HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Insider dealing under the SFO occurs when a person connected with a listed corporation deals in its securities while in possession of:

• a.Relevant, price-sensitive information that is not generally known to the market✓
• b.Only information published in the annual report
• c.A rumour circulating on social media
• d.Any information about the company at all, whether or not it is already public and whether or not it affects the price

Insider dealing turns on a 'connected person' dealing while in possession of 'relevant information': specific, price-sensitive information not generally known that, if known, would likely materially affect the price. Publicly available information cannot found the offence.

Entering matched buy and sell orders that involve no genuine change in beneficial ownership, in order to create a misleading appearance of active trading, is:

• a.Lawful if disclosed to the broker
• b.Only a breach of the Listing Rules
• c.A permitted market-making technique
• d.False trading, a form of market misconduct under the SFO✓

Wash sales and matched orders that create a false or misleading appearance of active trading constitute false trading, which is prohibited under both Part XIII (civil) and Part XIV (criminal) of the SFO.

When the Market Misconduct Tribunal (MMT) finds market misconduct under Part XIII of the SFO, it may:

• a.Cancel the company's listing automatically
• b.Order disgorgement, disqualification, a cold-shoulder order and a cease-and-desist order✓
• c.Impose a term of imprisonment on the individuals found to have engaged in the market misconduct in question
• d.Levy criminal fines

The MMT is a civil tribunal chaired by a judge. It can order disgorgement, disqualification (director bans), cold-shoulder and cease-and-desist orders, but it cannot impose imprisonment or criminal fines, which require criminal prosecution under Part XIV.

Part XIII of the SFO defines a number of distinct forms of 'market misconduct'. How many forms are there?

• a.Nine
• b.Three
• c.Four
• d.Six✓

Part XIII of the SFO sets out 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. Each has a mirror criminal offence in Part XIV.

Which of the following is NOT one of the forms of market misconduct under Part XIII of the SFO?

• a.Stock market manipulation
• b.Price rigging
• c.False trading (a false or misleading appearance of active trading)
• d.Failing to file an annual return with the Companies Registry✓

The six forms of market misconduct are insider dealing, false trading, price rigging, stock market manipulation, disclosure of information about prohibited transactions, and disclosure of false or misleading information inducing transactions (SFO Part XIII/XIV). Filing an annual return is a company-law obligation, not market misconduct.

The Market Misconduct Tribunal (MMT) is a CIVIL body. On what standard of proof does it decide whether market misconduct has occurred?

• a.To an absolute certainty
• b.The balance of probabilities✓
• c.Whichever standard the SFC selects for the case
• d.Beyond reasonable doubt

Because MMT proceedings under Part XIII of the SFO are civil, the tribunal decides on the balance of probabilities. The criminal 'beyond reasonable doubt' standard applies only to the parallel Part XIV criminal prosecutions in the courts.

How is the Market Misconduct Tribunal constituted?

• a.By a jury of twelve investors
• b.By the full board of HKEX
• c.By a chairman who is a judge, sitting with two other members✓
• d.By the Chief Executive of the SFC sitting alone, without any judicial member

The MMT is chaired by a judge (or former judge) of the Court of First Instance, sitting with two other members drawn from outside the Government. This judicial chairmanship reflects its civil, quasi-judicial character under Part XIII of the SFO.

Which of the following can the Market Misconduct Tribunal NOT do when it finds a person has engaged in market misconduct?

• a.Disqualify the person from being a company director
• b.Order the person to disgorge profits made
• c.Sentence the person to imprisonment✓
• d.Make a cold-shoulder order

The MMT is a civil tribunal. It can order disgorgement, disqualification, cold-shoulder and cease-and-desist orders and costs, but it cannot impose imprisonment or a criminal fine. A custodial sentence is only available on criminal conviction under Part XIV of the SFO.

What is the effect of a 'cold-shoulder order' made by the Market Misconduct Tribunal?

• a.It sends the case to the police for a criminal record
• b.It deprives the person of access to Hong Kong's market facilities for a specified period✓
• c.It automatically cancels the listing of any company the person controls and bars re-listing
• d.It freezes all of the person's personal bank accounts permanently

A cold-shoulder order bars the person, for a period of up to five years, from directly or indirectly acquiring, disposing of or dealing in securities through Hong Kong's market facilities. It is one of the civil sanctions available to the MMT under Part XIII of the SFO.

