I85PREP
⌘ K
IFMP Stock Brokers Certification (SBC), Pakistan study materials
IFMP Stock Brokers Certification (SBC), Pakistan study resources

IFMP Stock Brokers Certification (SBC), Pakistan practice questions

One question at a time. Build your IFMP Stock Brokers Certification (SBC), Pakistan understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Introduction to Financial Markets

Under the settlement cycle used for ready-for-delivery trades on the Pakistan Stock Exchange, when must a buyer's funds normally be available to the clearing company relative to trade date?

  1. On the second business day after trade date Correct answer.
  2. On the trade date itself before the market opens
  3. On the fifth business day after trade date
  4. On the last business day of the settlement month

Explanation

Trades on the Pakistan Stock Exchange settle on a T+2 basis, meaning the exchange of securities and cash is completed two business days after the trade is executed. The clearing company collects buyer funds before pay-out on that second day so delivery can be made against payment.

Question 2Introduction to Financial Markets

A company listed on the Pakistan Stock Exchange declares a cash dividend of PKR 5 per share with a book closure date set for 20 March. An investor buys the shares on 18 March. How should the investor expect to be treated for this dividend?

  1. The investor is entitled to the dividend because the purchase settled before book closure
  2. The investor is not entitled to the dividend because the shares were bought after the ex-dividend date Correct answer.
  3. The investor receives half the dividend as a pro-rata adjustment
  4. Entitlement depends only on whether the broker credits the shares before month end

Explanation

Entitlement to a declared dividend is fixed by the share transfer register on the book closure date, and the ex-dividend date is set earlier so that purchases after it do not settle in time to be registered. A purchase made after the ex-date therefore carries no right to the declared dividend.

Question 3Introduction to Financial Markets

Which body is the apex regulator empowered to license stock brokers and approve the listing regulations under which the Pakistan Stock Exchange operates?

  1. Securities and Exchange Commission of Pakistan Correct answer.
  2. Pakistan Mercantile Exchange
  3. State Bank of Pakistan
  4. Central Depository Company

Explanation

The Securities and Exchange Commission of Pakistan is the statutory regulator of the capital markets and licenses intermediaries such as brokers and underwriters. It also approves the exchange's regulatory framework, while the State Bank regulates banking and the central depository handles custody and settlement records.

Question 4Introduction to Financial Markets

An investor places a market order to buy 500 shares of a thinly traded stock. Which risk is most directly associated with this order type in that situation?

  1. Execution may occur at a materially worse price than the last traded price Correct answer.
  2. The broker is entitled to reject the order because price limits are absent
  3. The order may remain unfilled indefinitely because no price is specified
  4. The order converts automatically into a limit order at the previous close

Explanation

A market order prioritises immediate execution over price, so in an illiquid stock the available offers may be far above the last traded price. The investor gains certainty of execution but accepts price uncertainty, which is the defining trade-off of a market order.

Question 5Introduction to Financial Markets

In the primary market, an issuer sells shares to investors for the first time through an initial public offering. Which statement best describes the cash flow in that transaction?

  1. Proceeds go to existing shareholders who are selling down their stake
  2. Proceeds are held by the exchange as a guarantee fund
  3. Proceeds are returned to investors if the secondary market price later falls
  4. Proceeds go to the issuing company, which uses them for its stated purposes Correct answer.

Explanation

In a primary market issue the securities are created and sold by the issuer, so the subscription money is received by the company and becomes new capital. Secondary market trades, by contrast, transfer existing shares between investors without raising fresh funds for the issuer.

Question 6Introduction to Financial Markets

Which instrument represents an ownership claim on a company, ranks behind all creditors for repayment, and typically carries voting rights at general meetings?

  1. Term finance certificate
  2. Treasury bill
  3. Ordinary share Correct answer.
  4. Commercial paper

Explanation

An ordinary share is an equity claim that gives the holder residual interest in the company after all creditors are paid, together with voting rights at shareholder meetings. Debt instruments such as term finance certificates, commercial paper and treasury bills create creditor claims with contractual repayment priority.

