HKSI Paper 1: 80 Key Concepts and Study Guide
HKSI Paper 1, Fundamentals of Securities and Futures Regulation, covers the regulatory framework for Hong Kong's securities and futures industry. You need to understand who regulates each activity, how the main laws work and what intermediaries must do when dealing with clients.
Use these 80 key concepts to organise your revision across all nine public syllabus topics. Each includes an explanation, an original hypothetical example, a mistake to watch for and a self-check question. Read the official study guide valid for your sitting alongside this article; version 3.5 applies from 30 June 2026.
Exam format: HKSI examination overview . Latest published pass rate: 44.29% (Jul 2026) . A pass rate is a past result for a group of candidates, not your required score.
How to use these 80 concepts
- Read one topic at a time and, after each concept, attempt the self-check question before looking at the answer. If you get it wrong, re-read the explanation and example, then move on only when you can explain the distinction in your own words.
- Use the trap lines as a personal checklist. Before your exam, go through the traps only and ask yourself why each one is wrong; this converts passive reading into active recall and exposes weak areas quickly.
- Build a one-page map per topic listing the key regulators, ordinances, codes and their roles. Paper 1 rewards candidates who can match a fact pattern to the right regime, so practise sorting scenarios into SFO, Listing Rules, Takeovers Code and Code of Conduct buckets.
The practice examples are original and hypothetical unless explicitly identified as a published case. The concept count is a revision structure; it does not represent official question frequency or topic weighting.
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Topic 1: Regulatory overview of the Hong Kong financial industry
The landscape of products, regulators and market participants in Hong Kong, and how the SFC, exchanges and other bodies fit together.
1. Hong Kong as an international financial services centre
Hong Kong offers a wide range of financial products and services: securities, futures and options, collective investment schemes, corporate finance advisory, asset management, credit rating services and virtual asset activities. Each sits in its own regulatory framework, so you must be able to describe the variety and match each product to the right regime.
Example. Hypothetically, one firm deals in shares, trades index futures and distributes an authorised fund: three products, three rulebooks.
Watch out. Assuming one uniform rulebook covers all products; each product type follows a distinct regime.
Self-check: Why must each service line be mapped to its own regime?
Answer: Each is a distinct regulated activity with its own licensing scope and conduct requirements.
2. The two-tier regulatory structure and background to securities regulation
Government sets policy through the Financial Services and the Treasury Bureau, while independent regulators supervise the market. Modern securities regulation developed through reforms after past market crises, culminating in the SFO consolidating earlier ordinances and the SFC as independent statutory regulator.
Example. Hypothetically, the Bureau frames a new investor-protection policy; the SFC implements and polices it under the SFO.
Watch out. Treating the SFC as a government department taking daily instructions; it is independent.
Self-check: In a hypothetical policy shift, what distinguishes the Bureau's role from the SFC's?
Answer: The Bureau sets policy and proposes legislation; the SFC independently supervises and enforces under its statutory powers.
3. The SFC: objectives, functions and structure
The SFC is the independent statutory regulator for securities and futures. Its statutory objectives include maintaining market integrity, protecting investors, reducing systemic risk and promoting market development. It licenses intermediaries, authorises products, supervises markets and enforces the SFO and its subsidiary legislation.
Example. Hypothetically, the SFC investigates a mis-selling complaint, disciplines the licence and warns investors about an unauthorised product.
Watch out. 'Operating the stock exchange' is not an SFC function; exchanges operate the venues.
Self-check: Why is 'running the trading venue' wrong as an SFC function?
Answer: The SFC is the regulator, not a market operator; SEHK and HKFE run the venues under SFC oversight.
4. SFC divisions, committees, panels and tribunals
The SFC's work is divided among divisions covering intermediaries, corporate finance, investment products and enforcement. Some bodies are independent of the SFC, such as the Securities and Futures Appeals Tribunal, while others, like the Takeovers and Mergers Panel, operate within specific regulatory regimes.
Example. Hypothetically, licensing and product authorisation sit with different divisions, and an appeal goes to the independent Appeals Tribunal.
Watch out. Assuming one SFC body decides everything, or that the Takeovers Panel hears appeals.
Self-check: Why does an appeal against an SFC licensing decision go to an independent tribunal?
Answer: The Appeals Tribunal is separate from the SFC, providing impartial review of specified SFC decisions.
5. HKEX, SEHK, HKFE and clearing houses
HKEX is the listed holding company of the exchange group. Its operating subsidiaries include SEHK (securities), HKFE (futures and options) and the clearing houses for post-trade services. Exchanges operate the markets day to day; the SFC supervises them under the SFO framework.
