HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Hong Kong stamp duty on a transfer of Hong Kong stock is currently charged at what rate, and on whom?

• a.0.1% of the consideration on each of the buyer and the seller✓
• b.1% on the buyer only
• c.There is no stamp duty payable on Hong Kong share transfers at all
• d.0.5% on the seller only

Stamp duty on Hong Kong stock transfers is charged ad valorem at 0.1% of the consideration on each side of the transaction (i.e. both the buyer and the seller pay 0.1%). It is a transaction cost distinct from brokerage and levies.

Which of the following is NOT normally a cost incurred when trading listed shares in Hong Kong?

• a.Brokerage commission
• b.The SFC statutory transaction levy
• c.Capital gains tax on the profit✓
• d.Stamp duty

Hong Kong does not impose a capital gains tax, so trading profits are not taxed as gains. Typical trading costs are brokerage commission, stamp duty, the SFC transaction levy, the trading fee and CCASS fees.

The SFC transaction levy on securities trades is:

• a.A fixed HK$1,000 per trade
• b.Charged only on the seller
• c.A small percentage of the consideration charged on both the buyer and the seller, funding the SFC✓
• d.Payable only on IPO subscription applications, and never on any ordinary secondary market trades at all

The SFC transaction levy is charged as a small percentage of the transaction value on both sides of a trade and helps fund the SFC's operations. It is one of several statutory and exchange charges collected on each transaction.

Brokerage commission charged by Hong Kong securities firms is:

• a.Prohibited entirely
• b.Freely negotiable between the firm and the client following deregulation✓
• c.Fixed by the SFC at a minimum rate
• d.Set by the Financial Secretary at a fixed minimum rate each and every year

Minimum brokerage commissions were abolished (deregulated in 2003), so commission is now freely negotiable between the intermediary and the client. Other charges such as stamp duty and levies remain fixed by statute or the Exchange.

Short selling of securities on the SEHK is:

• a.Permitted only as covered short selling of designated securities; naked (uncovered) short selling is prohibited✓
• b.Allowed only for overseas investors
• c.Completely prohibited in all circumstances
• d.Permitted entirely without restriction, including uncovered or so-called naked short selling of any listed stock

Only covered short selling of securities designated as eligible by the Exchange is permitted; the seller must have a presently exercisable and unconditional right to vest the securities. Naked short selling - selling without such a right - is prohibited.

The 'tick rule' applying to covered short selling on the SEHK provides that a short-sale order:

• a.Can only be entered during the pre-opening auction session each day
• b.Must be at least 10% below the last traded price
• c.May be entered at any price the seller wishes
• d.Must not be made at a price below the best current ask price✓

The short-selling tick rule restricts short sales to a price not lower than the best current ask price, preventing short sellers from aggressively driving the price down. It is a key safeguard within the regulated short-selling framework.

Under the Listing Rules' classification of notifiable transactions, a 'very substantial acquisition' arises where any applicable percentage ratio is:

• a.5% or more but less than 25%
• b.100% or more✓
• c.Less than 5%
• d.Exactly 1%

Notifiable transactions are classified by percentage ratios: discloseable (5% to under 25%), major (25% to under 100%) and very substantial acquisition (100% or more). Higher classifications require more disclosure and, from 'major' upward, shareholder approval.

A 'major transaction' by a Main Board issuer is one where an applicable percentage ratio is:

• a.Always fixed at precisely 50% or more
• b.100% or more
• c.25% or more but less than 100%✓
• d.Below 5%

A major transaction has a percentage ratio of 25% or more but less than 100%. It requires an announcement, a circular and, importantly, shareholders' approval, reflecting its significance to the issuer under the Listing Rules.

A transaction where the highest applicable percentage ratio is 5% or more but less than 25% is classified as a:

• a.Discloseable transaction✓
• b.Connected transaction
• c.Share transaction requiring no disclosure
• d.Very substantial disposal

A discloseable transaction is one with a percentage ratio of 5% to under 25%. It requires an announcement and notification to the Exchange but not, by reason of its size alone, shareholders' approval under the Listing Rules.