A person convicted of a market-misconduct offence on indictment under Part XIV of the SFO faces a maximum term of imprisonment of:

• a.10 years✓
• b.5 years
• c.2 years
• d.6 months

On indictment, the criminal market-misconduct offences in Part XIV of the SFO carry a maximum of 10 years' imprisonment and a fine of up to HK$10 million. These criminal penalties are only available through prosecution in the courts, not the civil MMT.

For a single course of conduct, can the SFC pursue BOTH civil proceedings before the MMT and criminal prosecution under Part XIV?

• a.Yes, but only if the person consents
• b.Yes, the SFC is required to run the civil and criminal proceedings together in every market-misconduct case
• c.No, it must elect one route; a person is not to be dealt with under both regimes for the same conduct✓
• d.Only if HKEX approves both

The SFO's dual regime gives the SFC a choice of the civil (MMT) route or the criminal (Part XIV) route, but a person is not to be subjected to both for the same underlying conduct. This avoids double jeopardy while preserving flexibility in enforcement.

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

• a.A director, employee or substantial shareholder of the corporation or a related company✓
• b.Any member of the general public who happens to read the company's published news announcements
• c.Only holders of the company's debentures
• d.Only the chairman of the board

A connected person under the insider-dealing provisions includes directors, employees and substantial shareholders of the corporation (and of related corporations), and others who have access to relevant information through their professional or business relationship. This wide definition captures those with privileged access.

Under the insider-dealing provisions, a person is still treated as connected with a corporation for how long after ceasing to hold the connecting position?

• a.6 months✓
• b.There is no continuing period once the position ends
• c.10 years
• d.2 years

The SFO extends the definition so that a person remains a connected person for 6 months after they cease to be a director, employee or otherwise connected. This prevents insiders from escaping liability simply by resigning before dealing.

An insider passes specific price-sensitive, non-public information to a friend, who then trades on it. Under the SFO, the friend (the 'tippee'):

• a.Commits no wrong at all, because a tippee who is not connected with the company falls outside the rules
• b.Is liable only if they are a licensed person
• c.Is liable only in a foreign jurisdiction
• d.May be liable for insider dealing if they knew the information came from a connected person✓

Insider dealing under Part XIII/XIV of the SFO extends to a tippee who deals while knowing, or having reasonable cause to believe, that the relevant information came directly or indirectly from a connected person. The passing of the tip ('tipping') can itself also be caught.

A connected person who, without dealing personally, counsels or procures another person to deal in the corporation's securities while in possession of relevant information:

• a.Commits only a breach of the Listing Rules
• b.Is liable only if the other person makes a profit
• c.Still engages in insider dealing under the SFO✓
• d.Is not caught because they did not trade themselves

The insider-dealing provisions expressly capture a connected person who counsels or procures another to deal while knowing or having reasonable cause to believe that the other would deal on the relevant information. Personal trading is not required for liability under Part XIII/XIV of the SFO.

The statutory offence of insider dealing under the SFO concerns dealing in the securities of:

• a.Any private company in Hong Kong
• b.Only banks
• c.A listed corporation, or a corporation whose securities are listed on a recognised stock market✓
• d.Only companies that are incorporated outside Hong Kong and whose securities are not listed anywhere

Insider dealing is defined by reference to dealing in the listed securities of a corporation (or their derivatives). It concerns corporations whose securities are listed on a recognised stock market such as SEHK, not private companies with no listed securities (SFO Part XIII/XIV).

Which of the following is a recognised defence to an allegation of insider dealing under the SFO?

• a.That the person would have entered into the transaction regardless of the relevant information, and not for the purpose of using it to profit or avoid loss✓
• b.That the person has never been prosecuted before
• c.That the person only made a small profit
• d.That the person did not personally read any of the company's published announcements or circulars before deciding to place the relevant trade in the open market

The SFO provides specific statutory defences, including that the person was not dealing for the purpose of using the relevant information to make a profit or avoid a loss, or would have acted the same way without it. The size of any profit or a clean record is irrelevant.

