HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Which of the following is one of the forms of 'market misconduct' set out in the SFO?

• a.Failing to hold an annual general meeting
• b.Charging clients a high but fully disclosed commission
• c.Late filing of an annual return with the Companies Registry
• d.Price rigging✓

The SFO identifies six forms of market misconduct: insider dealing, false trading, price rigging, stock market manipulation, disclosure of information about prohibited transactions, and disclosure of false or misleading information inducing transactions. Administrative filing failures and disclosed fees are not market misconduct.

A trader repeatedly places and rapidly cancels large orders they never intend to execute, to push a stock's price in a chosen direction and profit from other participants' reactions. This conduct is best described under the SFO as:

• a.Stock market manipulation / a form of market misconduct✓
• b.Lawful, because the orders were cancelled before execution
• c.Permitted market making
• d.A breach only of the broker's internal policy

Creating an artificial or manipulated price through transactions or orders is stock market manipulation under Parts XIII and XIV of the SFO. Placing orders with no genuine intention to trade in order to move the price ('spoofing/layering') falls within the manipulation and false-trading prohibitions.

Deliberately spreading materially false information that is likely to induce others to buy or sell securities, knowing the information is false or being reckless as to its truth, is:

• a.Disclosure of false or misleading information inducing transactions, a form of market misconduct✓
• b.Only actionable in law if the person who spread the false information actually went on to trade in the securities that were concerned themselves
• c.A matter solely for the Stock Exchange Listing Rules
• d.Lawful if posted anonymously online

The SFO prohibits disclosure of information that is false or misleading in a material way and likely to induce transactions or affect price, where the person knew it was false/misleading or was reckless/negligent. It is one of the six forms of market misconduct and can be pursued civilly (Part XIII) or criminally (Part XIV).

Where market misconduct such as insider dealing is prosecuted criminally under Part XIV of the SFO, the maximum penalty on conviction on indictment is:

• a.Life imprisonment
• b.A caution with no financial penalty
• c.A fine of HK$1,000 only, together with a formal written warning letter that is placed on the offender's regulatory file for future reference
• d.A fine of HK$10 million and imprisonment for 10 years✓

Criminal market misconduct offences under Part XIV carry, on conviction on indictment, a maximum fine of HK$10 million and imprisonment for 10 years. This is separate from the civil route before the Market Misconduct Tribunal under Part XIII.

Under Part XV of the SFO, a director or chief executive of a listed corporation must notify their interests in the corporation's shares:

• a.In respect of all their interests (and short positions), with no minimum percentage threshold✓
• b.Only when they sell the shares
• c.Only if the interest reaches 5% of a class of voting shares, exactly mirroring the ordinary substantial-shareholder disclosure threshold
• d.Only if the interest reaches 10%

While substantial shareholders are caught at the 5% level, directors and chief executives of a listed corporation must disclose all of their interests, and short positions, in the corporation's shares and debentures under Part XV, regardless of size. Notifications are generally due within 3 business days.

For the purposes of the insider dealing provisions of the SFO, a 'connected person' of a listed corporation includes:

• a.Only the company's external auditor
• b.A director, employee or substantial shareholder of the corporation or of a related company, and a person with a business or professional relationship giving access to relevant information✓
• c.Only the Stock Exchange
• d.Any member of the investing public who happens to buy or sell the shares, since the insider dealing rules are said to apply identically to every participant in the market regardless of any relationship with the listed corporation

A 'connected person' includes directors, employees and substantial shareholders of the corporation or a related corporation, and persons who, because of a professional or business relationship, may have access to relevant (price-sensitive) information. Dealing while connected and in possession of such information can amount to insider dealing.

Under the SFO, communicating (tipping) inside information to another person, knowing or having reasonable cause to believe that person will use it to deal, is:

• a.Only a civil matter and never criminal
• b.Itself capable of amounting to insider dealing/market misconduct✓
• c.Permitted, because the tipper did not personally place any order to buy or sell the securities that were in question at any point at all
• d.Outside the scope of the insider dealing regime

The insider dealing regime covers not only dealing while in possession of relevant information but also counselling or procuring another to deal, and disclosing the information to a person the discloser knows or believes will deal. The tipper can be liable even without trading personally.

