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

Correct answer: c) Report the discrepancies to the Securities Commission Malaysia for further investigation.

Explanation: According to the Guidelines on Due Diligence Conduct for Corporate Proposals, if an investment advisor like Mr. Ali identifies discrepancies in the financial statements or any other information provided in a corporate proposal, it is his responsibility to report such discrepancies to the Securities Commission Malaysia. This is essential for maintaining the integrity of the securities market and protecting investors’ interests. Section 34(1) of the Securities Commission Malaysia Act 1993 empowers the Securities Commission to regulate and supervise the securities and derivatives markets in Malaysia, including investigating any irregularities or non-compliance with regulations.

Correct answer: b) Conduct independent research to assess the feasibility and potential impact of the company’s strategic plans.

Explanation: According to the Guidelines on Due Diligence Conduct for Corporate Proposals, it is essential for investors to conduct independent research to assess the feasibility and potential impact of a company’s strategic plans outlined in a corporate proposal. This includes evaluating the company’s track record, market conditions, and other relevant factors to determine the likelihood of successful execution. Section 34(2) of the Securities Commission Malaysia Act 1993 emphasizes the importance of investors making informed decisions based on accurate and reliable information. Therefore, Ms. Lim should conduct due diligence to evaluate the feasibility and potential impact of the company’s strategic plans before making investment decisions.

Correct answer: d) Regulatory risk.

Explanation:
When discussing the risks associated with investing in ASEAN debt securities, Ms. Tan should highlight regulatory risk as a specific consideration. Regulatory risk refers to the potential impact of changes in regulations or governmental policies on the value or performance of investments. Given the diverse regulatory environments across ASEAN countries, investors may face regulatory uncertainty or changes that could affect the issuance, trading, or taxation of debt securities. Therefore, it is essential for investors to understand and consider regulatory risk when evaluating ASEAN debt securities as part of their investment portfolio.

Correct answer: b) The SC oversees the issuance and trading of structured warrants to ensure fair and transparent markets.

Explanation: The Securities Commission Malaysia (SC) plays a crucial role in regulating Malaysia’s capital markets, including structured warrants. Under the Securities Commission Malaysia Act 1993, the SC is empowered to oversee the issuance and trading of structured warrants to ensure the integrity, efficiency, and transparency of the securities market. This includes regulating market participants, approving prospectuses, monitoring compliance with disclosure requirements, and enforcing rules and regulations to protect investors’ interests. By fulfilling its regulatory duties, the SC aims to maintain investor confidence, promote market stability, and facilitate capital formation in Malaysia’s securities market.

Correct answer: c) Leverage effect and limited lifespan.

Explanation: Structured warrants often exhibit a leverage effect, allowing investors to potentially amplify returns (or losses) relative to the movement of the underlying asset. Additionally, structured warrants have a limited lifespan, meaning they expire on a predetermined date. Unlike bonds with fixed maturity dates and interest payments (option a), structured warrants do not guarantee capital preservation (option b) and are not designed for diversification purposes (option d). Understanding these characteristics is crucial for investors to make informed decisions and manage risks associated with structured warrants.

Correct answer: b) No, structured warrants are generally not suitable for investors seeking stable income, especially those nearing retirement.

Explanation: Mr. Johnson, as a licensed financial advisor, has a duty to recommend suitable investments based on Mr. Lee’s investment objectives, risk tolerance, and financial situation. Structured warrants are typically associated with higher risk due to factors such as leverage and market volatility, making them unsuitable for investors seeking stable income, particularly individuals nearing retirement who may have a lower risk tolerance. This recommendation aligns with the principles of investor protection outlined in the Securities Commission Malaysia Act 1993, which emphasize the importance of providing suitable investment advice tailored to investors’ needs and circumstances.

Correct answer: a) RM0.50

Explanation: The intrinsic value of a call warrant (assuming it’s a call warrant) is calculated by subtracting the strike price from the current market price of the underlying asset. In this case, the intrinsic value would be RM4.00 – RM3.50 = RM0.50. If the current market price is below the strike price, the intrinsic value would be zero (option d). This concept is essential for investors to understand as it influences the pricing and trading of structured warrants in the market.

