HKSI Licensing Examination Paper 1 (Regulation) — All Questions

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.