The Stock Exchange of Hong Kong Limited operates as a recognized exchange company. The SFC's power to recognise (and to withdraw recognition from) an exchange company is found in the SFO under:

• a.Part XV (disclosure of interests)
• b.Part IV (offers of investments)
• c.Part III (recognized exchange companies and clearing houses)✓
• d.Part XII (investor compensation), which is also said to govern the recognition and the ongoing supervision of exchange companies and clearing houses

Part III of the SFO governs the recognition and supervision of exchange companies, clearing houses, exchange controllers and investor compensation companies. The SFC recognises these entities and oversees their rules, while HKEX is the recognized exchange controller that owns the operating companies.

Subsidiary legislation and rules made by the SFC under the SFO (such as the Financial Resources Rules) generally take effect subject to:

• a.Approval by the Stock Exchange board before the rules can be published and then brought into operation by the Commission across the market
• b.Ratification by the courts
• c.Being laid before the Legislative Council for negative vetting✓
• d.A public referendum

Rules made by the SFC under the SFO are subsidiary legislation and are subject to the negative vetting procedure of the Legislative Council. This provides legislative oversight while allowing the SFC to make detailed technical rules within its statutory powers.

The SFO consolidated ten previous ordinances into a single statute. It came into operation on:

• a.1 January 2000
• b.1 July 1997
• c.1 April 2003✓
• d.1 January 2013

The Securities and Futures Ordinance (Cap. 571) commenced on 1 April 2003, consolidating and modernising ten separate ordinances (including the former Securities Ordinance and Commodities Trading Ordinance) into one comprehensive law governing Hong Kong's securities and futures markets.

Under Part XII of the SFO, the Investor Compensation Fund is designed to:

• a.Compensate investors for pecuniary loss caused by a default (such as insolvency or misappropriation) of a licensed intermediary or authorised institution✓
• b.Guarantee investors against all trading losses, so that any fall in the value of an exchange-traded product they hold is automatically reimbursed to them by the Fund on demand at any time and in full
• c.Compensate investors whenever a share price falls
• d.Reimburse investors for poor investment advice

Part XII establishes the Investor Compensation Fund to compensate investors who suffer loss because a licensed intermediary or authorised institution defaults (for example, becomes insolvent or misappropriates client assets) in relation to exchange-traded products. It does not cover ordinary market losses or bad advice.

A person aggrieved by certain specified decisions of the SFC, such as a refusal or revocation of a licence, may seek a review of that decision by:

• a.The Stock Exchange Listing Committee
• b.The Market Misconduct Tribunal, which is said to hear reviews of the Commission's licensing and disciplinary decisions in these cases
• c.The Securities and Futures Appeals Tribunal (SFAT)✓
• d.The Hong Kong Monetary Authority

Under Part XI of the SFO, the Securities and Futures Appeals Tribunal, chaired by a judge, reviews specified decisions of the SFC (such as licensing and disciplinary decisions). The Market Misconduct Tribunal instead adjudicates alleged market misconduct.

Under the SFO, a futures contract eligible for regulation as such is generally one that is:

• a.Any private bet between two friends about the future direction of the market, provided that some money actually changes hands between them
• b.A physical purchase of goods for immediate delivery
• c.Only a contract cleared overseas
• d.A contract traded on a recognized futures market or through authorised automated trading services✓

The SFO's concept of a 'futures contract' centres on contracts made on or subject to the rules of a recognized futures market, or through authorised ATS. This ties the regulated product to organised, cleared markets rather than private bilateral wagers.

Under Part X of the SFO, where client assets or the interests of the investing public appear to be at risk, the SFC may:

• a.Only write a letter of concern to the firm with no further power to act at all, since intervention is said to require a fresh court order in every single case before it may be used
• b.Automatically take ownership of the firm
• c.Exercise intervention powers, such as restricting a licensed corporation's business or prohibiting dealings with certain assets✓
• d.Impose a prison sentence on the directors

Part X gives the SFC intervention powers to protect clients and the public, including imposing prohibitions and restrictions on a licensed corporation's business and on dealing with property, and requiring the maintenance of assets in Hong Kong. These are protective, not punitive, and can be used urgently.

