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 2010
Level 2
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SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
B
A
B
D
D
C
D
A
A
D
B
A
D
A
C
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
C
B
A
D
C
D
D
B
C
C
B
A
B
B
D
31
32
33
34
35
36
37
38
39
40
C
A
B
B
A
C
D
D
B
D
(60 marks)
SECTION B: SHORT ANSWER QUESTIONS
Question 2 – Ethics and Professional Standards
2(a) Whistle blowing means raising a concern about wrongdoing occurring in an
organization or body of people. CIS Code and standards states that Members and
Registered Students should report illegal conduct by market operators to an
appropriate authority where their disclosure is protected by law. Internally, they
also have a responsibility to report breaches of the Codes and Standards to CIS.
(2 marks)
2(b) Unfair trading include the following acts:
i. Taking unfair advantage of other members/registered students.
ii. Engaging in anti-competitive conducts.
iii. Engaging in unconscionable conduct
iv. Knowingly engaging or inducing another person to engage in a conduct that, or is
likely to mislead or deceive in the performance of their profession.
(2 marks)
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Question 3 – Law Relating to Securities and Investments
The veil of incorporation of a company may be lifted in the following situations:
i.
ii.
iii.
iv.
v.
vi.
Illegality
Fraudulent misconduct
Public policy
Taxation
Agency
Fraudulent transactions
(2 marks)
Question 4 – Regulations of Securities and Corporate Finance
4(a)
The agreement between the issuer of securities and the issuing house for the
packaging and issue of the securities is referred to as a vending agreement
(2 marks)
4(b)
i.
ii.
iii.
iv.
v.
Establishment of Assets Management Company of Nigeria (AMCON)
Reforms in the Banking sector
New rule on margin lending
Proposed Transaction Processing System
Renewed emphasis on risk management and corporate governance by
regulators
½ mark for each point (maximum 2 marks)
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SECTION C: COMPLUSORY QUESTIONS
Question 5 – Ethics and Professional Standards
5(a)
Corporate governance can be defined as is the set of processes, customs,
policies, laws and institutions affecting the way a company is directed,
administered or controlled. It also includes the relationships among the many
stakeholders involved and the goals for which the corporation is governed.
The positive effect of corporate governance on different stakeholders ultimately is
a strengthened economy, and hence good corporate governance is a tool for socio
economic development.
SEC’s corporate governance code addresses the following key issues:

Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability
to review and challenge management performance. It needs to be of sufficient
size and have an appropriate level of commitment to fulfill its responsibilities and
duties. There are issues about the appropriate mix of executive and nonexecutive directors. The corporate governance code also addresses issues such as
remuneration that can affect the objectivity and independence of the Board.

Rights and equitable treatment of shareholders:
The Code requires
organizations to respect the rights of shareholders and help shareholders to
exercise those rights. They can help shareholders exercise their rights by
effectively communicating information that is understandable and accessible and
encouraging shareholders to participate in general meetings. Different categories
of shareholders are also to be treated equally by the Board.

Interests of other stakeholders: Organizations should recognize that they
have legal and other obligations to all legitimate stakeholders. Companies should
pay adequate attention to the interests of its stakeholders such as its employees,
host community, the consumers and the general public. Public companies should
demonstrate sensitivity to Nigeria’s social and cultural diversity and should as
much as possible promote strategic national interests as well as national ethos
and values without compromising global aspirations where applicable.

Integrity and ethical behavior: Ethical and responsible decision making is not
only important for public relations, but it is also a necessary element in risk
management and avoiding lawsuits. SEC’s code of corporate governance requires
that companies should have a code of ethics and statement of business practices,
which should be implemented as part of the corporate governance practices of
the company to promote ethical and responsible decision making. This should be
implemented as part of the corporate governance practices of the company.

Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
shareholders with a level of accountability. They should also implement
procedures to independently verify and safeguard the integrity of the company's
financial reporting. Disclosure of material matters concerning the organization
should be timely.

Risk Management and Audit: The Code of Corporate Governance states that
the Board of a company is responsible for the process of risk management. It
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should accordingly form its own opinion on the effectiveness of the process.
Management is accountable to the Board for implementing and monitoring the
process of risk management and integrating it into the day-to-day activities of the
company.
Audit Committee It is the responsibility of the Board to ensure that the
committee is constituted in the manner stipulated by law and is able to effectively
discharge its statutory duties and responsibilities. At least one board member of
the committee should be financially literate. Members of the committee should
have basic financial literacy and should be able to read financial statements. At
least one member should have knowledge of accounting or financial
management.
(10 marks)

5(b)

CIS Members and Registered Students must disclose to their clients and
prospective clients all matters that could reasonably be expected to impair their
independence and objectivity.

They should inform their supervisors of any pressure arising from the
performance of their professional duties, or any act which is inconsistent with
any law, rule, regulation and CIS Code and Standards

Members and Registered Students who provide investment information, make
investment recommendations or take investment actions for their clients, shall
not beneficially own securities for which they make investment recommendation
or take investment action for their clients and prospective clients; unless such
beneficial ownership is disclosed to clients and prospective clients in investment
recommendations when it is judged that such ownership will not impair their
objectivity.

Members and Registered Students assigning recommendations shall allow their
clients and prospective clients adequate time to act on their recommendations
before acting on their own behalf or their employers.

They should not trade inconsistently with their firm’s published
recommendations, except in cases of clear personal necessity and only in
compliance with their employers’ disclosure procedures.