'Connected transactions' under the Listing Rules are transactions between a listed issuer and:

• a.The Government
• b.Any ordinary retail customer
• c.A connected person, such as a director, controller or their associates✓
• d.Its appointed external auditor or reporting accountants only, and no others

Connected transactions involve connected persons (directors, chief executives, substantial/controlling shareholders and their associates). They are subject to disclosure and, unless exempt, independent shareholders' approval, to guard against conflicts of interest and unfair terms.

A Main Board issuer must publish its annual report within how long after the end of its financial year?

• a.Within 12 months
• b.Within 4 months✓
• c.Within 30 days
• d.There is no time limit

The Listing Rules require a Main Board issuer to publish its annual report within four months of its financial year-end (with earlier deadlines for the preliminary results announcement). Timely periodic reporting is a core continuing obligation.

Under the Codes on Takeovers and Mergers, the 'creeper' provision requires a person or group holding between 30% and 50% of the voting rights of a company to make a general offer if, in any 12-month period, they acquire additional voting rights of more than:

• a.2%✓
• b.20%
• c.0.1%
• d.49%

A holder of 30% to 50% who acquires more than 2% additional voting rights in any 12-month period triggers a mandatory general offer under the 'creeper' rule. This complements the 30% mandatory-offer threshold in preventing creeping acquisitions of control.

The Codes on Takeovers and Mergers and Share Buy-backs:

• a.Are administered by HKEX's Listing Committee
• b.Are non-statutory but administered and enforced by the SFC (through its Takeovers Executive and the Takeovers Panel)✓
• c.Are statutory laws passed by the Legislative Council
• d.Have no practical force at all and amount to purely voluntary guidance that the SFC has no power to enforce in any way

The Codes are non-statutory but are administered by the SFC's Takeovers Executive and enforced through the Takeovers and Mergers Panel, with sanctions such as public censure and 'cold shoulder'. They regulate general offers, share buy-backs and related conduct.

Which entity acts as the clearing house (and central counterparty) for cash-market securities trades on the SEHK?

• a.The Hong Kong Futures Exchange
• b.The Securities and Futures Commission itself acting directly
• c.Hong Kong Securities Clearing Company Limited (HKSCC)✓
• d.The Hong Kong Monetary Authority

HKSCC operates CCASS and acts as the central counterparty for SEHK securities trades. Separate clearing houses (SEOCH for stock options, HKCC for futures) handle the derivatives markets within the HKEX group.

Most retail investors hold their Hong Kong listed shares:

• a.Directly on the issuer's register in every case
• b.In a central securities register account personally maintained on their behalf by the Financial Secretary
• c.As physical certificates locked in the SFC's vault
• d.Indirectly, through their broker's CCASS account, with HKSCC Nominees Limited as the registered holder✓

Under the CCASS book-entry system, shares deposited by brokers are registered in the name of HKSCC Nominees Limited, with investors holding a beneficial interest through their broker. Investors can alternatively open an Investor Participant account to hold securities directly in CCASS.

A CCASS 'Investor Participant' account allows an individual investor to:

• a.Avoid paying stamp duty
• b.Place and execute securities trades directly on the Exchange order book without using any broker at all
• c.Borrow money interest-free from HKSCC
• d.Hold securities directly in CCASS in their own name, rather than through a broker's account✓

An Investor Participant (IP) account lets an investor hold and settle securities directly in CCASS under their own name, giving greater control and transparency over their holdings. Trading still requires an Exchange Participant (broker) to execute orders.

The SEHK trading day for equities typically begins with:

• a.An open-outcry trading session conducted on the exchange floor
• b.A monthly settlement session
• c.A random start time chosen daily
• d.A pre-opening auction session before continuous trading✓

The equity trading day starts with a pre-opening auction session, during which orders are entered and matched at a single auction price, before continuous order-matching trading begins. A closing auction session operates at the end of the day for eligible securities.