Question 7Introduction to Financial Markets

A broker's client wants to buy shares but has only 40 percent of the required value in cash. The broker arranges financing for the balance against the shares as collateral. Which market practice does this describe?

  1. Margin trading Correct answer.
  2. Arbitrage
  3. Underwriting
  4. Short selling

Explanation

Margin trading allows an investor to buy securities by paying part of the value and borrowing the remainder through the broker, with the purchased securities pledged as collateral. The broker monitors the margin ratio and can call for additional funds if the collateral value declines.

Question 8Introduction to Financial Markets

An investor instructs a broker to sell 1,000 shares only if the price reaches PKR 150 or higher. How should this instruction be classified?

  1. Limit order Correct answer.
  2. Stop-loss order
  3. Iceberg order
  4. Market order

Explanation

A sell limit order sets a minimum acceptable price, so the shares are offered only at PKR 150 or better and may remain unexecuted if the market never reaches that level. A stop order, by contrast, becomes a market order once a trigger price is touched.

Question 9Introduction to Financial Markets

Which feature distinguishes the Pakistan Mercantile Exchange from the Pakistan Stock Exchange?

  1. It trades commodity futures contracts rather than listed equity shares Correct answer.
  2. It lists shares of unlisted companies for retail investors
  3. It conducts settlement for all equity trades on the stock exchange
  4. It sets the policy rate for the banking system

Explanation

The Pakistan Mercantile Exchange is a commodity derivatives market where futures contracts on items such as gold, crude oil and agricultural products are traded. Equity shares are listed and traded on the Pakistan Stock Exchange, which is a separate venue.

Question 10Introduction to Financial Markets

An index is constructed as a market-capitalisation weighted index. A company with a large market capitalisation doubles in price while all other constituents are unchanged. What is the most likely effect on the index?

  1. The index falls because higher prices reduce the number of shares outstanding
  2. The index is unaffected because averaging removes individual price effects
  3. The index change depends solely on the number of companies in the index
  4. The index rises by a small amount because large-cap moves dominate the weighting Correct answer.

Explanation

In a market-capitalisation weighted index, each constituent's influence is proportional to its market value, so a large company's price move shifts the index more than a small company's move. Doubling a heavily weighted stock therefore pushes the index up, with the size of the move reflecting that weight.

Question 11Introduction to Financial Markets

A company announces a 1-for-5 rights issue at a subscription price below the current market price. What is the main purpose of pricing the issue below market?

  1. To reduce the number of shares outstanding after the issue
  2. To make the entitlement attractive so shareholders subscribe and the company raises the target funds Correct answer.
  3. To penalise existing shareholders who decline to subscribe
  4. To transfer control of the company to the underwriter

Explanation

Rights are offered to existing shareholders in proportion to their holdings, and a discount to the market price encourages take-up so the issuer can raise the intended capital. The theoretical ex-rights price adjusts downward to reflect the discounted subscription, which is why the share price falls after the issue.

Question 12Introduction to Financial Markets

A client places a good-till-cancelled order with a broker. Which statement correctly describes how this order behaves?

  1. It remains active across trading sessions until executed or explicitly cancelled Correct answer.
  2. It is converted into a market order at the end of the day
  3. It executes only during the pre-open auction
  4. It is cancelled automatically at the close of the same trading session

Explanation

A good-till-cancelled order stays live in the broker's order book across successive trading days until it is filled or the client cancels it. Day orders, by contrast, lapse at the close of the session in which they are entered.

Question 13Introduction to Financial Markets

A broker receives a client's order to buy shares and simultaneously executes a matching sell order from its own proprietary account at a price slightly better than the market. Which concern does this practice raise under market conduct rules?