'False trading' under the SFO is essentially conduct that:

• a.Creates a false or misleading appearance of active trading, or of the market for or price of securities✓
• b.Involves executing trades outside the official market trading hours, which the SFO treats as inherently improper
• c.Involves selling securities at a loss
• d.Involves failing to settle a trade on time

False trading (Part XIII/XIV of the SFO) is conduct that creates, or is likely to create, a false or misleading appearance of active trading in securities, or a false or misleading appearance with respect to the market for, or price of, securities. Wash sales and matched orders are classic examples.

A 'wash sale', which can constitute false trading, is a transaction that:

• a.Is settled in cash rather than shares
• b.Always results in a genuine realised profit for the seller once the trade settles
• c.Is executed by a foreign broker
• d.Does not involve any change in the beneficial ownership of the securities✓

A wash sale is a transaction that does not involve a change in beneficial ownership - the same person is effectively on both sides. The SFO presumes such transactions create a false or misleading appearance of active trading, supporting a false-trading finding (Part XIII/XIV).

Two persons agree that one will place a buy order and the other a matching sell order for the same quantity at the same price and time, to inflate apparent turnover. This is best described as:

• a.Legitimate market making
• b.A breach only of the firm's own internal dealing policy
• c.A permitted block trade
• d.Matched orders amounting to false trading✓

Matched orders - buy and sell orders of substantially the same size, price and timing arranged between colluding parties - create a misleading appearance of active trading and constitute false trading under Part XIII/XIV of the SFO.

Which conduct falls specifically under 'price rigging' as defined in the SFO?

• a.Publishing an accurate research report
• b.Selling shares to realise a genuine loss
• c.Merely filing a substantial shareholder disclosure of interest notice with the Exchange a few days later than the permitted three business days
• d.A wash sale, or a fictitious or artificial transaction, that maintains, increases, reduces or stabilises the price of securities✓

Price rigging covers a wash sale that maintains, increases, reduces or stabilises the price of securities, and fictitious or artificial transactions that affect the price. It targets manipulation of price rather than merely the appearance of activity (SFO Part XIII/XIV).

The distinguishing feature of 'stock market manipulation' under the SFO is that the person:

• a.Effects two or more transactions that raise, lower or maintain the price, intending to induce others to deal✓
• b.Buys shares in a single genuine transaction for long-term investment without any intention to influence others
• c.Fails to disclose a substantial shareholding
• d.Provides accurate information to the SFC

Stock market manipulation involves effecting two or more transactions in a corporation's securities that increase, reduce, maintain or stabilise the price, with the intention of inducing others to buy or sell. The purpose of influencing other investors is the hallmark of this offence (SFO Part XIII/XIV).

How does 'stock market manipulation' differ from 'false trading'?

• a.There is no difference; the terms are identical
• b.Manipulation is civil only and false trading is criminal only
• c.False trading applies exclusively to debt securities such as bonds, whereas stock market manipulation is confined only to ordinary listed equity shares
• d.Manipulation focuses on moving the price to induce others to deal, while false trading focuses on creating a misleading appearance of active trading✓

Both are forms of market misconduct, but stock market manipulation centres on transactions intended to move the price and induce others to trade, whereas false trading centres on creating a false or misleading appearance of active trading or of the market. Each exists in both civil (Part XIII) and criminal (Part XIV) form.

The market-misconduct form 'disclosure of information about prohibited transactions' targets a person who:

• a.Simply advises a client, honestly and in good faith, not to buy a particular listed stock because its prospects appear poor in the current market conditions
• b.Publishes a company's audited accounts
• c.Reports a suspicious transaction to the JFIU
• d.Circulates information that the price of securities will move because of a prohibited transaction, expecting a benefit for themselves or an associate✓

This form of market misconduct catches a person who discloses or circulates information that the price of securities will be affected by a prohibited transaction (such as false trading or manipulation) carried out by them or an associate, where they expect to benefit. It is aimed at those who profit by publicising their own manipulation (SFO Part XIII/XIV).