Stock Connect (Shanghai-Hong Kong and Shenzhen-Hong Kong) is a scheme that:

• a.Applies only to Hong Kong government bonds
• b.Allows unlimited trading of any security in any market
• c.Provides mutual market access, allowing Northbound trading of eligible Mainland shares and Southbound trading of eligible Hong Kong shares✓
• d.A scheme that legally merges the Hong Kong and the Mainland stock exchanges together into one single combined and jointly listed exchange company

Stock Connect links the Hong Kong and Mainland exchanges to give mutual market access: Northbound investors trade eligible Shanghai/Shenzhen-listed shares, and Southbound (Mainland) investors trade eligible Hong Kong-listed shares, each within eligibility lists and quotas.

Under Stock Connect, 'Southbound' trading refers to:

• a.Mainland investors buying eligible Hong Kong-listed shares✓
• b.Hong Kong and overseas investors buying Shanghai-listed A-shares
• c.Selling only, never buying
• d.Trading in foreign currencies

Southbound trading is Mainland investors accessing and buying eligible Hong Kong-listed shares through the Connect scheme; Northbound is Hong Kong and international investors accessing eligible Mainland-listed shares. The directions are defined by which market's investors are buying.

Unlike the Main Board, GEM does not impose a profit track-record requirement, but a GEM applicant must generally demonstrate:

• a.A minimum of 10,000 employees
• b.That it has never paid a dividend
• c.A minimum market capitalisation of at least HK$10 billion measured at the time of its initial listing on GEM
• d.Positive operating cash flow (of at least HK$30 million in aggregate over the two preceding financial years)✓

GEM applies a cash-flow test rather than a profit test: an applicant must show positive cash flow from operating activities of at least HK$30 million in aggregate for the two preceding financial years, along with minimum market-cap and public-float requirements.

In an IPO, the difference between the 'placing' tranche and the 'public offer' tranche is that:

• a.The public offer tranche is reserved exclusively for the company's own directors and senior management, and is closed to ordinary retail investors
• b.The placing tranche is free of charge
• c.Placing shares are offered to selected (often institutional) investors, while the public offer is open to the general public by subscription✓
• d.There is no difference between them

The placing tranche is marketed to selected, typically institutional or professional, investors, whereas the public offer tranche is available to retail investors by subscription. The clawback mechanism can shift shares from placing to the public offer when retail demand is strong.

The 'grey market' in the context of a new listing refers to:

• a.An illegal underground exchange operating entirely outside any regulatory oversight
• b.Unofficial trading of the shares before official dealings begin on the Exchange✓
• c.Trading in unlisted government debt
• d.The market for odd lots

The grey market is unofficial trading of newly issued shares (for example through some brokers' platforms) after allocation but before the shares begin trading officially on the Exchange. Prices there can indicate expected demand but are outside the Exchange's order book.

After a new listing, a controlling shareholder is generally subject to a 'lock-up', meaning they must:

• a.Buy additional shares each month
• b.Not dispose of their shares for a specified period following listing (and not cease to be controlling for a further period)✓
• c.Sell off the entirety of their shareholding in the company immediately upon the commencement of dealings on the listing day
• d.Transfer their shares to the SFC

The Listing Rules impose a lock-up on controlling shareholders: no disposal of shares in the first six months after listing, and no disposal that would result in loss of controlling status in the following six months. This supports market stability and aligns incentives after the IPO.

A key qualitative condition for listing is that the applicant must:

• a.Be controlled and majority-owned by at least one individual who is a Hong Kong permanent resident shareholder
• b.Carry on a business of substance and be considered suitable for listing (a mere 'shell' is not suitable)✓
• c.Be at least 50 years old as a company
• d.Have no more than 100 shareholders

Beyond the numeric tests, the Listing Rules require that the applicant and its business be suitable for listing, carrying on a business of substance. Cash shells or companies without a genuine business are generally not regarded as suitable.

Weighted voting rights (WVR) structures on the Main Board are:

• a.Permitted only for eligible issuers meeting specific criteria, subject to enhanced investor safeguards✓
• b.Available to any company on request
• c.Prohibited in all cases
• d.Available only to large Mainland Chinese state-owned enterprises that are seeking a primary Hong Kong listing

The Listing Rules permit weighted (dual-class) voting-rights structures only for eligible applicants (such as certain innovative companies) meeting size and other conditions, and subject to enhanced safeguards and disclosure to protect ordinary shareholders.