The Financial Resources Rules, which require licensed corporations to maintain minimum capital, are made under the SFO principally to:

• a.Guarantee that firms make a trading profit in each financial year so that they can always remain solvent and continue to meet their obligations
• b.Ensure firms remain financially sound and able to meet their liabilities and protect client assets✓
• c.Fix the commissions firms may charge
• d.Set the price of listed securities

The Securities and Futures (Financial Resources) Rules impose minimum paid-up capital and liquid capital requirements so that licensed corporations remain solvent and can meet obligations, reducing the risk of failure and loss to clients. They do not regulate profitability or pricing.

Which statement about the Market Misconduct Tribunal (MMT) and the criminal courts under the SFO is correct?

• a.Only the MMT can deal with insider dealing
• b.For the same misconduct the SFC pursues either the civil (MMT) route or the criminal route, not both✓
• c.The Market Misconduct Tribunal can, on making a finding of misconduct, sentence the individuals concerned to a term of imprisonment as well as impose a criminal fine
• d.The same conduct is always pursued in both the MMT and the criminal courts at the same time

Parts XIII and XIV create parallel civil and criminal regimes for the same forms of market misconduct. To avoid double jeopardy, a person is not both proceeded against in the MMT and prosecuted criminally for the same conduct; the MMT is civil and cannot impose imprisonment.

Criminal prosecution of market misconduct offences under Part XIV of the SFO in the Hong Kong courts is conducted by:

• a.The Department of Justice (on behalf of the Secretary for Justice)✓
• b.The Hong Kong Monetary Authority
• c.The Stock Exchange of Hong Kong, acting through its Listing Division and its Listing Committee, in proceedings brought in the ordinary courts
• d.The Market Misconduct Tribunal

Although the SFC investigates market misconduct, criminal prosecutions are brought through the Department of Justice. The MMT is a civil tribunal; it does not prosecute, and the Stock Exchange has no criminal-prosecution role.

One of the statutory functions of the SFC under the SFO is to co-operate with and provide assistance to:

• a.Listed companies wishing to avoid disclosure
• b.Regulatory authorities and organisations, including overseas regulators, in the performance of their functions✓
• c.Only the Hong Kong Police Force, and no other body of any kind, may lawfully be assisted by the Commission in the performance of any of its functions
• d.Individual investors seeking stock tips

The SFO lists co-operating with and assisting other regulators, including counterparts outside Hong Kong, among the SFC's functions. This supports cross-border enforcement and is reinforced by the SFC being a signatory to the IOSCO Multilateral Memorandum of Understanding.

A licensed corporation dealing as principal, and a bank (authorised institution) carrying on regulated activities, are described in the SFO respectively as a:

• a.Licensed corporation and a registered institution✓
• b.Professional investor and a connected person
• c.Recognized exchange company and a clearing house
• d.Registered institution and a licensed corporation

Under the SFO a company licensed by the SFC to carry on regulated activities is a 'licensed corporation', while a bank/authorised institution that carries on regulated activities is a 'registered institution' whose front-line regulator is the HKMA. Both are subject to SFC conduct standards.

Wash sales and matched orders that involve no genuine change in beneficial ownership are prohibited under the SFO as a form of:

• a.Front running only
• b.False trading✓
• c.Lawful liquidity provision
• d.Insider dealing

False trading under Parts XIII and XIV of the SFO covers transactions that create, or are likely to create, a false or misleading appearance of active trading or of the market or price, including wash sales and matched orders with no change in beneficial ownership.

The SFC's regulatory objectives under the SFO include reducing systemic risk in the securities and futures industry. This means the SFC seeks to:

• a.Fix a minimum return for all investors
• b.Set the exchange rate of the Hong Kong dollar
• c.Guarantee that no listed company ever fails or is wound up, so that investors holding its shares can never suffer any loss of their capital
• d.Guard against the risk that the failure of one participant or product could destabilise the wider market✓

Reducing systemic risk is one of the SFC's statutory regulatory objectives under s.4 of the SFO. It targets the danger that distress at one intermediary, clearing house or product could cascade through the market, and is distinct from monetary policy (an HKMA function).

For insider dealing to arise under the SFO, the 'relevant information' the connected person holds must be information that:

• a.Concerns a company that is not listed
• b.Is a mere personal opinion about market direction
• c.Is specific, relates to the corporation, is not generally known, and would if known be likely to materially affect the share price✓
• d.Is already widely published in the newspapers and across other public media outlets, yet is still treated as relevant information for these purposes under the Ordinance

'Relevant information' is specific information about the listed corporation (or its securities) that is not generally known to those who deal or would deal in its securities but which, if generally known, would be likely to materially affect the price. Publicly known information cannot found the offence.