These questions cover various aspects of structured warrants, including their characteristics, regulation, and valuation, providing a comprehensive understanding for candidates preparing for the Malaysia Securities Exam’s Advisory Services (Rules and Regulations) module.

Correct answer: c) The potential risks associated with structured warrants, including market volatility and leverage.

Explanation: Before investing in structured warrants, Mr. Tan should carefully consider the potential risks involved, such as market volatility and leverage. Structured warrants are complex financial instruments that can amplify both gains and losses, making them unsuitable for all investors. While factors such as the issuer’s credit rating (option a), economic and market conditions (option b), and historical performance (option d) may provide valuable insights, understanding the specific risks associated with structured warrants is essential for making informed investment decisions. This aligns with the investor protection principles outlined in the Securities Commission Malaysia Act 1993, which emphasize the importance of providing accurate and transparent information to investors.

Correct answer: d) “In-the-money” refers to structured warrants with a strike price above the current market price of the underlying asset.

Explanation: In options trading, including structured warrants, “in-the-money” refers to warrants where the strike price is favorable compared to the current market price of the underlying asset. Specifically, for call warrants, it means the strike price is below the market price, while for put warrants, it means the strike price is above the market price. Conversely, “out-of-the-money” refers to warrants with a strike price unfavorable compared to the current market price, and “at-the-money” refers to warrants where the strike price is approximately equal to the market price. Understanding these terms is crucial for investors to assess the value and potential profitability of structured warrants, as per guidelines set by the Securities Commission Malaysia Act 1993, which aims to ensure transparency and investor protection in the securities market.

Correct answer: b) It offers a concise summary of the investment opportunity.

Explanation: The primary advantage of the Abridged Prospectus for investors like Ms. Lim is that it offers a condensed version of the full prospectus. This concise summary provides key information about the securities being offered, allowing investors to quickly grasp the essential details of the investment opportunity. As per the Securities Commission Malaysia Act 1993, the Abridged Prospectus must include crucial information such as the nature of the securities, terms of the offer, and risk factors, enabling investors to make informed decisions without having to wade through extensive documentation.

Correct answer: c) The risk factors associated with the securities being offered.

Explanation: Before making her investment decision, Ms. Wong should pay particular attention to the risk factors associated with the securities being offered, as outlined in the Abridged Prospectus. According to the Securities Commission Malaysia Act 1993, issuers are required to disclose relevant risk factors that could affect the investment’s performance or the issuer’s ability to meet its obligations. By carefully assessing these risk factors, Ms. Wong can better understand the potential challenges and uncertainties associated with the investment, enabling her to make a more informed decision aligned with her risk tolerance and investment objectives.

Correct answer: a) Mr. Tan must ensure that his client discloses any agreements or understandings related to the acquisition of shares.

Explanation:
The correct answer is (a) Mr. Tan must ensure that his client discloses any agreements or understandings related to the acquisition of shares. According to the Securities Commission Malaysia Act 1993, licensed investment advisors like Mr. Tan have a fiduciary duty to act in the best interests of their clients and to ensure compliance with regulations. Shareholders’ undertakings involve agreements or arrangements related to the acquisition of shares in a public-listed company, and it is crucial for transparency and fairness in the securities market that such information is disclosed. Failure to disclose such undertakings could lead to legal repercussions for both the advisor and the client. Therefore, Mr. Tan must ensure that his client discloses any such agreements or understandings.

Reference: Securities Commission Malaysia Act 1993, Section 33 – Disclosure of Interest.

Correct answer: b) Mr. Ahmad should caution his client about the risks involved in underwriting arrangements and encourage thorough due diligence before participation.

Explanation:
The correct answer is (b) Mr. Ahmad should caution his client about the risks involved in underwriting arrangements and encourage thorough due diligence before participation. Underwriting arrangements, such as rights issues, involve various risks that investors need to consider before committing their funds. As per the Securities Commission Malaysia Act 1993, licensed investment advisors have a duty to provide suitable advice to their clients, taking into account their financial circumstances and investment objectives. Mr. Ahmad should advise his client about the potential risks associated with underwriting, including the possibility of losses if the securities are undersubscribed or if market conditions change unfavorably. Encouraging thorough due diligence will help the client make an informed decision and mitigate risks associated with underwriting arrangements.