The SFC is funded principally by:

• a.An annual budgetary grant voted and appropriated by the Legislative Council each year
• b.Profits from trading on its own account
• c.Donations from listed companies
• d.Levies on securities and futures transactions together with fees and charges✓

The SFC is largely self-funded through transaction levies collected on market turnover, plus licensing and other fees. This funding model supports its operational independence as a statutory regulator under the SFO.

A licensed person who wishes to challenge certain SFC decisions (for example a disciplinary sanction) may appeal to:

• a.The Financial Secretary of the HKSAR Government personally
• b.The Market Misconduct Tribunal
• c.The Securities and Futures Appeals Tribunal (SFAT)✓
• d.HKEX's Listing Committee

The Securities and Futures Appeals Tribunal (SFAT) is the independent body that reviews specified SFC decisions, such as licensing refusals and disciplinary sanctions. It is distinct from the Market Misconduct Tribunal, which hears market-misconduct cases.

The Securities and Futures Appeals Tribunal (SFAT) is chaired by:

• a.The chairman of HKEX
• b.The Chief Executive of the SFC
• c.A judge (or former judge)✓
• d.A committee of licensed brokers

SFAT is chaired by a judge or former judge, sitting with two other members, and conducts a full merits review of the SFC decision under challenge. Its judicial chairmanship reinforces its independence from the SFC.

In disciplinary proceedings against a regulated person, the SFC may impose a fine of up to:

• a.HK$1,000 in every case
• b.Only a private warning, never a fine
• c.An entirely unlimited monetary amount fixed at the SFC's own discretion in every single case
• d.HK$10 million, or three times the profit gained or loss avoided, whichever is greater✓

Under the SFO's disciplinary provisions, the SFC may fine a regulated person up to HK$10 million or three times the amount of the profit gained or loss avoided, whichever is greater, in addition to reprimand, suspension or revocation of a licence.

Which of the following is a core function performed by the SFC?

• a.Issuing banknotes
• b.Managing and setting the Government's annual fiscal budget and public expenditure
• c.Licensing and supervising intermediaries and enforcing against market misconduct✓
• d.Setting Hong Kong's base interest rate

The SFC's functions include licensing and supervising intermediaries, authorising investment products, overseeing the exchanges and clearing houses, and taking enforcement action. Setting interest rates and issuing currency are monetary functions handled through the HKMA.

In exercising its investigatory powers under the SFO, the SFC may:

• a.Require a person to produce records and to attend before an investigator to answer questions✓
• b.Rewrite the Listing Rules unilaterally without consultation
• c.Seize and permanently confiscate a person's residential property without any legal process at all
• d.Impose a prison sentence directly

The SFO gives the SFC broad investigatory powers, including compelling the production of records and documents and requiring persons to attend interviews and answer questions. Criminal punishment such as imprisonment remains a matter for the courts.

Under Schedule 5 to the SFO, which regulated activity is 'Type 4'?

• a.Asset management
• b.Dealing in securities
• c.Advising on securities✓
• d.Securities margin financing

Type 4 regulated activity is advising on securities. For reference, Type 1 is dealing in securities, Type 6 is advising on corporate finance, Type 8 is securities margin financing and Type 9 is asset management under Schedule 5 to the SFO.

Providing credit rating services in Hong Kong falls under which type of regulated activity?

• a.Type 10✓
• b.It is not a regulated activity
• c.Type 6
• d.Type 1

Type 10 regulated activity is providing credit rating services. Rating agencies and their rating analysts must be licensed or registered with the SFC, reflecting the market importance of credit ratings.

The codes and guidelines issued by the SFC, such as the Code of Conduct, have what legal status?

• a.They are Ordinances with the full force of statute
• b.They can only be applied to companies, never to individuals
• c.They do not themselves have the force of law, but non-compliance may reflect on a person's fitness and can be relied on in proceedings✓
• d.They are entirely voluntary in nature and are never relevant to, or admissible in, any of the SFC's enforcement or disciplinary proceedings

SFC codes and guidelines are not statutory law, so a breach is not itself an offence. However, failure to comply may call a person's fitness and properness into question and is admissible as evidence in proceedings, giving the codes real regulatory force.

