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CME-1B: Saudi Capital Market Laws and Regulations (General): free practice test

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01A resident of Riyadh phones in an order to buy shares listed on a regulated stock exchange in another country. With no agreement between the Authority and the foreign authority, what is the position under Article 26?

Practice question Unit: Introduction to the Capital Market Authority

  1. AThe shares are subject to the Law, because the order originated in the Kingdom

    Article 26 says the opposite: an order from within the Kingdom does not bring the shares under the Law.

  2. BThe shares are not subject to the Law, although the order came from the Kingdom ✓ Correct answer

    Correct. Article 26 exempts securities listed or traded in a regulated market abroad, even when orders come by phone or electronically from the Kingdom.

  3. CThe shares are subject to the Law only if the order is placed electronically and not by phone

    Article 26 treats telephone and electronic orders alike.

  4. DThe shares are subject to the Law only if the buyer is a Saudi national

    Article 26 does not depend on the buyer's nationality.

Reference: Capital Market Law, Article 26; CME-1B workbook, ch. 1, section 1

02Al Riyada Financial Company commits to buy any shares that investors do not subscribe for in a new public offering. Which securities activity is the company carrying on through this commitment?

Practice question Unit: Securities Business Regulations

  1. AArranging

    Arranging covers introducing the parties to an offering or arranging its underwriting. Here the company itself undertakes to buy the unsold shares.

  2. BManaging

    Managing requires discretionary management of a security belonging to another person or operating investment funds, and neither is present.

  3. CDealing ✓ Correct answer

    Underwriting securities is part of dealing under Article 2, so the company is dealing in the shares as principal.

  4. DCustody

    Custody concerns safeguarding assets belonging to another person, and the company holds no one's assets here.

Reference: Securities Business Regulations, Article 2(1); CME-1B workbook, ch. 2, section 1

03Al-Riyada Financial Company applies for authorisation to carry out managing investments and operating funds. What is the minimum paid-up capital it must have?

Practice question Unit: Authorisation

  1. ASAR 50 million

    This amount is required for dealing and custody, not for managing investments and operating funds.

  2. BCapital covering its expected expenses for one year

    This applies to an applicant managing investments only, without operating funds; here the company also operates funds.

  3. CSAR 10 million

    The Regulations do not set this figure for any activity, and the minimum here is higher.

  4. DSAR 20 million ✓ Correct answer

    Correct. Managing investments and operating funds requires at least SAR 20 million of paid-up capital.

Reference: Capital Market Institutions Regulations, Article 6(g); CME-1B workbook, ch. 3, section 1.2

04Al-Nokhba Investment Company carried out a transaction for a client in which it had an actual conflict of interest. It told him orally and he agreed orally. He later suffered a loss because of the conflict. What is the firm's position under the fiduciary duty on conflicts of interest and Article 41?

Practice question Unit: Regulated Activities

  1. AIt must pay the client the value of the loss, since nothing was in writing ✓ Correct answer

    Correct. The institution must pay the value of the loss unless it disclosed the conflict in writing and the client agreed in writing to proceed, and that did not happen.

  2. BIt owes nothing, because the client agreed to proceed with the transaction

    Oral agreement is not enough. Article 41 requires the client's written agreement to relieve the institution.

  3. CIt bears half of the loss, because the client took part in the decision to proceed

    The Regulations do not split the loss in half. Either the institution pays it in full or the conditions for relief are met.

  4. DIt owes nothing, because the transaction was carried out for the client's account, not the firm's

    That the transaction was for the client's account does not remove liability. The conflict itself calls for written disclosure and written agreement.

Reference: Capital Market Institutions Regulations, Annex 5.4, item 2, and Article 41(b) and (d); CME-1B workbook, ch. 4, section 1.1

05The Board of the Authority is reviewing a prospectus for Al-Qimma Industrial Company. It contains every item required by Article 42, but it states the company's revenue at a figure far above the true one. May the Board reject it?

Practice question Unit: Regulated Activities

  1. ANo, because the prospectus contains all the information Article 42 requires

    Having every item does not prevent rejection. Incorrect information on material matters is a separate ground.

  2. BNo, because the only ground for rejection is unpaid prospectus fees

    Unpaid fees are one ground for rejection, not the only one.

  3. CYes, because it contains incorrect information on material matters ✓ Correct answer

    Correct. The Board may reject a prospectus that contains incorrect information on material matters or false or misleading statements.

  4. DYes, but only after the issuer has sold the securities to investors

    Rejection does not depend on any sale. The issuer may not sell before the prospectus is approved in the first place.

Reference: Capital Market Law, Article 44(b) with Article 42; CME-1B workbook, ch. 4, section 3.1.1

06Al-Riyada Financial Company will offer units of a private fund by private placement under the Investment Funds Regulations. Which subscription structure meets the private placement conditions for retail clients?

Practice question Unit: Regulated Activities

  1. AUp to SAR 250,000 per retail client, and not more than 30% of total cash subscriptions

    SAR 250,000 per retail client exceeds the SAR 200,000 maximum per offeree.