Example. Hypothetically, shares trade on SEHK and futures on HKFE, both within the HKEX group.
Watch out. Using HKEX and SEHK interchangeably; HKEX is the holding company, SEHK the operating exchange.
Self-check: Which entity lists a company's shares: HKEX or SEHK?
Answer: SEHK; HKEX is the holding company, while SEHK is the operating exchange that lists and trades securities.
6. Other regulators and the registered institution regime
Beyond the SFC, key regulators include the HKMA (banking), the Insurance Authority, the MPFA and the Companies Registry. A bank carrying on regulated activities registers with the SFC as a registered institution, with the HKMA as front-line regulator for licensing-related matters.
Example. Hypothetically, a bank deals in securities: SFC registration under the SFO plus HKMA front-line involvement illustrate dual oversight.
Watch out. Assuming the SFC regulates everything financial; banking, insurance and MPF have their own regulators.
Self-check: Which two regulators are involved when a bank deals in securities?
Answer: The SFC as securities regulator, and the HKMA as front-line regulator for the registered institution.
7. Market participants: intermediaries, investors and support services
An intermediary is a person whose business consists of one or more regulated activities: either a licensed corporation or a registered institution. Individuals who carry on regulated activities for a licensed corporation are licensed representatives; individuals engaged by a registered institution to carry on regulated activity on its behalf are relevant individuals, who are not separately licensed or registered with the SFC but must be fit and proper and have their names and particulars entered in the register maintained by the HKMA. Markets also include investors and support providers such as trustees, custodians, auditors and share registrars, regulated differently.
Example. Hypothetically, a fund has a licensed distributor, a trustee and a share registrar; only the distributor is an intermediary.
Watch out. Assuming everyone in the market is an intermediary; support providers follow their own codes.
Self-check: In a fund with a distributor, trustee and registrar, who is the intermediary?
Answer: The distributor; the trustee and registrar perform support functions under their own regimes.
Topic 2: Principles of relevant Hong Kong law and the Companies Ordinance
How Hong Kong's legal system works, and company law fundamentals: company types, share capital, meetings, directors, shareholders, inspectors and winding up.
8. Hong Kong's legal system and sources of law
Hong Kong follows a common law system where court decisions form precedent alongside legislation. Sources include the Basic Law, ordinances, subsidiary legislation and case law. Securities regulation combines statute (the SFO) with subsidiary legislation and codes, so knowing the hierarchy and legal force of each source is essential.
Example. Hypothetically, a court interprets an unclear SFO term by applying the ordinance text and earlier precedent.
Watch out. Treating codes like the Code of Conduct as ordinances; they are regulatory instruments, not legislation.
Self-check: Is the Code of Conduct primary legislation?
Answer: No; it is an SFC-issued code whose breach can be taken into account in disciplinary action, but it is not legislation.
9. Civil, criminal and disciplinary routes
Civil proceedings settle disputes between parties for remedies like damages; criminal prosecutions by the state can bring fines or imprisonment; disciplinary action targets a licence or registration. Different SFO provisions attach different consequences: only provisions expressly creating offences are criminal. Never assume a breach is automatically a crime.
Example. Hypothetically, a record-keeping breach could attract discipline, prosecution or both, depending on the provision.
Watch out. Calling every breach criminal; only provisions expressly creating offences carry criminal liability.
Self-check: A firm breaches an SFO requirement. Why can you not assume a criminal offence?
Answer: Because the consequence depends on how the specific provision is framed; many breaches lead to civil or disciplinary consequences instead.
10. Courts, tribunals and arbitration
Courts hear civil and criminal cases with formal procedures. Tribunals such as the Market Misconduct Tribunal and the Securities and Futures Appeals Tribunal are specialised statutory bodies with defined jurisdictions and less formal procedures. Arbitration is private dispute resolution by an agreed arbitrator.
Example. Hypothetically, insider dealing goes to the MMT under its statutory jurisdiction, while a contract dispute goes to court or arbitration.
Watch out. Assuming tribunals are informal courts; their jurisdiction is defined by statute.
Self-check: Why does a market misconduct case go to the MMT rather than a court or arbitration?
Answer: Because the MMT has specific statutory jurisdiction over market misconduct under the SFO; jurisdiction determines the forum.
11. Types of companies and their constitution
Hong Kong has companies limited by shares, limited by guarantee and unlimited companies, divided into private and public. A private company restricts share transfers and cannot offer shares to the public. The articles of association bind the company and members and define internal authority.
Example. Hypothetically, a director issues shares without required article authority; the issue may be invalid.
