Malaysia Securities Exam Module 19A - Advisory Services (Rules and Regulations) – Part A

Correct Answer: b) Discuss with the client their specific ESG preferences and goals to tailor an investment strategy that aligns with their values.

Explanation: According to Malaysia Securities Commission guidelines, licensed investment advisors have a duty to consider their clients’ preferences and values when recommending investment strategies. In the case of socially responsible investing, it is essential for advisors like Mr. Raj to have a thorough discussion with clients about their ESG preferences and goals. By understanding the client’s values, Mr. Raj can tailor an investment strategy that aligns with their desire to support companies with positive environmental, social, and governance practices. This approach promotes client satisfaction and demonstrates the advisor’s commitment to meeting their individual needs. Failure to consider ESG factors may lead to dissatisfaction among socially conscious investors and potential regulatory scrutiny under the Capital Markets and Services Act 2007 (CMSA).

Correct Answer:
c) Mr. O must disclose his intention to purchase additional shares to the Securities Commission Malaysia and the board of directors.

Explanation:
As a director of a listed company, Mr. O is subject to stringent disclosure requirements under Malaysian securities regulations. If Mr. O intends to purchase additional shares of the company, he must disclose his intention to the Securities Commission Malaysia and the board of directors. This disclosure is essential to ensure transparency, prevent conflicts of interest, and uphold the integrity of the capital market. Failure to disclose such information may lead to regulatory sanctions and legal consequences. Therefore, option (c) is the correct answer as Mr. O must disclose his intention to purchase additional shares to the relevant regulatory authorities and the board of directors.

Reference:
Securities Industry (Take-Overs and Mergers) Regulations 2016 – Regulation 6.

Correct Answer:
a) The notice indicates that Mr. S is required to sell his shares to the majority shareholder at a fair price determined by an independent valuer. Mr. S has the option to accept the offer or challenge the valuation process if he believes it is unfair.

Explanation:
A notice of compulsory acquisition typically indicates that minority shareholders, like Mr. S, are required to sell their shares to the majority shareholder at a fair price determined by an independent valuer. Under Malaysian securities regulations, minority shareholders have the option to accept the offer or challenge the valuation process if they believe it is unfair. This ensures that minority shareholders receive fair compensation for their shares in compulsory acquisition scenarios. Therefore, option (a) is the correct answer as the notice of compulsory acquisition entails Mr. S’s obligation to sell his shares at a fair price, with the option to challenge the valuation if necessary.

Reference:
Securities Industry (Take-Overs and Mergers) Regulations 2016 – Regulation 17.

Correct Answer:
c) Ms. T should report her suspicions to the Securities Commission Malaysia or Bursa Malaysia Securities Berhad.

Explanation:
If Ms. T suspects insider trading during a take-over bid or any other securities transaction, she should report her concerns to the appropriate regulatory authorities, such as the Securities Commission Malaysia or Bursa Malaysia Securities Berhad. Reporting suspicions of insider trading is crucial for maintaining the integrity and fairness of the capital market and protecting the interests of investors. By reporting her concerns to the regulatory authorities, Ms. T contributes to the detection and prevention of unlawful activities and helps uphold investor confidence in the market. Therefore, option (c) is the correct answer as Ms. T should report her suspicions to the Securities Commission Malaysia or Bursa Malaysia Securities Berhad for further investigation.

Reference:
Capital Markets and Services Act 2007 – Sections 188 and 195.

Correct Answer:
d) All of the above.

Explanation:
Before accepting the tender offer, Mr. U should consider various factors to make an informed decision. Firstly, he should assess the current market price of the shares to determine their value and the premium offered by the tender offer. Secondly, Mr. U should evaluate any potential conflicts of interest arising from the transaction, especially if he holds a position of influence within the company. Additionally, Mr. U should consider the potential impact of the sale on the company’s share price and overall market perception. Therefore, option (d) is the correct answer as Mr. U should consider all of these aspects before accepting the tender offer.

Reference:
Securities Industry (Take-Overs and Mergers) Regulations 2016 – Regulation 10.

Correct Answer:
b) Mr. V has the right to attend the shareholder meeting and vote on the proposed merger.