Which of the following orders can the Market Misconduct Tribunal make against a person found to have engaged in market misconduct?

• a.An order delisting the company
• b.A criminal fine
• c.A sentence of imprisonment, which the civil Market Misconduct Tribunal is empowered to impose directly on the person who is concerned
• d.A disgorgement order requiring payment of any profit gained or loss avoided✓

The civil MMT can, among other orders, require disgorgement of profits gained or losses avoided, disqualify a person from being a director, and make cold-shoulder and cease-and-desist orders. It cannot impose imprisonment or criminal fines, which belong to the criminal courts.

The safe harbours in Part XIVA of the SFO allow a listed corporation to withhold, for a limited time, disclosure of inside information where, for example:

• a.The directors of the listed corporation simply prefer not to disclose the information because they consider it to be commercially inconvenient at the time
• b.Disclosure is prohibited by law, or the information concerns an incomplete negotiation kept confidential✓
• c.The information is unfavourable to management
• d.The share price is falling

Part XIVA permits deferral of disclosure under defined safe harbours, such as where disclosure is prohibited by law/court order, or the information concerns an incomplete proposal or negotiation and confidentiality is preserved. The safe harbour is lost if confidentiality is breached.

A licensed corporation discovers that its liquid capital has fallen below the minimum required by the Financial Resources Rules. Under the SFO regime it must:

• a.Do nothing, since the rules are only guidance
• b.Wait until the next annual audit to mention the capital shortfall, on the basis that the Financial Resources Rules are treated as guidance only rather than as binding rules
• c.Immediately notify the SFC and stop taking on business that would worsen the position, as required by the rules✓
• d.Quietly borrow client money to cover the gap

The Financial Resources Rules require a licensed corporation to notify the SFC promptly when its financial resources fall below the required level (or on other trigger events) and to take remedial steps. Using client money to plug the gap would breach the Client Money Rules and conduct requirements.

Which statement about the two enforcement routes for the same market misconduct under the SFO is correct?

• a.The civil route before the Market Misconduct Tribunal allows a term of imprisonment to be imposed on the individuals who are found to be responsible for the conduct
• b.Both routes may be pursued together for identical conduct
• c.The criminal route requires proof beyond reasonable doubt, whereas the civil MMT applies the civil standard of proof✓
• d.Neither route can result in disgorgement of profits

Criminal prosecution under Part XIV requires proof beyond reasonable doubt, while the civil MMT under Part XIII operates on the balance of probabilities. Because of this difference, and to avoid double jeopardy, the SFC selects one route for a given course of conduct.

An auditor of a licensed corporation who becomes aware of a matter that adversely affects the firm's financial position to a material extent is, under the SFO, generally:

• a.Prohibited from telling anyone
• b.Required to report the matter to the SFC✓
• c.Required to report it only to the firm's clients
• d.Required only to note it in the following year's accounts

The SFO imposes reporting obligations on auditors of licensed corporations: an auditor who becomes aware of specified matters (such as a material adverse effect on the firm's financial position or a breach of the Financial Resources Rules) must report to the SFC, overriding ordinary confidentiality.

The SFO's regulatory objectives, set out in s.4, do NOT include:

• a.Guaranteeing that every investor makes a profit✓
• b.Maintaining fair, efficient, transparent and orderly markets
• c.Protecting the investing public
• d.Minimising crime and misconduct in the industry

Section 4 lists objectives including maintaining fair, efficient, transparent and orderly markets, protecting the public, minimising crime and misconduct, reducing systemic risk, and assisting the Financial Secretary. Guaranteeing profits is expressly not part of the SFC's role.

Price rigging under the SFO includes:

• a.Paying a disclosed brokerage commission
• b.Entering into a wash sale or a fictitious/artificial transaction that maintains, increases, reduces or stabilises the price of securities✓
• c.Publicly and accurately reporting a listed company's audited results in accordance with the applicable accounting standards and the Listing Rules of the exchange
• d.Buying shares because you genuinely believe they are undervalued

Price rigging under the SFO involves wash sales or fictitious or artificial transactions that have the effect of maintaining, increasing, reducing or stabilising the price of securities. Genuine trading on a real view of value, and disclosed fees, are not price rigging.