Watch out. Assuming directors can do anything the ordinance allows; the articles limit their powers.
Self-check: Why can a private company not simply offer shares to the public?
Answer: A private company by definition restricts transfers and cannot invite the public; it must become a public company first.
12. Share capital and debentures
Ordinary shares carry full voting and dividend rights; preference shares give priority in dividends or capital, often with limited voting. Debentures evidence company debt, often secured; debenture holders are creditors ranking ahead of shareholders on winding up, but they cannot vote at meetings.
Example. Hypothetically, preference holders receive fixed dividends first but do not vote; debenture holders are paid from charged assets first.
Watch out. Confusing debenture holders with shareholders; creditors have priority, not membership rights.
Self-check: Why do debenture holders rank ahead of shareholders on winding up, and what do they lack?
Answer: They are creditors, often secured, so they are paid first; they lack voting and other membership rights.
13. Meetings and resolutions
Companies decide major matters through members' resolutions. Ordinary resolutions need a simple majority for routine matters; special resolutions, with a higher statutory majority and proper notice, are required for significant matters such as altering the articles or reducing capital. Valid proceedings also need quorum and proper voting.
Example. Hypothetically, altering articles by simple majority fails because a special resolution is required.
Watch out. Using ordinary and special resolutions interchangeably; the wrong type invalidates the decision.
Self-check: Is an article alteration valid if passed by simple majority with proper notice?
Answer: No; altering the articles requires a special resolution with the statutory majority, so the alteration is ineffective.
14. Directors' powers, duties and liabilities
Directors manage the company under the articles' powers. They owe duties to the company: good faith in its interests, care and skill, avoiding conflicts, and not misusing position or information. Breach can bring personal liability.
Example. Hypothetically, a director diverts a corporate opportunity to a personal venture, breaching loyalty and risking an order to account for profits.
Watch out. Assuming duties run to shareholders personally; core duties are owed to the company as a separate entity.
Self-check: A director takes a corporate opportunity. To whom is the duty owed and what follows?
Answer: The company; the director faces personal liability, such as accounting for profits or compensating the company.
15. Shareholder rights and minority protection
Shareholders vote at meetings, receive declared dividends and share surplus assets on winding up, but management power rests with directors. Because majorities can abuse control, the law provides minority protection, notably remedies for unfairly prejudicial conduct and personal actions for improper acts done to members.
Example. Hypothetically, a majority transfers company assets to itself at undervalue; the minority may seek relief for unfairly prejudicial conduct.
Watch out. Assuming shareholders can direct day-to-day management; they exercise control mainly through resolutions.
Self-check: What protection exists for conduct that is lawful in form but unfairly harms members?
Answer: The unfairly prejudicial conduct remedy lets minority members seek court relief rather than only winding up.
16. Inspectors and winding up
The Financial Secretary may appoint inspectors to investigate company affairs where grounds exist, such as wrongdoing; inspectors investigate and report but do not adjudicate. Winding up may be compulsory (by court) or voluntary: members' voluntary for solvent companies with a declaration of solvency, or creditors' voluntary where insolvent.
Example. Hypothetically, inspectors report on alleged fraud; any prosecution or liquidation follows through other legal channels.
Watch out. Assuming inspectors punish, or that all winding ups need court; voluntary routes start with members.
Self-check: Why can insolvent companies not use members' voluntary winding up?
Answer: That route needs a declaration of solvency; insolvent companies use creditors' voluntary winding up or court liquidation.
Topic 3: Securities and Futures Ordinance (SFO)
The SFO's structure, key definitions, and the main operative parts from the SFC's powers through to market misconduct and disclosure regimes.
17. The SFO: background, objectives and structure
The SFO is Hong Kong's principal securities legislation, consolidating earlier ordinances into one statute. It provides the regime for the industry, protects investors, maintains market integrity and empowers the SFC. Its parts cover the SFC, exchanges, offers, licensing, client assets, conduct, supervision, discipline, compensation, market misconduct and disclosure of interests.
Example. Hypothetically, licensing, client money rules and insider dealing sanctions all trace back to the SFO or its subsidiary legislation.
Watch out. Treating the SFO as just one rule; it is the parent statute for most securities and futures regulation.
Self-check: What did the SFO achieve compared with the earlier framework?
Answer: It consolidated separate securities and futures ordinances into one coherent statute, closing gaps and enabling consistent supervision.
18. Key SFO definitions
Schedule 1 defines key terms. 'Securities' broadly covers shares, debentures, CIS interests and other instruments; 'futures contracts' cover contracts on underlying assets or rates; an 'intermediary' is a person whose business consists of regulated activities. The definitions are deliberately wide, so new products often fall within them.