  2. BUp to SAR 180,000 per retail client, and not more than 45% of total cash subscriptions ✓ Correct answer

    SAR 180,000 does not exceed 200,000 and 45% does not exceed 50%, so both conditions are met.

  3. CUp to SAR 150,000 per retail client, and up to 60% of total cash subscriptions

    The per-client amount is acceptable, but 60% exceeds the 50% cap on total cash subscriptions.

  4. DUp to SAR 200,000 per retail client, and up to 55% of total cash subscriptions

    The per-client amount is within SAR 200,000, but 55% exceeds the 50% cap on cash subscriptions.

Reference: Investment Funds Regulations, Article 82(a) and (b); CME-1B workbook, ch. 4, section 2

07Al-Ufuq Contracting Company is owned by five individual shareholders: Khalid 30%, Sara 25%, Omar 15%, Huda 15% and Fahad 15%. No one outside them exercises actual control. Who is a beneficial owner under the ownership test?

Practice question Unit: Anti-Money Laundering and Counter-Terrorist Financing

  1. AKhalid only, because he holds the largest share.

    The test is not the largest share: anyone holding 25% or more is a beneficial owner even if not the largest.

  2. BKhalid, Sara and Omar, because their combined shares exceed 50%.

    Each person's share is assessed separately, and shareholders who individually fall below the test are not added together.

  3. CKhalid and Sara, because each holds 25% or more. ✓ Correct answer

    A natural person who owns 25% or more of the company's shares is a beneficial owner, which applies to Khalid and Sara only.

  4. DAll five shareholders, because each holds a share in the company.

    Holding less than 25% does not make a person a beneficial owner unless he exercises actual control.

Reference: CME-1B workbook, ch. 5, section 2.2.1; Anti-Money Laundering Law, Article 1(15)

08An investor claims damages because a listed company failed to make a statement that the Exchange rules required. Which of the following must a claimant establish in a claim about an untrue statement, but not in a claim about an omitted mandatory statement?

Practice question Unit: Prohibitions

  1. AThat the claimant was not aware of the omission, or of the untruth of the statement, when trading

    Required in both: paragraphs (b)(1) and (d)(1) require the claimant's lack of awareness.

  2. BThat the claim relates to the purchase or sale of a security

    Required in both: the claim must relate to a purchase or sale of a security under paragraphs (a) and (c).

  3. CThat the maker knew the statement was untrue, or knew there was a substantial likelihood that it was ✓ Correct answer

    Correct: the maker's knowledge of the untruth is a condition in paragraph (b)(3) only, with no counterpart in paragraph (d) on omissions.

  4. DThat the claimant would not have bought or sold, or would not have done so at that price, had he known

    Required in both: paragraphs (b)(2) and (d)(2) require that the claimant would not have traded, or not at that price.

Reference: Market Conduct Regulations, Article 10(b) and (d); CME-1B workbook, ch. 6, section 1.2

09In which of the following cases may one person perform two registrable functions at a capital market institution without any special approval from the Authority?

Practice question Unit: Capital Market Institutions Regulations

  1. AThe CEO is also the institution's CFO

    The CEO, CFO and compliance officer must be separate persons unless the Authority approves otherwise.

  2. BThe CFO is also the institution's compliance officer

    The separation requirement covers the CFO and the compliance officer, so they cannot be one person without the Authority's approval.

  3. CThe compliance officer is also the MLRO ✓ Correct answer

    Correct. Paragraph (d) allows one person to perform more than one function and excepts only combining the CEO, CFO and compliance officer, and combining the compliance officer with a client function.

  4. DThe compliance officer is also the investment adviser who serves clients

    The compliance officer may not perform a client function such as investment advice.

Reference: Capital Market Institutions Regulations, Article 20(d); CME-1B workbook, ch. 7, section 1

10Al-Riyada Financial has Chinese wall arrangements suited to its business and effectively implemented. A portfolio manager in its asset management department bought shares of a listed company for clients after a colleague in the corporate finance department, who knew inside information about that company, advised him to buy. What is the firm's position under Article 30(c)?

Practice question Unit: Systems and Controls

  1. AIt can rely on the exception because its arrangements are appropriate and effectively implemented

    The three conditions in Article 30(c) must all be met; meeting two of them is not enough.

  2. BIt can rely on the exception if the compliance officer approves the trade after it has been executed

    A later approval by the compliance officer is not a condition of Article 30(c) and does not cure advice that came from a person with the inside information.

  3. CIt cannot rely on the exception, because an individual involved in the dealing received advice from a person who knew the inside information ✓ Correct answer

    Correct. The third condition in Article 30(c) is that no individual involved in the dealing has the inside information or has taken advice from someone who does, so the protection from Articles 5 and 6 of the Market Conduct Regulations is lost.

  4. DIt can rely on the exception if it reports the trade to the Authority within one business day

    The exception does not make a report to the Authority a substitute for the three conditions.

Reference: Capital Market Institutions Regulations, Article 30(c); CME-1B workbook, ch. 8, section 1.2

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