Explanation:
Under Malaysian securities regulations, minority shareholders like Mr. V have the right to participate in the decision-making process regarding proposed mergers involving the company. Mr. V has the right to attend the shareholder meeting convened to discuss and vote on the proposed merger. While minority shareholders may not have the power to unilaterally block the merger, their votes and opinions contribute to the overall decision-making process. Therefore, option (b) is the correct answer as Mr. V has the right to attend the shareholder meeting and vote on the proposed merger under Malaysian securities regulations.

Reference:
Malaysian Code on Take-Overs and Mergers 2016 – Paragraphs 3.1 and 4.2.

Correct Answer:
c) Refrain from trading in the company’s shares until the information is made public.

Explanation:
As a director of a listed company, Mr. X is prohibited from trading in the company’s shares based on material non-public information, also known as insider trading. Therefore, Mr. X should refrain from trading in the company’s shares until the information becomes publicly available or ceases to be material. This ensures compliance with Malaysian securities regulations and prevents the misuse of privileged information for personal gain. Therefore, option (c) is the correct answer as Mr. X should refrain from trading in the company’s shares until the material non-public information is made public.

Reference:
Capital Markets and Services Act 2007 – Section 188.

Correct Answer: b) Diversify the investment portfolio across various asset classes.

Explanation: According to the Guidelines on Conduct for Capital Market Intermediaries, licensed investment advisors are required to provide suitable investment advice to their clients based on their risk appetite, financial goals, and other relevant factors. Diversification is a fundamental principle of risk management in investing. By spreading investments across various asset classes such as stocks, bonds, and commodities, the overall risk of the portfolio can be reduced while still potentially achieving satisfactory returns. This approach aligns with the client’s objective of maximizing returns while mitigating risks, making option (b) the correct answer.

Correct Answer: c) Recommend diversifying the investment portfolio to reduce concentration risk.

Explanation: The Guidelines on Conduct for Capital Market Intermediaries emphasize the importance of managing concentration risk in investment portfolios. Concentration risk arises when a significant portion of the portfolio is invested in a single asset or asset class, increasing vulnerability to adverse events specific to that investment. Ms. Lee should recommend diversifying the client’s portfolio to spread risk across different investments, reducing the impact of any single asset’s performance on the overall portfolio. This aligns with the regulatory requirement to prioritize the client’s best interests and ensure prudent investment practices, making option (c) the correct answer.

Correct Answer: d) Report the unauthorized trading activity to the relevant regulatory authorities.

Explanation: Unauthorized trading violates regulatory guidelines and undermines the trust and integrity of the financial advisory relationship. Financial planners have a fiduciary duty to act in their clients’ best interests and must promptly address any unauthorized activity in client accounts. Reporting such activity to the appropriate regulatory authorities is essential for investigation and enforcement of investor protection laws. Mr. Wong should prioritize protecting his client’s interests and upholding regulatory compliance by reporting the unauthorized trades, ensuring accountability and safeguarding against potential financial harm. Option (d) is the correct answer as it aligns with regulatory requirements for addressing unauthorized trading and protecting investor rights.

Correct Answer: b) Advise the client against trading based on insider information to avoid legal and ethical violations.

Explanation: Insider trading involves trading securities based on material, non-public information, which is illegal and unethical. Licensed stockbrokers are obligated to adhere to securities laws and regulations, including prohibitions against insider trading. Mr. Ahmad should prioritize compliance with legal and ethical standards and advise the client against trading based on insider information. By doing so, Mr. Ahmad upholds market integrity, protects the interests of all investors, and mitigates the risk of legal and regulatory sanctions. Option (b) is the correct answer as it underscores the importance of ethical conduct and regulatory compliance in securities trading.

Correct Answer: c) Recommend allocating a small portion of the portfolio to startup investments for diversification purposes.

Explanation: Investing in startups offers the potential for significant returns but also carries high risks due to uncertain business models and market volatility. As per regulatory guidelines, investment advisors should provide suitable advice that aligns with clients’ risk tolerance and investment objectives. Mr. Tan should advise the client to allocate only a small portion of their portfolio to startup investments to mitigate risk through diversification. This approach balances the potential for high returns with prudent risk management, aligning with the client’s interest in pursuing growth opportunities while safeguarding against excessive risk exposure. Option (c) is the correct answer as it reflects the principles of diversification and suitability in investment advice.

