HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Every licensed corporation must appoint responsible officers (ROs) for each regulated activity it conducts. The minimum requirement is:

• a.Three ROs, all of whom must be executive directors
• b.At least two ROs per regulated activity, at least one of whom is an executive director✓
• c.One RO for the whole firm regardless of activities
• d.A single responsible officer for the firm as a whole, who need not be a director or be actively involved in supervision

A licensed corporation must have at least two responsible officers for each regulated activity, and at least one RO must be an executive director available to supervise the business at all times.

In deciding whether to grant a licence, the SFC applies the 'fit and proper' test. Which factor is relevant?

• a.The applicant's financial status, competence, reputation and reliability✓
• b.Whether the applicant banks with a specific institution
• c.The applicant's political affiliation
• d.The number of social-media followers and public endorsements the applicant has accumulated within the industry

The Fit and Proper Guidelines require the SFC to consider an applicant's financial status and solvency, qualifications and experience (competence), and reputation, character, reliability and financial integrity. Commercial or political preferences are irrelevant.

Licensed individuals must keep their knowledge current through Continuous Professional Training (CPT). Under the SFC's current regime this means:

• a.A single fixed total of forty hours completed once every five years, none of which needs to relate to regulatory compliance
• b.No formal requirement, only encouragement
• c.A one-off course taken only at the time of licensing
• d.A minimum number of CPT hours each calendar year for each regulated activity, including compliance and ethics content✓

The SFC's CPT regime requires ongoing annual CPT hours for each regulated activity, with a defined minimum devoted to regulatory-compliance and ethics topics (currently 10 hours per year, of which at least 5 relate to compliance). Verify the current figures against the SFC's guidelines before relying on them.

The Securities and Futures (Client Money) Rules require a licensed corporation to:

• a.Remit all client money to the SFC
• b.Hold client money in a segregated account with an authorised institution, separate from the firm's own money✓
• c.Lend client money to its directors
• d.Treat client money as part of the firm's own working capital, pooling it with corporate funds to meet day-to-day expenses

The Client Money Rules require client money to be held in a segregated client account with an authorised institution, kept separate from the firm's own assets so clients are protected if the firm fails. Parallel Client Securities Rules apply to client securities.

Which activity would generally require a licence for Type 1 regulated activity (dealing in securities)?

• a.A company issuing and selling only its own shares to raise capital
• b.A newspaper that publishes general share-price tables and routine market commentary for its ordinary readership
• c.A person giving investment views to family members, not as a business
• d.A firm that, for a commission, receives and transmits clients' orders to buy listed shares✓

Receiving and transmitting client orders in listed securities for a commission is dealing in securities (Type 1) and requires a licence. An issuer selling only its own securities, incidental media reporting and non-business private views fall outside the licensing net.

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.

A member of the public can check whether a firm or individual is licensed by the SFC, and for which regulated activities, by consulting:

• a.The Companies Registry's charges index
• b.A confidential internal list that is made available only to banks and other authorised institutions on a written request being made to the Commission
• c.The Stock Exchange trading floor
• d.The SFC's public register of licensed persons and registered institutions✓

The SFC maintains a public register of licensed persons and registered institutions, showing the regulated activities they are licensed/registered for and any conditions or public disciplinary actions. Investors are encouraged to verify status before dealing with an intermediary.

A licensed person ceases to meet the fit-and-proper standard part-way through their licence (for example, following a serious conviction). Under the SFO the SFC may:

• a.Only issue a private note
• b.Suspend or revoke the licence, or attach conditions, because being fit and proper is a continuing requirement✓
• c.Do nothing until the licence expires at the end of its current term, and then simply decline to renew the licence at that later point in time
• d.Refer the matter to the Companies Registry

Being fit and proper is a continuing obligation, not a one-off test at entry. If a licensed person ceases to be fit and proper, the SFC may exercise its disciplinary and licensing powers to suspend, revoke or impose conditions on the licence to protect the investing public.

A person applying to be a licensed representative may, in appropriate cases, apply for a provisional licence in order to:

• a.Trade for their own account without supervision
• b.Avoid ever having to meet the competence, fit-and-proper and continuing-professional-training requirements that would otherwise apply on full licensing
• c.Bypass the fit-and-proper assessment permanently
• d.Begin carrying on the regulated activity while their substantive licence application is being processed✓

A provisional licence lets a representative applicant start work while the full application is assessed, subject to conditions and the SFC's power to withdraw it. It does not lower the fit-and-proper or competence standards, which must still be met for the substantive licence.

A licensed corporation that acts as a sponsor for an initial public offering is carrying on which type of regulated activity, for which the SFC imposes additional eligibility and 'principal' requirements?

• a.Type 9 (asset management)
• b.Type 6 (advising on corporate finance)✓
• c.Type 8 (securities margin financing)
• d.Type 1 (dealing in securities), which is the regulated activity said to cover all initial-public-offering sponsor work carried on by the firm

Sponsor work on IPOs falls within Type 6 (advising on corporate finance). Firms must meet additional sponsor eligibility criteria and appoint sponsor principals, reflecting the gatekeeper role sponsors play in the quality of listing applications and prospectus disclosure.

A licensed corporation changes its business address and the responsibilities of one of its responsible officers. Under the licensing/information rules it must:

• a.Take no action, since such changes are private
• b.Notify the SFC of the changes within the required time✓
• c.Wait until the next annual audit to report any of the changes to the Commission or to any other regulator that may be involved in supervising it
• d.Notify only its clients

The Securities and Futures (Licensing and Registration) (Information) Rules require licensed corporations and individuals to notify the SFC of specified changes in their circumstances (such as address, business, or officers) within the prescribed periods, keeping the register accurate and supervision effective.

