company
v.
Duty to disclose particulars - He has a duty to give his particulars on all trade
circulars, show cards, business letter headed papers, etc;
vi.
Oversight function -The Director has the duty to provide oversight assistance to
the management team of the company.
(5 marks)
Question 7 - Regulations of Securities and Corporate Finance
i. Stockbroker
•
•
•
The Investor approaches a stockbroking firm to open an account.
He fills CSCS shareholder’s particulars form (Form CSCS-R005) and submits
required documents for identification and to meet KYC requirements ( e.g
drivers license or National ID card, utility bills e.t.c).
These documents are forwarded to CSCS office with a covering letter by the
Stock broker.
ii. CSCS
•
•
•
At CSCS, a clearing house number (CHN), ie CSCS number is assigned to the
investor.
An investor’s stock account number is automatically generated for the
shareholder in the custody of the Stock broker in the CSCS system.
Shareholder’s full personal details are captured in the shareholder’s account in
the custody of the stockbroker.
iii. Stockbroker
•
•
•
•
•
•
Once with CSCS and stock account numbers, the investor gives mandate to
the Stockbroker and makes payments for shares requested (including charges
and brokers commission).
He collects receipt as evidence of payment.
Stock broker makes purchases on the floor.
Investor obtains contract note after purchase.
Investor’s account is credited after 4 working days (T +3).
Investor fills transferees’ form for record purposes. This is forwarded to the
Registrar by the Stockbroker.
iv. Registrar
•
Transferees’ form is filed for record purposes by the Registrar (for future
verification of bonus or right issue) . This is done at least once for every security
invested in.
(10½ marks)
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