Members and Registered Students shall give priority to investment transactions
for clients over their personal or employers’ account transactions.

Members and Registered Students engaged in investment management /
transactions shall place priority on transactions for their respective employer
over transactions in securities of which Members and registered students are or
expected to be the beneficial owners, so that such personal transactions do not
operate adversely to their employer’s interests.

Disclosure should not reveal “inside information” or other commercially sensitive
or confidential information.
(8 marks)
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Question 6 – Law Relating to Securities and Investments
6(a)
Rescission
Rescission (also called overturning) can been defined as the unmaking of a contract
between parties. Rescission is the unwinding of a transaction. This is done to bring the
parties, as far as possible, back to the position in which they were before they entered
into a contract.
This remedy is available to an aggrieved shareholder who can show the court that there
was a misstatement made either innocently or fraudulently in the prospectus.
The shareholder can bring an action against the company if the prospective contained
statement , promises or forecasts which was false, deceptive or misleading; or did not
contain a statement, report or account required to be contained.
The plaintiff must also prove that he relied on the false statement to subscribe for the
shares and that the statement was material to him in taking the investment decision he
took.
Damages for Deceit and Misrepresentation
This is a common law remedy available to the plaintiff in this circumstance.
To succeed, the following must be satisfied:
i.
That the misrepresentation is a statement of fact which is material
ii.
That he acted on the misrepresentation
iii.
That the statement was addressed to him
iv.
That the suffered loss or damage on account of relying on the misrepresentation
(7 marks)
6(b) The powers and role of SEC in the Nigerian capital market include the following:
v.
Register and regulate securities exchange; capital trade points; futures, options
and derivatives exchanges; commodity exchanges and any other recognized
investment exchange.
vi.
Prepare adequate guidelines, organize training programmes and disseminate
information necessary for the establishment of securities exchange and capital
trade points.
vii.
Register funds, capital trade points, futures, options and derivatives as well as
other intermediaries and self-regulatory organizations in the securities industry.
viii.
Keep and maintain separate registers of foreign direct investment and foreign
portfolio investments.
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ix.
Promote investors’ education and the training of categories of intermediaries in
the security industry.
x.
Establish specialized departments to regulate collective investments including all
collective investment schemes such as unit trusts, esusu schemes, pension
funds and other such schemes;
xi.
Regulate mergers, acquisitions, take-over and other
combinations.
xii.
Call for information from and undertake, inspect, conduct inquiries and audits of
the Securities Exchanges, Unit Trusts, Mutual Funds, Capital Trade Points,
Futures, Options And Derivatives Exchanges as well as other intermediaries and
Self-regulatory Organisations in the securities industry
xiii.
Conduct research into all or any aspect of the securities industry
xiv.
Prevent fraudulent and unfair trade practices relating to the securities industry
xv.
Advice the Minister on all matters' relating to the securities industry
xvi.
Disqualify unfit individuals from being employed anywhere in the securities
industry
xvii.
Liaise effectively with the regulators and supervisors of other financial
institutions locally and overseas
forms
of
business
xviii. Perform such other functions and exercise such other powers not inconsistent
with the Act as are necessary or expedient for giving full effect to the provisions
of the Act.
(7 marks)
Question 7 – Regulations of Securities and Corporate Finance
7(a)
The client should first review the background to the case and ascertain whether the
Stockbroker exercised duty of care, and undertook due diligence as a fiduciary, and
professional adviser in giving the investment advice.
Did the stockbroker take into consideration the client’s unique circumstances, and
capacity to undertake risk in giving the advice? Did he give the advice just to take
undue advantage of the client (for instance to earn a commission)? Did he give the
advice in good faith?
If the client feels that the Stockbroker had acted with his best interest in mind, then he
should simply bear the loss. Investors need to be aware that the capital market exposes
investors to risks. The market could deliver tremendous wealth if projections work out as
envisaged; it could also completely wipe out investors’ wealth if things go wrong, as in
this situation.
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However, if the investor feels the Stockbroker is guilty of wrong doing, then he should
exploit the dispute resolution mechanisms and procedures within the Nigerian Capital
Market. The client should proceed to complain to the Securities and Exchange
Commission (SEC), The Nigerian Stock Exchange (NSE) and the Chartered Institute of
Stockbrokers (CIS).
(41/2 marks)
7(b)
The client should proceed straight to petition the Chartered Institute of Stockbrokers,
which is the umbrella body that regulates the practice of Stockbroking by Individual
Stockbrokers in Nigeria. This action is primarily against the Stockbroker involved in the
fraudulent dealing.
In addition however, other common law rights of action may also be available to the
client including damages for breach of contract, negligence or possible conspiracy.
(41/2 marks)
7(c)
SEC as the apex regulatory body in the Nigerian Capital Market has enormous powers
to protect investors and prevent fraudulent and unfair trade practices relating to the
securities industry.
SEC can sanction the Stockbroking firm where the office manager works by
disallowing the firm to operate in the capital market until the losses suffered are
addressed and redressed.
(41/2 marks)
7(d)
In the event of the firm’s collapse, compensation could be available from the
investors’ protection fund being maintained by the NSE. Apart from this, the client has
a right of claim against all the Stockbrokers working in that firm, jointly and
severally, before the firm became insolvent. This is with reference to the provisions of
Regulation 6(a)(vi) and 6(b) of CIS membership Regulation and Code of Conduct
2005.
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