  1. It is a routine crossing that requires no disclosure or client consent
  2. It may constitute front-running or misuse of client order information and is prohibited Correct answer.
  3. It is permitted provided the trade is reported after settlement
  4. It is allowed only for orders above a specified large-value threshold

Explanation

Using knowledge of a client's pending order to trade for the firm's own account ahead of or against that order is an abuse of client information and breaches fair dealing obligations. Brokers must manage conflicts of interest and obtain proper consent for any agency cross, executed transparently on the exchange.

Question 14Introduction to Financial Markets

The State Bank of Pakistan raises its policy rate sharply. Which transmission effect on the equity market is most consistent with standard financial analysis?

  1. Equity prices rise immediately because companies earn more interest on cash balances
  2. Equity valuations generally face downward pressure as discount rates rise and bond yields become more competitive Correct answer.
  3. Listed companies become cheaper to finance because borrowing costs fall
  4. Dividend yields automatically rise to match the new policy rate

Explanation

A higher policy rate lifts the risk-free rate used to discount future cash flows, which lowers present valuations, and it raises yields on fixed-income alternatives that compete with equities. Financing costs for leveraged companies also increase, adding further pressure on earnings.

Question 15Introduction to Financial Markets

A listed company proposes to buy back part of its own share capital through the exchange. Which effect should an analyst most reasonably expect, all else equal?

  1. Market capitalisation increases by the value of the repurchased shares
  2. Earnings per share may rise because the same earnings are spread over fewer shares Correct answer.
  3. Total shareholders' equity increases because the shares are cancelled
  4. The company's debt-to-equity ratio falls because cash is retained

Explanation

A buy-back reduces the number of shares outstanding, so if net profit is unchanged the earnings attributable to each remaining share increase. The cash spent reduces the company's assets, and the repurchased shares are cancelled, which lowers rather than raises total equity.

Question 16Introduction to Financial Markets

Which document must a company publish before an initial public offering so that investors can assess the issuer's business, financials, risks and the use of proceeds?

  1. Prospectus Correct answer.
  2. Margin agreement
  3. Trust deed
  4. Custody agreement

Explanation

A prospectus is the statutory disclosure document for a public offer of securities, containing the issuer's business description, audited financials, risk factors and the purpose of the issue. Investors rely on it to make an informed subscription decision, and it is approved by the regulator before the offer opens.

Question 17Introduction to Financial Markets

An investor wants protection against a sharp fall in a stock she owns but does not want to sell the shares. Which exchange-traded strategy is most directly suited to this objective?

  1. Buying a put option on the stock Correct answer.
  2. Buying a call option on the stock
  3. Writing a put option on the stock
  4. Buying a futures contract on the stock

Explanation

A put option gives the holder the right to sell the underlying at the strike price, so its value rises as the stock falls and offsets losses on the held shares. This provides downside protection while the investor retains ownership and any dividend entitlement.

Question 18Introduction to Financial Markets

Which statement correctly describes the role of the Central Depository Company in Pakistan's equity market?

  1. It holds shares in electronic book-entry form and facilitates transfer between investor accounts Correct answer.
  2. It matches buy and sell orders and determines the opening price each day
  3. It lends funds to brokers for margin trading
  4. It approves prospectuses for initial public offerings

Explanation

The Central Depository Company maintains securities in dematerialised book-entry form and transfers ownership electronically between participant accounts, removing the need for physical certificates. Order matching is performed by the exchange's trading system, while prospectus approval rests with the regulator.

Question 19Introduction to Financial Markets

A stock trades at PKR 100 and an investor sells it short, expecting a decline. The price instead rises to PKR 130 and the position is closed. Ignoring costs, what is the outcome and which risk does this illustrate?

  1. A loss of PKR 30 per share, illustrating the theoretically unlimited loss risk of short selling Correct answer.
  2. A profit of PKR 30 per share, illustrating leverage benefit
  3. No profit or loss, because short positions are settled at the original price
  4. A loss of PKR 100 per share, illustrating the maximum loss of a short position

Explanation

A short seller profits only if the price falls, so a rise from PKR 100 to PKR 130 produces a loss of PKR 30 per share on closing. Because a share price can in principle rise without limit, the potential loss on an uncovered short position is theoretically unbounded.