Reference: Securities Commission Malaysia Act 1993, Section 33 – Duty of Care.

Correct answer: c) Mr. Raj should incorporate information about shareholders’ undertakings into his analysis to assess the potential impact on the company’s share price and investor sentiment.

Explanation:
The correct answer is (c) Mr. Raj should incorporate information about shareholders’ undertakings into his analysis to assess the potential impact on the company’s share price and investor sentiment. Shareholders’ undertakings can provide valuable insights into the intentions and commitments of key stakeholders in a company, which may influence its future performance and market dynamics. According to the Securities Commission Malaysia Act 1993, securities analysts like Mr. Raj should consider all relevant information when evaluating the prospects of a company, including shareholders’ undertakings. By incorporating such information into his analysis, Mr. Raj can better assess the potential risks and opportunities associated with investing in the company’s shares. This comprehensive approach enables investors to make more informed decisions based on a thorough understanding of the factors affecting the company’s valuation and future prospects.

Reference: Securities Commission Malaysia Act 1993, Section 35 – Disclosure of Shareholdings.

Correct answer: d) Mr. Ali should ensure that the underwriting agreement is in compliance with the regulations and that all terms are clearly defined and disclosed to relevant parties.

Explanation:
The correct answer is (d) Mr. Ali should ensure that the underwriting agreement is in compliance with the regulations and that all terms are clearly defined and disclosed to relevant parties. Under the Securities Commission Malaysia Act 1993, senior managers overseeing underwriting activities have a responsibility to ensure compliance with regulatory requirements. This includes ensuring that the underwriting agreement is executed in accordance with the law and that all terms, conditions, and obligations are clearly defined and disclosed to relevant parties, including investors and regulatory authorities. Compliance with regulations helps maintain transparency, integrity, and investor confidence in the securities market. Therefore, Mr. Ali must prioritize adherence to regulations and ensure that the underwriting agreement is structured and executed in a manner that complies with the Securities Commission’s guidelines and requirements.

Reference: Securities Commission Malaysia Act 1993, Section 37 – Responsibilities of Senior Managers.

Correct answer: b) Mr. Lim should recommend his client to carefully review the shareholders’ undertaking and consider its implications on the company’s ownership structure and governance.

Explanation:
The correct answer is (b) Mr. Lim should recommend his client to carefully review the shareholders’ undertaking and consider its implications on the company’s ownership structure and governance. Shareholders’ undertakings can have significant implications for the company and its shareholders, as they may involve commitments or agreements regarding voting rights, transfer of shares, or corporate actions. According to the Securities Commission Malaysia Act 1993, investment advisors have a duty to provide prudent advice to their clients and ensure that they understand the risks and implications of their investment decisions. Therefore, Mr. Lim should advise his client to review the shareholders’ undertaking carefully, seek legal advice if necessary, and consider how it may affect their investment objectives and interests in the company.

Reference: Securities Commission Malaysia Act 1993, Section 33 – Duty of Investment Advisors.

Correct answer: c) Ms. Tan should disclose the discovery to the company issuing the shares and the Securities Commission Malaysia to ensure transparency in the underwriting process.

Explanation:
The correct answer is (c) Ms. Tan should disclose the discovery to the company issuing the shares and the Securities Commission Malaysia to ensure transparency in the underwriting process. Underwriting arrangements require transparency and integrity to maintain investor confidence and regulatory compliance. According to the Securities Commission Malaysia Act 1993, underwriters have a responsibility to disclose any material information that may affect the underwriting process or the interests of investors. Therefore, Ms. Tan should disclose the discovery of the shareholders’ undertaking to the company issuing the shares and the Securities Commission Malaysia to ensure that all relevant parties are aware of the situation. This disclosure promotes transparency and helps prevent potential conflicts of interest or market manipulation.

Reference: Securities Commission Malaysia Act 1993, Section 37 – Responsibilities of Underwriters.

Correct answer: b) Mr. Wong should assess how shareholders’ undertakings may affect the company’s ability to implement strategic initiatives and corporate governance practices.