Under the SFO, the SFC's power to authorise investment products and offering documents (for example under Part IV) is exercised so as to:

• a.Fix the price at which the product must be sold
• b.Ensure disclosure is adequate and the offering complies with applicable requirements, without endorsing the merits of the investment✓
• c.Provide the SFC's personal recommendation to buy
• d.Guarantee that the product will be profitable for the investors who buy it, so that authorisation operates as an official endorsement of the investment's commercial merits

SFC authorisation of a product or offering document signifies that disclosure and regulatory requirements are met; it is not a recommendation and does not guarantee the investment's commercial merits. Offering documents must carry a statement to that effect.

An individual who wishes to carry on a regulated activity on behalf of a licensed corporation must be licensed as a representative and must be:

• a.At least 30 years old
• b.A Hong Kong permanent resident
• c.A shareholder of the licensed corporation who holds a substantial stake in its issued and paid-up share capital
• d.Accredited to that licensed corporation as their principal✓

A licensed representative must be accredited to a licensed corporation, which acts as the representative's principal and is responsible for supervising them. A representative may be accredited to more than one licensed corporation only with the SFC's approval.

A responsible officer (RO) of a licensed corporation is:

• a.An officer appointed only by the Stock Exchange
• b.A licensed representative additionally approved by the SFC to supervise the corporation's conduct of a regulated activity✓
• c.Any employee of the firm who has passed one qualifying examination set by the industry institute, regardless of that employee's actual experience or seniority
• d.A person who need not be licensed at all

An RO is a licensed representative who has been additionally approved by the SFC (under s.126 of the SFO) as a responsible officer to supervise the licensed corporation's conduct of the relevant regulated activity. ROs must satisfy heightened competence and management-experience requirements.

Under the SFC's Managers-In-Charge (MIC) regime, a licensed corporation must:

• a.Abolish the responsible-officer role
• b.Appoint managers only for its overseas offices
• c.Identify the senior individuals responsible for each of eight specified Core Functions and provide their details to the SFC✓
• d.Appoint one single manager for the entire firm regardless of its functions, who then takes on responsibility for supervising every separate part of the business

The MIC regime requires licensed corporations to identify Managers-In-Charge for eight Core Functions (including overall management oversight, key business line, compliance, risk management, and finance and accounting) and to submit management structure information to the SFC, sharpening accountability of senior management.

Under the MIC regime, the SFC expects the Managers-In-Charge of which Core Functions normally to be approved as responsible officers?

• a.Only the anti-money-laundering function
• b.The information technology and the human resources functions, which the Commission is said to treat as the two most critical of all to supervise closely
• c.Only the finance and accounting function
• d.The Overall Management Oversight function and the Key Business Line function✓

The SFC expects that MICs of the Overall Management Oversight function and of the Key Business Line (i.e. those directing the regulated activities) should generally be responsible officers, since they are directly responsible for managing the regulated business.

A person proposing to become a substantial shareholder of a licensed corporation must, under the SFO:

• a.Obtain the SFC's prior approval before becoming a substantial shareholder✓
• b.Obtain approval from the Companies Registry
• c.Merely notify the Stock Exchange afterwards, once the substantial shareholding has actually been acquired, paid for and fully settled in the market
• d.Do nothing, as ownership is unregulated

Under s.132 of the SFO, a person must obtain the SFC's approval before becoming a substantial shareholder (holding 10% or more of the shares or voting power) of a licensed corporation. The SFC assesses whether the person is fit and proper, since controllers can influence the firm's conduct.

When assessing whether an applicant is 'fit and proper', the SFC has statutory regard under s.129 of the SFO to matters including:

• a.Which bank the applicant uses
• b.Financial status, education and experience, ability to carry on the activity competently, honestly and fairly, and reputation, character and reliability✓
• c.The applicant's political party membership
• d.The applicant's astrological sign and personal star chart, which the Commission is said to be required by statute to take into account as part of the fit-and-proper assessment

Section 129 directs the SFC to consider, among other things, the person's financial status, qualifications, experience and competence, reputation, character, reliability and integrity, and any past convictions or disciplinary action. Irrelevant personal characteristics play no part in the test.