Question 20Introduction to Financial Markets

Which of the following best explains why a stock exchange operates a circuit breaker or price limit mechanism?

  1. To prevent foreign investors from participating in the market
  2. To fix the closing price of each stock at the previous day's level
  3. To guarantee that every investor earns a minimum return
  4. To pause trading temporarily when prices move beyond set thresholds, allowing order flow and information to stabilise Correct answer.

Explanation

Circuit breakers halt or pause trading when a stock or the index moves beyond predetermined thresholds, giving participants time to absorb information and reducing disorderly panic-driven trading. They are risk-management tools and do not guarantee returns or fix prices.

Question 21Regulatory Framework

Under the SECP regulatory framework, which body is the apex regulator of Pakistan's securities market and licenses stock brokers?

  1. The Central Depository Company
  2. The Securities and Exchange Commission of Pakistan Correct answer.
  3. The Pakistan Stock Exchange Limited
  4. The State Bank of Pakistan

Explanation

The SECP is the statutory regulator of the securities market under the Securities and Exchange Commission of Pakistan Act, and it licenses and supervises brokers. The SBP regulates banking and monetary policy, while PSX and CDC are market infrastructure institutions operating under SECP oversight.

Question 22Regulatory Framework

A broker's licence issued by the SECP is granted to the broker as a legal entity. Which statement best describes what this licence permits?

  1. It permits the broker to conduct any financial service without further approval
  2. It permits the broker to operate only on the exchange where it first listed
  3. It permits the broker to carry on the specific regulated activity for which it is licensed, subject to continuing conditions Correct answer.
  4. It permits the broker to accept client funds without any segregation requirement

Explanation

A broker licence authorises a defined regulated activity and remains subject to continuing obligations and conditions imposed by the SECP. It is not a blanket authorisation for all financial services, and client money handling remains subject to segregation and other conduct rules.

Question 23Regulatory Framework

In Pakistan's securities market, which entity acts as the central depository responsible for electronic book-entry settlement of securities?

  1. The Securities and Exchange Commission of Pakistan
  2. The Central Depository Company of Pakistan Limited Correct answer.
  3. The National Clearing Company of Pakistan Limited
  4. The Pakistan Mercantile Exchange

Explanation

CDC maintains securities in electronic book-entry form and provides depository and custody services. NCCPL handles clearing and settlement of trades, while PMEX deals in commodities and the SECP is the regulator.

Question 24Regulatory Framework

A client asks a broker whether the broker can guarantee a fixed minimum return on an equity portfolio. Under Pakistani regulatory conduct standards, how should the broker respond?

  1. The broker may guarantee returns only for portfolios above a set size
  2. The broker may guarantee returns if approved by the exchange
  3. The broker may guarantee returns if the client signs a written waiver
  4. The broker must refuse, because guaranteeing returns on equity investments is prohibited conduct Correct answer.

Explanation

Brokers are prohibited from assuring clients of returns or profits on securities, because such assurances misrepresent the risk inherent in market investment. No client waiver or exchange approval can legitimise a guaranteed-return promise.

Question 25Regulatory Framework

Which of the following best describes the purpose of know-your-customer (KYC) requirements in broker-client onboarding?

  1. To determine the client's eligibility for margin financing limits
  2. To satisfy exchange listing requirements for the broker's own shares
  3. To identify and verify the client so that money laundering and terrorist financing risks are managed Correct answer.
  4. To assess whether the client is likely to generate sufficient brokerage commission

Explanation

KYC is an anti-money-laundering and counter-terrorist-financing control requiring identification and verification of clients and understanding of their activity. It is not a commercial screening tool, a margin criterion, or a listing obligation.