Correct Answer: b) Advise the client against margin trading due to the high risks involved, especially in speculative trading.

Explanation: Margin trading involves borrowing funds to increase the size of trading positions, amplifying both potential gains and losses. Speculative trading strategies further heighten the risk profile, potentially leading to substantial financial losses. As a registered financial planner, Ms. Lim is obligated to act in the best interests of her clients and provide suitable advice that prioritizes risk management and financial well-being. Advising against margin trading aligns with regulatory guidelines aimed at protecting investors from excessive risk-taking and promoting prudent investment practices. Option (b) is the correct answer as it emphasizes the importance of risk awareness and responsible investing in speculative trading scenarios.

Correct Answer: A) Educate the client about the risks associated with investing in cryptocurrencies, including market volatility and regulatory uncertainties.

Explanation: According to Malaysia Securities Commission regulations, licensed financial advisors have a duty to provide comprehensive advice to their clients, including discussing the risks associated with investing in cryptocurrencies. Ms. Wong should educate her client about the potential risks such as market volatility, regulatory uncertainties, and security vulnerabilities inherent in cryptocurrency investments. By understanding these risks, the client can make informed decisions and mitigate potential losses. Failing to discuss such risks or guaranteeing returns without addressing the risks associated with cryptocurrencies may lead to regulatory sanctions under the Capital Markets and Services Act 2007 (CMSA).

Correct Answer: b) Discuss the client’s investment objectives and risk tolerance to recommend a suitable mutual fund.

Explanation: According to Malaysia Securities Commission regulations, licensed investment advisors have a duty to recommend suitable investment options based on their clients’ investment objectives and risk tolerance. Mr. Lim should assess the client’s financial goals, time horizon, and risk tolerance before recommending a mutual fund. By understanding the client’s investment preferences, Mr. Lim can recommend a mutual fund that aligns with the client’s objectives and risk profile. Failing to assess the client’s risk tolerance or guaranteeing returns without considering the client’s investment objectives may lead to regulatory sanctions under the Capital Markets and Services Act 2007 (CMSA).

Correct Answer: D) Ensure compliance with regulatory requirements and disclosure obligations throughout the bond issuance process.

Explanation: According to Malaysia Securities Commission regulations, corporate finance advisors involved in bond issuances have a duty to ensure compliance with regulatory requirements and disclosure obligations. Ms. Lim’s responsibility is to oversee the bond issuance process and ensure that all necessary disclosures are made to investors and regulatory authorities. This includes providing accurate information about the company’s financial performance, creditworthiness, and risks associated with investing in the bonds. By fulfilling this responsibility, Ms. Lim contributes to the transparency and integrity of the capital market. Failure to comply with regulatory requirements may result in legal and regulatory consequences under the Capital Markets and Services Act 2007 (CMSA).

Correct Answer: b) Discuss the client’s investment objectives, risk tolerance, and time horizon to recommend a suitable REIT.

Explanation: According to Malaysia Securities Commission regulations, licensed investment advisors have a duty to recommend suitable investment options based on their clients’ investment objectives, risk tolerance, and time horizon. Mr. Tan should assess the client’s financial goals, risk tolerance, and investment time frame before recommending a REIT. By understanding these factors, Mr. Tan can recommend a REIT that aligns with the client’s objectives and risk profile, whether it be income-focused, growth-oriented, or a blend of both. Failing to assess the client’s risk tolerance or guaranteeing returns without considering the client’s investment objectives may lead to regulatory sanctions under the Capital Markets and Services Act 2007 (CMSA).

Correct Answer: b) Ensure compliance with regulatory requirements and disclosure obligations throughout the rights issue process.

Explanation: According to Malaysia Securities Commission guidelines, corporate finance advisors involved in rights issues have a duty to ensure compliance with regulatory requirements and disclosure obligations. Ms. Lim’s responsibility is to oversee the rights issue process and ensure that all necessary disclosures are made to shareholders and regulatory authorities. This includes providing accurate information about the company’s financial position, the purpose of the rights issue, and the rights of existing shareholders. By fulfilling this responsibility, Ms. Lim contributes to the transparency and integrity of the capital market. Failure to comply with regulatory requirements may result in legal and regulatory consequences under the Capital Markets and Services Act 2007 (CMSA).