A person spreads a false rumour on social media that a listed company is about to be taken over, in order to push up its share price. Under the SFO this is most directly:

• a.Insider dealing
• b.Merely a technical breach of the Personal Data (Privacy) Ordinance only
• c.Disclosure of false or misleading information inducing transactions✓
• d.A permitted expression of opinion

Disseminating information that is false or misleading in a material particular, and likely to induce dealing or to affect the price, is the market-misconduct form 'disclosure of false or misleading information inducing transactions' (SFO Part XIII/XIV). Spreading false takeover rumours to move a price is a classic example.

For the offence of disclosing false or misleading information inducing transactions, the required state of mind is that the person, at the time of disclosure:

• a.Had made a genuine profit
• b.Intended to help the company
• c.Was genuinely acting under the express written instructions of the SFC at the relevant time of disclosure
• d.Knew the information was false or misleading, or was reckless or negligent as to whether it was✓

The offence is made out where the person knew that, or was reckless or negligent as to whether, the information was false or misleading in a material particular. Negligence suffices, making this a comparatively broad market-misconduct provision (SFO Part XIII/XIV).

Criminal market-misconduct offences under Part XIV of the SFO are prosecuted:

• a.By the Companies Registry
• b.In the criminal courts, on prosecution brought by or on behalf of the authorities (e.g. the Department of Justice / SFC)✓
• c.By the Market Misconduct Tribunal, sitting as a criminal court with the power to convict offenders and impose imprisonment
• d.By HKEX's disciplinary committee

Part XIV creates criminal offences that are tried in the ordinary criminal courts, not the MMT. Prosecutions may be brought by the SFC (summarily) or on indictment by the Department of Justice, and conviction can lead to imprisonment and fines.

A finding by the Market Misconduct Tribunal that a person engaged in market misconduct:

• a.Is a civil determination and does not, of itself, give the person a criminal record✓
• b.Amounts to a criminal conviction and criminal record
• c.Can result in a term of imprisonment being imposed directly by the tribunal upon the person
• d.Can only be made with the person's consent

MMT proceedings are civil. A finding of market misconduct is not a criminal conviction and does not create a criminal record, although it can lead to civil sanctions and consequential SFC disciplinary action. Criminal consequences arise only under the Part XIV route.

A disgorgement order made by the MMT requires the wrongdoer to:

• a.Serve community service
• b.Pay to the Government an amount equal to the profit gained or loss avoided through the misconduct✓
• c.Pay monetary compensation directly to each and every investor who traded in the market on that day
• d.Surrender their passport permanently

A disgorgement order requires the person to give up the profit gained or loss avoided as a result of the market misconduct, payable to the Government. It is restitutionary in nature and is one of the civil orders available to the MMT under Part XIII of the SFO.

A disqualification order made by the MMT can bar a person from being a director or being involved in the management of a listed corporation for a period of up to:

• a.5 years✓
• b.3 months
• c.1 year
• d.Life, in every case

The MMT may make a disqualification order for a period of up to five years, prohibiting the person from being a director or otherwise involved in the management of a corporation without leave of the court. It is a key civil deterrent under Part XIII of the SFO.

Separately from the six forms of market misconduct, Part XIVA of the SFO requires a listed corporation to disclose 'inside information' to the public:

• a.Only once a year in its annual report
• b.Within 30 days of its next board meeting
• c.As soon as reasonably practicable after the information comes to its knowledge✓
• d.Only if and when a shareholder specifically writes in to request the information first

Part XIVA imposes a statutory obligation on listed corporations to disclose inside information to the public as soon as reasonably practicable after it comes to their knowledge, unless a safe harbour applies. This promotes timely, market-wide disclosure and reduces the scope for insider dealing.

'Inside information' under the Part XIVA disclosure regime is, in essence:

• a.Any information that has already been fully published in the newspapers and is therefore generally known to all of the market participants who regularly deal in the securities concerned
• b.Specific information about the corporation not generally known to the market that would, if generally known, be likely to materially affect the price of its securities✓
• c.Only the company's audited annual accounts
• d.Any internal email of the company

Inside information mirrors the concept of 'relevant information' in insider dealing: specific information about the corporation (or its securities) that is not generally known but would, if known, be likely to have a material effect on price. Its timely disclosure is required under Part XIVA of the SFO.