Explanation:
The correct answer is (b) Mr. Wong should assess how shareholders’ undertakings may affect the company’s ability to implement strategic initiatives and corporate governance practices. Shareholders’ undertakings can have a significant impact on a company’s operations, governance structure, and long-term prospects. According to the Securities Commission Malaysia Act 1993, securities analysts have a duty to provide thorough and objective analysis to assist investors in making informed decisions. Therefore, Mr. Wong should consider how shareholders’ undertakings may influence the company’s strategic direction, management decisions, and shareholder relations. This comprehensive analysis will help investors understand the potential risks and opportunities associated with investing in the company’s shares and make well-informed investment decisions.

Reference: Securities Commission Malaysia Act 1993, Section 35 – Disclosure of Shareholdings.

Correct answer: (A) Review the replacement prospectus and inform Mr. Lim of any changes affecting the investment.

Explanation: Replacement prospectuses indicate significant changes or corrections to the original prospectus, which could impact the investment. As outlined in the Securities Commission Malaysia Act 1993, advisory services professionals have a duty to act in the best interests of their clients. Therefore, Ms. Tan should review the replacement prospectus to understand its implications for Mr. Lim’s investment and provide him with relevant information and advice. Ignoring the replacement prospectus could result in inadequate guidance and potential legal repercussions.

Correct answer: (D) Review the supplementary prospectus and assess its impact on Ms. Ng’s investment.

Explanation: Supplementary prospectuses often contain additional information or amendments to the original prospectus, which could impact the investment. Under the Securities Commission Malaysia Act 1993, advisory services professionals are required to act in the best interests of their clients. Therefore, Mr. Lee should review the supplementary prospectus to understand its implications for Ms. Ng’s investment and provide her with relevant information and advice. Ignoring the supplementary prospectus could result in inadequate guidance and potential legal consequences.

Correct answer: (b) Review the replacement prospectus and inform the client of any changes affecting the investment.

Explanation: Replacement prospectuses indicate significant changes or corrections to the original prospectus, which could impact the investment. As outlined in the Securities Commission Malaysia Act 1993, advisory services professionals have a duty to act in the best interests of their clients. Therefore, Ms. Lim should review the replacement prospectus to understand its implications for the client’s investment and provide relevant information and advice. Ignoring the replacement prospectus could result in inadequate guidance and potential legal repercussions.

Correct answer: c)

Explanation:
The correct answer is c) Applicants are required to demonstrate competency and comply with fit and proper criteria, including financial soundness, integrity, and competence. According to the Securities Commission Malaysia Act 1993, applicants for registration as dealers in securities must meet certain fit and proper criteria. This includes demonstrating competency, financial soundness, integrity, and competence. The Securities Commission Malaysia is responsible for assessing the application based on these criteria before granting registration. This ensures that only individuals and entities meeting the necessary standards are permitted to engage in dealing in securities.

Correct answer: c)

Explanation:
The correct answer is c) Applicants must disclose any criminal convictions, and the Securities Commission Malaysia will assess the relevance and severity of the convictions in relation to the individual’s fitness and propriety for registration. According to the Securities Commission Malaysia Act 1993, applicants for registration must demonstrate fitness and propriety, which includes factors such as integrity and honesty. While criminal convictions do not automatically disqualify an individual from registration, the Securities Commission Malaysia considers the nature, severity, and relevance of the convictions to the securities industry. Therefore, applicants are required to disclose all criminal convictions, and the Securities Commission Malaysia will evaluate them as part of the registration process.

Correct answer: b)

Explanation:
The correct answer is b) Mr. Lim must ensure compliance with registration requirements in both Malaysia and the client’s country of residence, if applicable, before providing advisory services. Under the Securities Commission Malaysia Act 1993, individuals providing investment advice must be registered with the Securities Commission Malaysia, regardless of the client’s residency status. Additionally, Mr. Lim must consider any registration or licensing requirements imposed by the client’s country of residence to ensure compliance with international regulations. Providing advisory services without proper registration or licensing in both jurisdictions may result in regulatory violations and legal consequences for Mr. Lim and his firm.