Correct Answer: (c) Accurate valuations provide stakeholders with essential information for decision-making.

Explanation: Accurate property asset valuations play a crucial role in corporate proposals by providing stakeholders with essential information for decision-making. These valuations enable investors, regulators, and corporate management to assess the financial viability and risks associated with proposed projects. By incorporating accurate valuations into proposals, corporations enhance transparency, credibility, and investor confidence. This aligns with regulatory objectives aimed at promoting market integrity and investor protection.

Reference: Securities Commission Malaysia’s guidelines on disclosure requirements in corporate proposals.

Correct Answer: (c) Disclosing valuation methodologies and engaging independent, qualified valuers

Explanation: Disclosing valuation methodologies and engaging independent, qualified valuers demonstrate a commitment to regulatory compliance in property asset valuations for corporate proposals. This ensures transparency, accuracy, and credibility in the valuation process, aligning with regulatory requirements and investor expectations. Hiring unqualified valuers or inflating property values may lead to regulatory violations and undermine investor trust. By adhering to best practices and regulatory standards, corporations uphold market integrity and investor protection.

Reference: Securities Commission Malaysia’s guidelines on due diligence and independence in property valuations.

Correct Answer: (b) Disclose all relevant information about the securities and the issuing company.

Explanation: As a director involved in preparing the prospectus, Mr. Ali must adhere to the regulatory requirements governing securities issuance. This includes disclosing all material information about the securities being offered and the issuing company, both positive and negative aspects. Failing to disclose relevant information accurately can mislead investors and violate securities laws. Therefore, Mr. Ali should ensure transparency and completeness in the prospectus, following guidelines set forth by regulatory bodies like the Securities Commission Malaysia.

Correct Answer: (a) To protect minority shareholders’ interests

Explanation: The correct answer is (a) To protect minority shareholders’ interests. The rules and regulations regarding take-overs, mergers, and compulsory acquisitions in Malaysia are primarily designed to safeguard the rights and interests of minority shareholders. This objective is crucial to ensure fairness and transparency in corporate transactions, preventing any abuse of power by majority shareholders or controlling parties. The regulations aim to provide minority shareholders with adequate information, fair treatment, and opportunities to make informed decisions concerning corporate restructuring activities. This objective aligns with the Securities Commission Malaysia’s (SC) commitment to maintaining market integrity and investor protection, as outlined in various securities laws and regulations, including the Capital Markets and Services Act 2007 (CMSA) and the Malaysian Code on Take-Overs and Mergers 2016 (the Code).

Correct Answer: (b) Securities Commission Malaysia (SC)

Explanation: The correct answer is (b) Securities Commission Malaysia (SC). The SC is the statutory body responsible for regulating and supervising the Malaysian capital markets, including corporate takeovers, mergers, and compulsory acquisitions. It operates under the purview of the Securities Commission Malaysia Act 1993 (SCMA) and is empowered to enforce securities laws, issue guidelines, and oversee compliance with regulatory requirements. As part of its regulatory mandate, the SC administers the Malaysian Code on Take-Overs and Mergers 2016 (the Code) and ensures that market participants adhere to its provisions. By entrusting regulatory oversight to the SC, Malaysia aims to maintain market integrity, protect investor interests, and foster a conducive environment for fair and transparent corporate transactions.

Correct Answer: (d) Minority shareholders must be treated fairly and receive a fair value for their shares

Explanation: The correct answer is (d) Minority shareholders must be treated fairly and receive a fair value for their shares. In compulsory acquisitions, where majority shareholders seek to acquire the shares held by minority shareholders, Malaysian regulations mandate that minority shareholders must be treated fairly and receive a fair value for their shares. This requirement aims to protect minority shareholders’ interests and ensure that they are not disadvantaged by the compulsory acquisition process. While minority shareholders may not have the option to reject the compulsory acquisition outright, they are entitled to receive compensation that reflects the fair value of their shares, as determined through independent valuation processes. Additionally, regulatory oversight and adherence to corporate governance standards help safeguard minority shareholders’ rights and promote transparency and fairness in compulsory acquisition transactions, in line with the principles outlined in the Malaysian Code on Take-Overs and Mergers 2016 (the Code) and other relevant securities regulations.