Question 26Regulatory Framework

A broker maintains a client's cash in the broker's own bank account alongside firm funds. Which regulatory principle does this most directly breach?

  1. The requirement to route all orders through a single exchange
  2. The requirement to obtain prior SECP approval for each trade
  3. The requirement to publish daily net capital figures
  4. The requirement to segregate client money from the broker's own money Correct answer.

Explanation

Client money must be held separately from the broker's proprietary funds so that it remains identifiable and protected if the firm fails. Commingling breaches the client-asset segregation principle and undermines investor protection.

Question 27Regulatory Framework

Which statement correctly describes the relationship between the SECP and the Pakistan Stock Exchange in the regulatory architecture?

  1. The SECP and the exchange are co-equal regulators with no hierarchy
  2. The exchange regulates the SECP through its listing rules
  3. The SECP regulates the exchange, which in turn regulates and monitors its trading members Correct answer.
  4. The exchange sets statutory law while the SECP enforces it

Explanation

Pakistan follows a layered model in which the SECP is the statutory regulator and the exchange performs front-line regulation and monitoring of its members under SECP oversight. The exchange does not regulate the regulator, and it does not make statutory law.

Question 28Regulatory Framework

A client instructs a broker to execute a purchase in a security that the broker has not yet verified as permitted for that client's account category. What is the broker's most appropriate compliance action?

  1. Execute the order and record the client's verbal assurance
  2. Route the order to another broker to avoid the restriction
  3. Execute the order and verify eligibility afterwards
  4. Hold the order until eligibility and account restrictions are verified Correct answer.

Explanation

Brokers must verify that an order is permissible for the client's account before execution, so pre-trade checks are required. Executing first and verifying later, or relying on the client's assurance, defeats the control.

Question 29Regulatory Framework

A broker's compliance officer discovers that a client has been trading through accounts opened in the names of several unrelated individuals who share one controller. What is the most appropriate regulatory response?

  1. Close all accounts immediately without further inquiry
  2. Report the client to the exchange's listing department
  3. Treat the arrangement as potential layering and escalate for enhanced due diligence and possible reporting Correct answer.
  4. Accept the arrangement because each account was individually KYC-verified

Explanation

Multiple accounts controlled by one person under different names can indicate layering or concealment of beneficial ownership, so enhanced due diligence and escalation are required. Individual KYC verification of each account does not resolve the beneficial ownership question.

Question 30Regulatory Framework

Under the regulatory framework, a broker proposes to appoint a new director who was previously associated with a firm whose licence was cancelled for fraud. What should the broker do before the appointment takes effect?

  1. Appoint the director and disclose the history at the next annual inspection
  2. Ask the exchange to waive the fit-and-proper requirement
  3. Submit a fit-and-proper assessment to the SECP and await non-objection Correct answer.
  4. Appoint the director because past conduct of a different firm is irrelevant

Explanation

Directors and key persons must satisfy fit-and-proper criteria, and the broker must obtain regulatory clearance before the appointment becomes effective. Past regulatory action against a person is directly relevant to that assessment.

Question 31Regulatory Framework

A broker wants to use a client's idle cash in the client's account to fund the broker's proprietary trading position for two days. Which regulatory position applies?

  1. This is permitted if the client is informed after the fact
  2. This is permitted if the position is closed within two days
  3. This is permitted if the broker earns no profit from the position
  4. This is prohibited because client funds may not be used for the broker's own trading Correct answer.

Explanation

Client funds must be used only for the client's purposes and cannot be applied to the broker's proprietary activities, regardless of duration. Short duration or absence of profit does not cure the misuse of client assets.

Question 32Regulatory Framework

A broker executes a client order on the exchange and the trade fails to settle on the settlement date because the client lacks funds. Which party is primarily responsible to the clearing house for the resulting obligation?