A breach of the Part XIVA duty to disclose inside information is dealt with by:

• a.The Market Misconduct Tribunal, which may impose a regulatory fine (up to HK$8 million) and other civil sanctions✓
• b.Automatic delisting of the company
• c.Arbitration organised by HKEX
• d.A criminal trial in the ordinary courts automatically leading to mandatory imprisonment of the responsible directors

Enforcement of the Part XIVA inside-information disclosure obligation is through the civil MMT, which can impose a regulatory fine of up to HK$8 million on the corporation and responsible officers, along with other orders. It is a civil, not criminal, regime.

A listed corporation may rely on a 'safe harbour' to delay disclosing inside information under Part XIVA where, for example:

• a.The information is favourable to the share price
• b.The company has not held a board meeting that month
• c.Disclosure would prejudice incomplete negotiations, and confidentiality has been preserved✓
• d.The directors would simply prefer, for their own convenience, to keep the good news to themselves for now

Part XIVA provides safe harbours permitting a temporary withholding of disclosure - for instance where the information concerns an incomplete proposal or negotiation and confidentiality is preserved. A mere preference for secrecy is not a valid ground.

The insider-dealing concept of 'relevant information' requires the information to be, among other things:

• a.Specific, not generally known to market participants, and price-sensitive✓
• b.Contained only in the annual report
• c.A matter of the dealer's personal opinion
• d.General market commentary that is already widely circulating among investors

Relevant information must be specific information about the corporation or its securities, not generally known to the persons who deal in those securities, which if generally known would be likely to materially affect the price. Once it is public it can no longer found an insider-dealing case (SFO Part XIII/XIV).

The overriding purpose of the market-misconduct provisions in the SFO is to:

• a.Protect the integrity of the market and maintain a fair, informed and orderly market✓
• b.Guarantee that investors never lose money
• c.Raise additional general revenue for the Government through the collection of civil fines
• d.Fix the price of listed shares

The market-misconduct regime protects market integrity and investor confidence by ensuring prices reflect genuine supply and demand and publicly available information, not manipulation or the misuse of non-public information. It does not guarantee investment outcomes.

The market-misconduct provisions of the SFO apply to dealings in:

• a.Residential property only
• b.Physical commodities only
• c.Physical foreign currency banknotes and coins exchanged at licensed money changers only
• d.Securities and futures contracts (and related instruments) traded in Hong Kong✓

Market misconduct under Parts XIII and XIV covers securities and futures contracts and related instruments. Manipulation and false-trading provisions extend to the futures market as well as the securities market, protecting both.

In addition to persons who directly engage in market misconduct, the SFO can reach a person who:

• a.Merely holds shares in the company passively as an ordinary long-term investor
• b.Reports the misconduct to the SFC
• c.Reads about the misconduct in the press
• d.Assists or is knowingly involved in the market misconduct of another✓

A person who aids, abets, counsels, procures or is otherwise knowingly involved in another's market misconduct can also be the subject of MMT orders. Liability is not limited to the person who physically executed the trades (SFO Part XIII/XIV).

The use of fraudulent or deceptive devices in transactions in securities or futures is:

• a.Regulated solely by the Listing Rules
• b.Only a civil matter before the MMT
• c.Permitted so long as it is disclosed to the counterparty
• d.A criminal offence under Part XIV of the SFO✓

The SFO criminalises the use of any fraudulent or deceptive device, scheme or artifice in transactions in securities or futures contracts (Part XIV). This broad anti-fraud provision supplements the specific market-misconduct forms.

The MMT may, in addition to its principal orders, require a person found to have engaged in market misconduct to:

• a.Pay the costs and expenses of the proceedings and of the SFC's investigation✓
• b.Personally guarantee the share price for a year
• c.Publish an apology in every newspaper worldwide
• d.Buy back all of the shares that were traded in the market on that particular day

The MMT can order the person to pay the costs of the tribunal proceedings and the SFC's investigation costs, in addition to disgorgement, disqualification and cold-shoulder orders. These are civil consequences under Part XIII of the SFO.