A licensed representative wishes to be accredited to two different licensed corporations at the same time. This is:

• a.Always prohibited without any exception, because a representative may only ever be accredited to a single principal at any one time under the rules
• b.A matter solely for the two firms to agree between themselves
• c.Permitted only with the SFC's approval, with conflicts of interest properly managed✓
• d.Automatically permitted with no approval needed

A representative is normally accredited to a single principal, but may be accredited to more than one licensed corporation with the SFC's approval, provided conflicts of interest and supervisory responsibility are appropriately addressed. Each principal remains responsible for supervising the representative.

Which of the following persons would generally NOT require an SFC licence?

• a.A firm receiving and transmitting clients' securities orders for a commission, which is said to be treated as exempt agency work outside the licensing net
• b.A company managing client portfolios for a fee
• c.A company issuing and selling only its own shares to raise capital for its business✓
• d.A firm advising the public on the merits of specific listed shares as a business

An issuer selling only its own securities to raise capital for itself is generally not carrying on a business in a regulated activity and does not need a licence. Order routing (Type 1), portfolio management (Type 9) and advising on securities as a business (Type 4) do require licensing.

When determining the level of a disciplinary fine on a licensed person, the SFC has published:

• a.A rule that fines are decided by the Stock Exchange
• b.A fixed statutory tariff that requires exactly the same fine to be imposed for every breach of the same provision, regardless of the circumstances of the case
• c.Disciplinary Fining Guidelines setting out the factors it considers✓
• d.No guidance at all

The SFC's Disciplinary Fining Guidelines explain the factors it weighs (such as the nature, seriousness and impact of the misconduct, benefit gained, and the person's disciplinary record and co-operation) when setting a fine within the statutory maximum. This promotes consistency and transparency.

The requirement that a licensed corporation have at least two responsible officers for each regulated activity exists mainly to:

• a.Ensure that competent, accountable supervision of the regulated activity is available at all times✓
• b.Provide extra shareholders
• c.Satisfy the Stock Exchange listing rules
• d.Increase the licensed firm's annual tax bill, so that it is required to contribute rather more to the overall funding of the regulatory system

Requiring at least two ROs (at least one an executive director) for each regulated activity ensures there is always a fit-and-proper, accountable person supervising the business, avoiding gaps in supervision if one RO is absent. It reflects the SFC's emphasis on senior-management responsibility.

The eight Core Functions under the MIC regime include, among others:

• a.Overall management oversight, key business line, risk management, and finance and accounting✓
• b.Only compliance and nothing else
• c.Advertising, investor relations and travel
• d.Marketing, catering, building security and cleaning, which the regime is said to treat as the core operational functions of the licensed firm

The MIC Core Functions comprise overall management oversight, key business line, operational control and review, risk management, finance and accounting, information technology, compliance, and anti-money-laundering/counter-terrorist-financing. Each must have an identified Manager-In-Charge accountable to senior management.

A licensed corporation that holds client money in Hong Kong must, under the Client Money Rules:

• a.Transfer it to the SFC each week
• b.Lend it to its directors on request
• c.Keep it in a segregated client account with an authorised institution, separate from the firm's own money✓
• d.Mix it with the firm's own operating funds for the sake of efficiency, provided only that the combined total is reconciled at the end of each month

The Securities and Futures (Client Money) Rules require client money to be held in a segregated client bank account with an authorised institution, kept separate from the firm's own money, so that clients' funds are protected on the firm's insolvency. Payments out are tightly restricted to permitted purposes.

The competence requirements distinguish between a licensed representative and a responsible officer principally because a responsible officer:

• a.Carries supervisory and management responsibility and so must meet additional experience and management-competence standards✓
• b.Handles rather less client contact and therefore faces a reduced set of the competence and continuing-training requirements that apply to representatives
• c.Is not required to be fit and proper
• d.Never needs any qualifications

An RO must satisfy higher competence standards, including relevant management experience, because they supervise the regulated activity and bear accountability for the firm's conduct. A representative operates under supervision and faces the baseline competence requirements.

If a licensed corporation wants to add a new regulated activity to its existing licence, it must:

• a.Register the change with the Companies Registry only
• b.Obtain approval from its clients
• c.Simply start conducting the new regulated activity straight away, provided only that it notifies the Commission within seven business days afterwards
• d.Apply to the SFC to vary its licence and demonstrate it meets the requirements for the additional activity✓

Because a licence is specific to the regulated activities stated on it, adding a new activity requires an application to vary the licence, with the firm meeting the fit-and-proper, competence, responsible-officer and financial-resources requirements for that activity before conducting it.

The subsidiary legislation made under the SFO that governs how licensed corporations must safeguard, use and account for client money and client securities is collectively important because it:

• a.Guarantee that clients cannot lose money on any leveraged position that is taken through the firm's securities margin financing facilities
• b.Protects client assets by requiring segregation and restricting their use✓
• c.Applies only to overseas clients
• d.Sets the commission rates firms may charge

The Client Money and Client Securities Rules require segregation of client assets from firm assets and restrict how those assets may be used, so that clients are protected if the firm fails or misbehaves. Asset protection, not pricing or profit, is their purpose.

A licensed corporation must maintain adequate systems of control and sufficient resources. Ultimate responsibility for ensuring these are in place rests with:

• a.The external auditor alone
• b.The SFC
• c.The firm's senior management✓
• d.The most junior back-office clerk

Under General Principle 9 of the Code of Conduct and the Management, Supervision and Internal Control Guidelines, ultimate responsibility for maintaining appropriate standards of conduct, adequate controls, competent staffing and sufficient resources lies with the firm's senior management, reinforced by the MIC regime.