  1. The central depository, which guarantees all settlements
  2. The clearing member broker, who has a direct obligation to the clearing house Correct answer.
  3. The client, who has a direct contractual obligation to the clearing house
  4. The exchange, which absorbs all failed trades

Explanation

Clearing houses face clearing members, not underlying clients, so the broker as clearing member must meet the settlement obligation. The broker then has a separate recourse claim against the defaulting client under its client agreement.

Question 33Regulatory Framework

A broker's research analyst recommends a stock in a report while the broker's proprietary desk holds a large position in the same stock. Which control most directly addresses the regulatory concern?

  1. Disclosing the proprietary holding and maintaining information barriers between research and trading Correct answer.
  2. Requiring the analyst to hold the stock personally
  3. Publishing the report only to institutional clients
  4. Prohibiting the broker from ever holding proprietary positions

Explanation

Conflicts of interest arising from proprietary positions must be managed through disclosure and organisational separation of research from trading. Personal holdings by the analyst or restricting distribution do not manage the firm-level conflict.

Question 34Regulatory Framework

A client complains that a broker executed a trade at a price materially worse than the prevailing market price without explanation. Under best-execution principles, what must the broker be able to demonstrate?

  1. That the execution terms were the best reasonably available under the circumstances and were properly recorded Correct answer.
  2. That the exchange approved the price after execution
  3. That the trade was profitable for the broker
  4. That the client had signed a general risk disclosure statement

Explanation

Best execution requires the broker to take reasonable steps to obtain the best available terms and to be able to evidence how the order was handled. A generic risk disclosure or exchange post-approval does not satisfy that obligation.

Question 35Regulatory Framework

Which of the following is the most accurate description of the SECP's powers when a broker repeatedly breaches client-money rules?

  1. It may only issue a warning letter with no financial consequence
  2. It may refer the matter solely to the exchange, which alone can sanction the broker
  3. It may suspend the broker only with the prior consent of the broker's clients
  4. It may impose penalties, restrict the licence, or cancel the licence after due process Correct answer.

Explanation

The SECP has a graduated range of enforcement tools, from penalties and directions to suspension or cancellation of the licence, exercised after due process. It is not confined to warnings, and client consent is not a precondition for regulatory action.

Question 36Regulatory Framework

A broker offers a client a discretionary managed account. Which regulatory safeguard is most relevant to this service?

  1. A requirement that the broker guarantee a minimum return
  2. A blanket waiver of all client complaints
  3. An oral understanding that the broker may trade as it sees fit
  4. A documented mandate defining the broker's discretion and periodic reporting to the client Correct answer.

Explanation

Discretionary arrangements require a clear written mandate setting the scope of authority, together with reporting so the client can monitor activity. Oral understandings and blanket complaint waivers undermine investor protection, and return guarantees are prohibited.

Question 37Regulatory Framework

Under the framework governing brokers' record-keeping, which statement is most accurate?

  1. Records of client orders and transactions must be maintained for the prescribed retention period and be available to the regulator Correct answer.
  2. Only paper records are acceptable for regulatory inspection
  3. Records may be discarded once the client confirms the contract note
  4. Records need be kept only for transactions above a monetary threshold

Explanation

Brokers must maintain complete and accurate records of orders and transactions for the prescribed period and produce them on regulatory request. Client confirmation does not shorten retention, electronic records are acceptable, and no monetary threshold exempts small trades.

Question 38Regulatory Framework

A broker's agent solicits clients in a city where the broker has no branch and collects cash from clients at the agent's office. Which regulatory concern is most significant?

  1. The agent's location, because brokers may operate from only one city
  2. Unauthorised collection of client cash outside controlled channels and possible unapproved agent activity Correct answer.
  3. The absence of a branch, because branches are prohibited
  4. The agent's collection of cash, because brokers may not accept cash at all

Explanation

Cash collection through unauthorised agents creates misappropriation and AML risks and may breach rules on authorised representatives and payment channels. Broker operations are not confined to one city, and cash acceptance is not absolutely prohibited but must follow controlled procedures.