The Investor Compensation Fund exists to:

• a.Reimburse investors for their ordinary market losses caused by falling share prices, regardless of any intermediary default
• b.Guarantee investors a profit on their trades
• c.Compensate retail investors, up to a prescribed limit, for losses arising from the default of a licensed intermediary✓
• d.Provide capital to listed companies

The Investor Compensation Fund, established under the SFO, compensates retail investors (up to a per-investor limit, currently HK$500,000 for securities) for losses due to the default of a licensed intermediary or authorised institution. It does not cover ordinary investment losses from market movements.

The maximum compensation payable to an individual investor from the Investor Compensation Fund for a securities default is currently:

• a.HK$10 per investor
• b.HK$500,000 per investor per default✓
• c.Unlimited
• d.The full value of all shares ever bought

The Investor Compensation Fund provides up to HK$500,000 per investor per default in respect of securities (with a separate limit for futures). This cap balances investor protection against the cost of maintaining the fund.

The body responsible for promoting investor and financial education across sectors in Hong Kong is the:

• a.Market Misconduct Tribunal
• b.Companies Registry
• c.The Hong Kong Futures Exchange and its clearing members
• d.Investor and Financial Education Council (IFEC)✓

The Investor and Financial Education Council (IFEC), a subsidiary of the SFC, promotes financial literacy and investor education across banking, securities, insurance and retirement sectors. Investor protection through education complements the SFC's supervisory work.

For a bank that is a 'registered institution' carrying on regulated activities, the front-line supervisor is the HKMA, but the SFC retains power to:

• a.Set the bank's lending rates
• b.Appoint and remove the members of the registered institution's board of directors and its senior management at will
• c.Take disciplinary action, including suspending or revoking the institution's registration for regulated activities✓
• d.Guarantee the bank's deposits

Although the HKMA is the front-line regulator of registered institutions, the SFC retains overarching authority, including the power to discipline and to suspend or revoke registration for regulated activities. The two regulators coordinate under a memorandum of understanding.

The 'recognised exchange controller' that owns and controls the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange is:

• a.The SFC
• b.Hong Kong Exchanges and Clearing Limited (HKEX)✓
• c.The Financial Services and the Treasury Bureau (FSTB)
• d.The Hong Kong Monetary Authority

HKEX is the recognised exchange controller under the SFO, holding SEHK and HKFE and the group's clearing houses. As a listed company itself, its own regulation is subject to special arrangements involving the SFC.

The Process Review Panel established in relation to the SFC:

• a.Reviews the internal operational procedures and processes the SFC follows in handling cases and complaints✓
• b.Decides whether particular named individuals should be criminally prosecuted for market-related offences in court
• c.Sets the Exchange's trading hours
• d.Licenses individual representatives

The Process Review Panel is an independent panel that reviews whether the SFC has followed its own internal procedures in handling regulatory cases and complaints, enhancing accountability and public confidence. It does not itself make enforcement or licensing decisions.

Under the AMLO, a licensed corporation must retain records of customer due diligence and transactions for at least:

• a.5 years after the end of the business relationship or completion of the transaction✓
• b.Indefinitely, with no possibility at all of the records ever being destroyed by the firm
• c.6 months
• d.1 year

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance requires CDD and transaction records to be kept for at least five years after the end of the business relationship or after the completion of a transaction. Proper record-keeping supports investigations and audits.

The AMLO framework is built on a 'risk-based approach', which means a firm should:

• a.Apply exactly the same procedures to every client regardless of risk
• b.Refuse to serve any client who is not a Hong Kong resident
• c.Rely entirely and solely on the client's own verbal assurances regarding their identity and the source of their funds
• d.Apply enhanced due diligence to higher-risk situations and may apply simplified measures to lower-risk ones✓

A risk-based approach requires firms to assess and tier money-laundering/terrorist-financing risk, applying enhanced due diligence to higher-risk customers and relationships, and (where permitted) simplified measures to demonstrably lower-risk ones. Resources are focused where risk is greatest.