To satisfy the competence requirement for licensing, an individual applicant must generally:

• a.Be nominated by an existing responsible officer only
• b.Meet recognised academic or industry qualification requirements, pass the relevant local regulatory framework examinations, and have relevant industry experience, unless an exemption applies✓
• c.Hold shares in a listed company
• d.Simply pay the prescribed application fee to the Commission, after which competence is presumed for all of the regulated activities that the applicant may wish to conduct, without the need for any further qualification, examination or experience

The SFC's competence guidelines require academic/industry qualifications, passing the relevant HKSI Institute Licensing Examination papers (covering the local regulatory framework), and appropriate industry experience, with defined exemptions. Competence is one limb of the fit-and-proper test.

The purpose of the SFC's Continuous Professional Training (CPT) requirement is to ensure that licensed individuals:

• a.Never need to sit any examination again during the rest of their careers, because the grant of a licence is said to remove all further training obligations for good
• b.Increase the commission they earn
• c.Keep their knowledge and skills, including of regulatory and compliance matters, current throughout their careers✓
• d.Attend social events organised by the industry

CPT requires licensed individuals to undertake ongoing training each year, including a component on regulatory compliance and ethics, so their competence remains current after initial licensing. Firms must keep CPT records. Verify the current minimum hours against the SFC's guidelines before relying on them.

A temporary licence under the SFO is intended for:

• a.Unlicensed marketing staff
• b.Any Hong Kong resident who wants to trade in securities or futures for their own personal account through a licensed intermediary, without ever needing to hold any full licence of their own
• c.A permanent replacement for a full licence
• d.A person licensed or authorised in an acceptable jurisdiction outside Hong Kong who wishes to carry on certain regulated activities in Hong Kong for a short period✓

A temporary licence allows a person already licensed or registered in an acceptable overseas jurisdiction to carry on limited regulated activities in Hong Kong for a short period (subject to statutory maximum durations). It is not available for all regulated activities and cannot substitute for full licensing on an ongoing basis.

Which statement about an SFC licence is correct?

• a.A licence lasts for the whole of the licensee's life and never needs any further action once it has first been granted by the Commission
• b.A licence is granted to a specific person for specific regulated activities and is not transferable✓
• c.A single licence automatically covers every type of regulated activity
• d.A licence can be freely sold or transferred to another person

A licence is personal to the licensee and specifies the regulated activities it covers; it cannot be transferred or sold. A person wishing to carry on an additional type of regulated activity must apply to have the licence varied, and annual fees and continuing obligations apply.

The Client Securities and Securities Collateral Rules require a licensed corporation that receives client securities in Hong Kong to:

• a.Register all client securities in the firm's own name and then treat them as if they were its own property, to be used freely in the ordinary course of its business
• b.Sell them to meet the firm's expenses
• c.Hold them in a segregated account designated for clients, or registered in the client's name or the firm's associated entity, and not misuse them✓
• d.Send them to the SFC for safekeeping

The Client Securities Rules require client securities to be segregated from the firm's own assets, held in a designated client account or registered in the client's name (or an associated entity), safeguarding them if the firm fails. They cannot be used for the firm's own purposes without proper authority.

Under the Client Securities Rules, a licensed corporation that wishes to deposit a client's securities collateral with a third party as security for its own borrowing generally needs the client's:

• a.The client's purely verbal agreement, renewed on a daily basis each morning before any of the client's securities collateral may be repledged to a third party
• b.Permission from the Stock Exchange
• c.No authority at all
• d.Written standing authority, valid for a period not exceeding 12 months (subject to renewal)✓

Repledging or depositing client securities collateral requires the client's written standing authority, which is valid for up to 12 months and may be renewed. This protects clients from having their assets used to secure the firm's obligations without informed consent.

Under the Securities and Futures (Keeping of Records) Rules, a licensed corporation must keep its business and transaction records for a period of at least:

• a.3 years
• b.1 year
• c.7 years✓
• d.6 months

The Keeping of Records Rules require licensed corporations to keep proper records sufficient to explain and reflect their financial position and transactions, and to retain them for at least 7 years. This supports supervision, audit and enforcement.