Question 39Regulatory Framework

A broker receives a large block order from a client and simultaneously buys the same security for its own account ahead of executing the client order. What regulatory breach does this most clearly represent?

  1. Arbitrage, because the broker captured a price difference
  2. Market making, because the broker provided liquidity
  3. Front running, because the broker exploited knowledge of the client order for its own benefit Correct answer.
  4. Churning, because the broker traded excessively in the client account

Explanation

Trading ahead of a known client order to profit from its expected price impact is front running and breaches duties of fair dealing and priority of client orders. Churning concerns excessive trading for the client, while market making and arbitrage do not describe exploiting confidential order information.

Question 40Regulatory Framework

Which of the following best explains why the regulatory framework requires brokers to maintain a minimum net capital or financial resource requirement?

  1. To set a ceiling on the number of clients a broker may serve
  2. To fund the exchange's marketing budget
  3. To guarantee that clients earn a minimum return on their portfolios
  4. To ensure the broker can meet obligations to clients and the clearing house without becoming insolvent Correct answer.

Explanation

Minimum financial resource requirements are prudential safeguards ensuring the broker can absorb losses and meet obligations to clients and the clearing house. They are not return guarantees, funding mechanisms for the exchange, or client caps.

Question 41Regulatory Framework

A broker discovers an error in a client's contract note showing a purchase when the client had instructed a sale. What is the most appropriate regulatory and client-protective response?

  1. Ask the client to sign a waiver of any claim before correction
  2. Correct the record silently without informing the client
  3. Promptly correct the record, notify the client, and rectify any resulting loss in line with the client agreement Correct answer.
  4. Leave the record unchanged because the trade has already settled

Explanation

Errors must be corrected promptly, disclosed to the affected client, and any resulting loss rectified according to the client agreement and regulatory requirements. Silent correction or pressure to waive claims compounds the breach.

Question 42Regulatory Framework

A listed company's director shares unpublished price-sensitive information with a broker, who then trades in the security. Which regulatory characterisation is most accurate?

  1. The broker's trade is lawful because the director authorised the disclosure
  2. The broker's trade is lawful if executed through a discretionary account
  3. The broker has engaged in insider dealing, which is prohibited under the securities law Correct answer.
  4. The broker has merely acted on a market rumour and committed no breach

Explanation

Trading on unpublished price-sensitive information obtained from an insider constitutes insider dealing and is prohibited. Authorisation by the source, the use of a discretionary account, or calling the information a rumour does not legitimise the conduct.

Question 43Regulatory Framework

A broker holds client securities in its own name at the depository in a pool rather than in segregated sub-accounts. What is the principal regulatory risk this creates?

  1. Loss of the broker's eligibility to trade on the exchange
  2. Increased transaction costs for the broker on each trade
  3. Difficulty in identifying and returning each client's securities on the broker's insolvency Correct answer.
  4. Automatic cancellation of the clients' KYC records

Explanation

Segregated client accounts exist so that each client's assets remain identifiable and returnable if the broker fails. Pooling in the broker's own name creates a shortfall and reconciliation risk, which is why segregation rules apply.

Question 44Regulatory Framework

A broker's proprietary trading desk learns from the settlement department that a large client is about to default on a purchase, information not yet public. The desk sells the security short. Which regulatory concern is most directly engaged?

  1. Misuse of confidential information obtained within the firm, engaging market-abuse and information-barrier rules Correct answer.
  2. Excessive commission generation, engaging churning rules
  3. Inadequate net capital, engaging prudential rules
  4. Failure to segregate client cash, engaging custody rules

Explanation

Non-public information about a client's impending default is material and confidential, and trading on it engages market-abuse prohibitions and the firm's duty to maintain information barriers. The other issues concern different rules and are not the direct concern here.

Question 45Regulatory Framework

A broker outsources its order-management system to a third-party vendor. Under the regulatory framework, which statement best describes the broker's responsibility?