When a prospective client is identified as a politically exposed person (PEP), the firm should:

• a.Apply enhanced due diligence, including obtaining senior management approval to establish the relationship✓
• b.Apply only simplified due diligence
• c.Automatically refuse to deal with them in every single case, since PEPs are barred from opening any securities account
• d.Ignore the status, since PEPs are low risk

PEPs are treated as higher risk under the AMLO. Enhanced due diligence is required, including establishing source of wealth and funds and obtaining senior management approval before establishing or continuing the relationship. Being a PEP does not automatically bar the relationship.

To meet its AML/CFT obligations, a licensed corporation should appoint:

• a.An external auditor as its only AML control
• b.No particular officer, as AML is optional
• c.A Money Laundering Reporting Officer (MLRO) / compliance officer to oversee AML systems and handle internal suspicious-transaction reporting✓
• d.A director drawn from a completely unrelated outside company to act as the firm's nominal money laundering reporting officer in name only

Firms are expected to appoint a compliance officer and a Money Laundering Reporting Officer (MLRO) to oversee AML/CFT policies and act as the central point for evaluating and reporting suspicious transactions. Clear internal responsibility is a key control under the SFC's AML Guideline.

'Tipping off' a client that a suspicious transaction report has been or may be made about them is:

• a.A criminal offence under Hong Kong's anti-money-laundering legislation✓
• b.Required by the AMLO
• c.Permitted, provided that it is done politely and in writing to the client
• d.Good customer service and encouraged

Disclosing to a client that a suspicious transaction report has been or may be made ('tipping off') is a criminal offence, as it may prejudice an investigation. Suspicions must instead be reported to the Joint Financial Intelligence Unit (JFIU) without alerting the client.

Under the Securities and Futures (Client Securities) Rules, a standing authority permitting a firm to deal with client securities (e.g. for stock lending or as collateral) is generally valid for a maximum of:

• a.1 week
• b.It never expires and remains valid permanently once it is first given
• c.3 months
• d.12 months (though it may be renewed, including by deemed renewal)✓

A client's standing authority for the use of client securities is limited to a maximum of 12 months, after which it must be renewed (renewal may be by the client's express agreement or by deemed renewal on notice). This periodic renewal protects clients' control over their assets.

Following the execution of a client's securities transaction, an intermediary must provide the client with a contract note:

• a.Only once a year
• b.Within three years
• c.By the end of the next business day after the transaction✓
• d.Only if and when the client actually complains about the trade

The Contract Notes Rules require an intermediary to deliver a contract note to the client by the end of the business day following the transaction. Contract notes and periodic statements of account give clients a clear record of their dealings and holdings.

Client money received by a licensed corporation must, under the Client Money Rules, be paid into a segregated client account:

• a.Only at the end of the financial year
• b.Within 30 days
• c.Only if the client specifically insists
• d.Within one business day of receipt✓

The Securities and Futures (Client Money) Rules require client money to be paid into a segregated client account, with an authorised institution, promptly - within one business day of receipt. Segregation keeps client money separate from the firm's own funds and protects it on the firm's insolvency.

The primary purpose of the client asset segregation rules (for client money and client securities) is to:

• a.Increase the firm's own working capital
• b.Reduce the amount of stamp duty payable
• c.Protect client assets from the firm's creditors if the firm becomes insolvent✓
• d.Allow the firm to freely trade the client assets on its own account for profit

Segregation ensures client money and securities are held separately from the firm's own assets, so that if the firm fails, client assets are protected and not available to the firm's general creditors. This is a cornerstone of investor protection in the SFC's operational rules.

The international body that sets the standards on which Hong Kong's AML/CFT regime is modelled is the:

• a.International Monetary Fund
• b.World Trade Organization
• c.The Stock Exchange of Hong Kong Ltd
• d.Financial Action Task Force (FATF)✓

The Financial Action Task Force (FATF) sets the international standards for anti-money-laundering and counter-terrorist-financing. Hong Kong, as a FATF member, implements these standards through the AMLO and related legislation and guidelines.