Correct Answer: b) Recommend gradually reducing exposure to technology stocks and diversifying the portfolio across multiple sectors.

Explanation: Concentration risk arises when a portfolio is heavily weighted in a single sector or asset class, increasing vulnerability to adverse events specific to that sector. Mr. Wong should prioritize diversification to mitigate concentration risk and enhance portfolio resilience. By recommending gradual reduction of exposure to technology stocks and diversification across multiple sectors, Mr. Wong aligns with prudent investment principles and regulatory guidelines promoting risk management and suitability. This approach allows the client to maintain potential for growth while reducing exposure to sector-specific risks. Option (b) is the correct answer as it reflects the importance of portfolio diversification for long-term wealth preservation and risk mitigation.

Correct Answer: c) Suggest integrating ESG factors into investment analysis alongside traditional financial metrics to identify sustainable investment opportunities.

Explanation: Integrating ESG criteria into investment decisions involves considering environmental, social, and governance factors alongside traditional financial metrics to assess the long-term sustainability and ethical impact of investments. Ms. Lim should guide the client to adopt a balanced approach that incorporates ESG considerations without sacrificing financial performance. By integrating ESG factors into investment analysis, investors can identify companies with strong sustainability practices, effective governance structures, and positive social impact, aligning with the client’s ethical investment objectives. This approach promotes responsible investing and supports sustainable business practices while pursuing financial returns. Option (c) is the correct answer as it emphasizes the importance of integrating ESG considerations into investment decision-making processes for ethical and sustainable investing.

Correct Answer: A) Encourage the client to gradually reduce exposure to fossil fuel companies while exploring investment opportunities in renewable energy sectors.

Explanation: Transitioning to a more environmentally sustainable portfolio involves gradually reducing exposure to industries with adverse environmental impacts, such as fossil fuels, while increasing investments in sectors promoting sustainability, such as renewable energy. Mr. Rahman should assist the client in implementing a phased approach to divestment and reallocation that considers both environmental objectives and financial implications. By gradually reducing exposure to fossil fuel companies and exploring opportunities in renewable energy sectors, the client can align their investment portfolio with their environmental values while managing potential risks and maximizing returns. Option (A) is the correct answer as it reflects a prudent approach to transitioning to a more environmentally sustainable investment portfolio.

Correct Answer: b) Advise the client against investing in companies with controversial labor practices to uphold ethical standards.

Explanation: As a licensed stockbroker, Mr. Tan has a responsibility to act in the best interests of the client and consider ethical implications in investment decisions. Investing in companies with controversial labor practices may conflict with the client’s ethical values and expose them to reputational and financial risks. By advising against such investments, Mr. Tan upholds ethical standards and promotes responsible investing practices. Option (b) is the correct answer as it emphasizes the importance of aligning investment decisions with ethical values and societal considerations.

Correct Answer: c) Suggest incorporating gender diversity metrics into investment analysis to identify companies with inclusive workplace policies.

Explanation: Investing in companies that prioritize gender diversity and equality can align with the client’s values while potentially generating financial returns. Ms. Lee should guide the client to incorporate gender diversity metrics, such as the representation of women in leadership roles and workplace policies promoting equality, into investment analysis. By selecting companies with strong commitments to gender diversity and inclusion, the client can support social causes while pursuing financial goals. Option (c) is the correct answer as it emphasizes the importance of integrating social considerations, such as gender diversity, into investment decision-making processes.

Correct Answer: b) Ms. Lim should emphasize the significant risks involved in forex trading, including volatility, geopolitical factors, and exchange rate fluctuations.

Explanation: The guidance note on the provision of investment advice stipulates that financial advisors must provide accurate and comprehensive information to clients or participants, enabling them to make informed investment decisions. Forex trading involves substantial risks due to factors such as currency volatility, geopolitical tensions, and interest rate fluctuations. Therefore, it is essential for Ms. Lim to highlight these risks to participants, ensuring they understand the potential downsides of engaging in forex trading. This approach aligns with the requirements of the Malaysian securities laws, particularly under the Capital Markets and Services Act 2007, which prioritize investor protection and transparency in financial advice.