  1. The broker remains fully responsible for compliance and must manage the outsourcing risk, including vendor oversight Correct answer.
  2. The broker is responsible only if the vendor is located in Pakistan
  3. Responsibility transfers to the vendor because it operates the system
  4. Responsibility transfers to the SECP because it approves technology vendors

Explanation

Outsourcing does not transfer regulatory responsibility; the broker must conduct due diligence, contract for controls and audit access, and monitor the vendor. The regulator does not assume responsibility by approving a vendor, and location does not determine accountability.

Question 46Regulatory Framework

Under the SECP's regulatory framework for stock brokers, which document primarily sets out the licensing conditions and conduct requirements for a broker?

  1. The Pakistan Stock Exchange's listing regulations
  2. The broker's own internal compliance manual
  3. The Securities Act, 2015 and the SECP's Broker Licensing Regulations Correct answer.
  4. The State Bank of Pakistan's prudential regulations

Explanation

The Securities Act, 2015 provides the statutory basis for securities market regulation, and the SECP's Broker Licensing Regulations (or equivalent) specify the licensing conditions and conduct requirements for brokers. Internal manuals implement these rules but do not create them, and PSX listing regulations govern listed companies, not broker licensing.

Question 47Regulatory Framework

A broker receives a complaint from a client about unauthorized trading in the client's account. Under the regulatory framework, what is the broker's most appropriate first step?

  1. Ignore the complaint because the client signed a risk disclosure
  2. Log the complaint in the complaints register and initiate an internal investigation Correct answer.
  3. Refer the client directly to the SECP without any internal review
  4. Immediately reimburse the client for all losses without investigation

Explanation

Brokers are required to maintain a complaints register and have a documented procedure for handling client complaints, including internal investigation. Reimbursing without investigation or ignoring the complaint would breach conduct requirements, and direct referral to the SECP bypasses the broker's own complaint-handling obligations.

Question 48Regulatory Framework

Which of the following best describes the SECP's role in relation to the Pakistan Stock Exchange (PSX) under the regulatory framework?

  1. The SECP is the apex regulator that oversees the PSX and approves its regulations Correct answer.
  2. The SECP and PSX have identical enforcement powers over brokers
  3. The PSX has autonomous rule-making power without SECP oversight
  4. The SECP operates the trading platform while the PSX sets listing rules

Explanation

The SECP is the apex regulator of the securities market and oversees the PSX, including approving amendments to PSX regulations. The PSX operates the exchange and enforces its own rules, but it does so under the SECP's oversight, and the two bodies do not have identical enforcement powers.

Question 49Regulatory Framework

A broker's client wants to open a trading account. Under the regulatory framework, which of the following is a mandatory requirement before the account can be activated?

  1. The client must complete a risk profile and provide know-your-customer documentation Correct answer.
  2. The client must sign a power of attorney in favor of the broker
  3. The client must deposit a minimum of PKR 1 million
  4. The client must provide a bank guarantee

Explanation

Brokers are required to conduct know-your-customer (KYC) checks and assess the client's risk profile before opening an account, as part of anti-money laundering and suitability requirements. A bank guarantee, a minimum deposit, or a power of attorney are not universal mandatory conditions for account opening.

Question 50Regulatory Framework

A broker executes a client's buy order for 1,000 shares at PKR 50 per share. The broker charges a commission of 0.5% and applicable taxes. Which document must the broker provide to the client to confirm the transaction?

  1. A contract note containing the details of the trade Correct answer.
  2. A verbal confirmation over the phone
  3. A monthly account statement only
  4. A copy of the broker's internal trade blotter

Explanation

The regulatory framework requires brokers to issue a contract note for each transaction, showing details such as the security, quantity, price, commission, and taxes. A monthly statement summarizes activity but does not replace the per-trade contract note, and verbal confirmation or internal blotters are not sufficient.