The Contract Notes, Statements of Account and Receipts Rules require a licensed corporation, after executing a transaction for a client, to:

• a.Provide the client with a contract note containing prescribed details within the required time✓
• b.Provide details only to professional investors
• c.Provide nothing at all to the client unless and until the client complains, in which case a short summary of the recent dealings may then be supplied
• d.Provide details only once a year

The Contract Notes Rules require prescribed contract notes for securities/futures transactions and periodic statements of account, so clients receive timely, accurate records of their dealings and holdings. This transparency underpins the firm's conduct obligations.

A licensed corporation that carries on Type 1 (dealing in securities) and holds client assets must maintain minimum capital under the Financial Resources Rules of:

• a.No capital at all
• b.Paid-up share capital of HK$5 million and liquid capital of HK$3 million✓
• c.Paid-up share capital of HK$100 and liquid capital of HK$100
• d.Paid-up share capital of HK$50 million and liquid capital of HK$25 million

A dealer (Type 1) that is not exempt and holds client assets must generally maintain paid-up share capital of HK$5 million and required liquid capital of HK$3 million under the Financial Resources Rules. Requirements differ by regulated-activity type and whether client assets are held.

A licensed corporation carrying on only advisory activities (for example Type 4 or Type 6) that does not hold client assets is generally required to maintain:

• a.Liquid capital of HK$3 million
• b.Nil minimum paid-up share capital and required liquid capital of HK$100,000✓
• c.No liquid capital at all
• d.Paid-up share capital of HK$10 million together with required liquid capital of the very same amount, maintained at all times without exception

Advisers that do not hold client assets face lighter capital requirements: typically no minimum paid-up share capital and required liquid capital of HK$100,000 under the Financial Resources Rules, reflecting the lower risk they pose to client money and securities.

A firm licensed for Type 1 (dealing in securities) gives advice on securities to its clients that is wholly incidental to its dealing business. In relation to a separate Type 4 (advising on securities) licence, the firm:

• a.Must cease giving any advice
• b.Is exempt from needing a separate Type 4 licence because the advice is wholly incidental to its dealing✓
• c.Must obtain HKMA approval instead
• d.Must always obtain a separate Type 4 licence for advising on securities, even where that advice is purely and wholly incidental to its dealing business

Schedule 5 provides that advising on securities carried on wholly incidentally to dealing in securities (Type 1) does not itself constitute Type 4 regulated activity. Similar incidental exemptions apply, for example, to asset managers advising incidentally to their Type 9 activity.

An asset manager licensed for Type 9 (asset management) that, in managing a portfolio, also advises on and deals in the underlying securities for that portfolio:

• a.Must register with the HKMA
• b.Must obtain separate Type 1 and Type 4 licences in every single case, in addition to its Type 9 asset management licence, before it may lawfully act at all
• c.Is carrying on unlicensed activity
• d.May rely on incidental exemptions so that such dealing and advising, carried on solely for the managed portfolios, need not be separately licensed✓

Schedule 5 exemptions allow a Type 9 asset manager to carry out dealing and advising that are solely incidental to managing a portfolio for its clients without separate Type 1/4 licences. If the firm deals or advises for outside clients beyond the managed portfolios, separate licences may be required.

Individuals who carry on regulated activities on behalf of a registered institution (a bank) are:

• a.Licensed representatives of the SFC whose particulars are entered on the Commission's public register of licensed persons and corporations
• b.Automatically responsible officers
• c.Not subject to any regulator
• d.'Relevant individuals' whose particulars are entered in a register maintained by the HKMA✓

At banks (registered institutions), individuals conducting regulated activities are 'relevant individuals' recorded in the HKMA's register rather than SFC-licensed representatives. Their conduct is nonetheless assessed against SFC standards, with the HKMA as front-line regulator.

At a registered institution, individuals who supervise a regulated activity (the counterpart of a licensed corporation's responsible officers) are approved as:

• a.Executive officers approved by the HKMA✓
• b.Managers appointed by the Stock Exchange
• c.Responsible officers approved by the SFC
• d.Trustees approved by the MPFA

At a bank, senior individuals responsible for supervising a regulated activity are 'executive officers' approved by the HKMA under the Banking Ordinance, mirroring the responsible-officer role at licensed corporations. Front-line supervision of the bank's securities business rests with the HKMA.