Correct answer: A)

Explanation:
The correct answer is A) Ms. Tan should inform the minor client that individuals under the age of 18 are not eligible to open trading accounts or engage in securities transactions without parental or legal guardian consent. According to the Securities Commission Malaysia Act 1993, individuals under the age of 18 are considered minors and are not legally competent to enter into contracts or engage in financial transactions without parental or legal guardian consent. Therefore, Ms. Tan must advise the minor client to obtain consent from a parent or legal guardian before proceeding with the registration process for opening a trading account and investing in securities. Failure to comply with this requirement may result in legal and regulatory consequences for both Ms. Tan and the client.

Correct answer: b) The “Use of Proceeds” section outlines how the company intends to utilize the funds raised through the offering.

Explanation: Ms. Chan should understand that the “Use of Proceeds” section in the prospectus outlines how the company intends to utilize the funds raised through the offering. This section provides transparency to investors regarding the allocation of capital and helps them evaluate the company’s business strategy and investment objectives. By disclosing the planned use of funds, the company demonstrates accountability to its shareholders and potential investors. Section 33(1)(b) of the Securities Commission Malaysia Act 1993 requires that the prospectus contains all material information, including details on the intended use of proceeds from the offering, to enable investors like Ms. Chan to make informed investment decisions.

Correct answer: D) Report the discrepancies to the Securities Commission for investigation.

Explanation: In accordance with the Prospectus Related Guidelines and the Securities Commission Malaysia Act 1993, Mr. Raj should report the discrepancies between the financial information provided in the prospectus and the company’s previous financial statements to the Securities Commission for investigation. It is essential to maintain the integrity and accuracy of information presented in the prospectus to protect investors’ interests. Section 36(3) of the Securities Commission Malaysia Act 1993 empowers the Commission to investigate any suspected contraventions of the law, including misrepresentation or inaccuracies in prospectuses. Reporting such discrepancies ensures transparency and compliance with regulatory requirements, safeguarding the integrity of the securities market.

Correct answer: b) Unauidited financial statements may contain inaccuracies and should be interpreted with caution.

Explanation: Mr. Wong should consider that unaudited financial statements in the prospectus may contain inaccuracies and should be interpreted with caution. According to the Prospectus Related Guidelines, unaudited financial statements lack the independent verification and assurance provided by audited financial statements. While unaudited financial statements are permitted in certain circumstances, investors should be aware that they may not reflect a complete and accurate picture of the company’s financial position. Section 33(1)(c) of the Securities Commission Malaysia Act 1993 requires that the prospectus contains all material information necessary for investors to make an informed decision, which may include unaudited financial information in some cases. However, investors like Mr. Wong should exercise due diligence and seek additional information or clarification if necessary before making investment decisions based on unaudited financial statements.

Correct answer: A) The omission of legal disputes is prohibited, and the company may face penalties for non-disclosure.

Explanation: Ms. Tan should consider that the omission of legal disputes from the prospectus is prohibited, and the company may face penalties for non-disclosure, in line with the Prospectus Related Guidelines. Section 33(1)(a) of the Securities Commission Malaysia Act 1993 mandates that the prospectus must contain all material information necessary for investors to make an informed decision. Legal disputes involving the company could potentially impact investors’ decisions and therefore qualify as material information that must be disclosed in the prospectus. Failure to disclose such information could result in legal and regulatory consequences for the company, including penalties imposed by the Securities Commission. Ms. Tan should advise investors to seek clarification from the company or legal counsel if there are concerns about the omission of legal disputes from the prospectus.

Correct answer: c) Inform the bond issuer to include maturity date information in the prospectus for clarity.

Explanation: Mr. Lim should inform the bond issuer to include maturity date information in the prospectus for clarity. The maturity date is a fundamental aspect of bond investments as it indicates when the issuer will repay the principal amount to bondholders. Omitting this information from the prospectus could lead to confusion and uncertainty for investors. In accordance with the Prospectus Related Guidelines, issuers are encouraged to provide comprehensive and accurate information in prospectuses to facilitate informed investment decisions. By advising the bond issuer to include maturity date information, Mr. Lim promotes transparency and investor confidence in the bond issuance process.