Example. Hypothetically, a pooled fund interest is not a share but can still fall within the definition of securities.
Watch out. Assuming only shares and bonds are securities; CIS interests and other instruments are included.
Self-check: Why might dealing in a pooled fund interest require a licence?
Answer: Because securities includes CIS interests; if the product fits the definition, dealing is a regulated activity unless exempt.
19. Part II: the SFC's constitution, objectives and powers
Part II establishes the SFC as a body corporate, sets its statutory objectives and confers its functions: licensing and supervising intermediaries, authorising products, overseeing market operators, making rules and issuing codes. The SFC's authority is statutory, derived from the SFO itself.
Example. Hypothetically, a firm questions the SFC's power to issue the Code of Conduct; Part II empowers codes for intermediary conduct.
Watch out. Assuming SFC powers come from general government authority rather than specific legislation.
Self-check: Where does the SFC's authority to regulate intermediary conduct come from?
Answer: From the SFO itself; Part II confers the functions, including issuing codes of conduct.
20. Parts III and IIIA: exchanges, clearing houses and OTC derivatives
Part III provides the framework for exchange companies and recognised clearing houses, including recognition and SFC oversight of their rules. Part IIIA addresses OTC derivative transactions, supporting the reform agenda of reporting, clearing and transparency for privately negotiated derivatives, aimed at reducing systemic risk.
Example. Hypothetically, SEHK changes a rule with SFC approval, while a privately negotiated swap faces reporting obligations under the OTC regime.
Watch out. Assuming OTC derivatives are unregulated because they are privately negotiated; Part IIIA exists to regulate them.
Self-check: Why does a privately negotiated derivative still attract regulatory obligations?
Answer: Part IIIA and its subsidiary legislation impose reporting and related obligations on qualifying OTC transactions.
21. Parts IV and IVA: offers of investments and OFCs
Part IV regulates public offers: investments offered to the public must be SFC-authorised or fall within exemptions, protecting investors through standards and disclosure. Part IVA establishes the open-ended fund company, a corporate form designed for funds: it continues despite redemptions, must have a custodian and operates under SFC oversight.
Example. Hypothetically, a manager offers an unauthorised fund to the public without an exemption, breaching Part IV.
Watch out. Assuming any product can be offered publicly, or that an OFC is just an ordinary investing company.
Self-check: Why is publicly offering an unauthorised fund a problem?
Answer: Part IV requires authorisation or an exemption; without either, the offer breaches the regime.
22. Part V: licensing and registration
Part V is the gateway to the intermediary regime: no one may carry on a regulated activity as a business unless licensed (corporations) or registered (authorised institutions), subject to exemptions. It covers applications, conditions, representatives, responsible officers and the fit and proper test. Company and individual licensing are separate requirements.
Example. Hypothetically, a licensed company's staff cannot deal with clients until they are licensed representatives with approved responsible officers in place.
Watch out. Assuming a company licence automatically covers its individuals; representatives and ROs need their own approvals.
Self-check: Can a newly licensed firm's staff deal with clients immediately?
Answer: Not necessarily; individuals must be licensed representatives and the firm needs approved responsible officers for each activity.
23. Parts VI and VII: client assets, records and business conduct
Part VI underpins subsidiary legislation on capital, segregated client securities and client money, record keeping and audit. Part VII sets statutory conduct requirements for intermediaries, including honest and fair dealing, and anchors the Code of Conduct. Together they protect client assets and set day-to-day conduct standards.
Example. Hypothetically, a firm mixing client money with its own breaches segregation rules even if its records are accurate.
Watch out. Assuming good records substitute for segregation, or that conduct rules exist only in the Code.
Self-check: Why is mixing client money with firm money unacceptable even with accurate records?
Answer: Segregation protects clients from the firm's creditors; records cannot substitute for the required trust arrangements.
24. Parts VIII to XII: supervision, discipline, appeals and compensation
Part VIII gives the SFC supervisory and investigative powers, such as requiring records and information. Part IX provides discipline against licences, appealable to the independent Appeals Tribunal (Part XI). Part X allows intervention, like injunctions, to protect investors. Part XII compensates losses from intermediary default.
Example. Hypothetically, the SFC investigates suspected misuse of client money and can discipline the licence, with appeal to the independent tribunal.
Watch out. Assuming the compensation fund covers market losses; it addresses intermediary default, not investment outcomes.
Self-check: Does investor compensation cover a loss from a falling stock price?
Answer: No; Part XII compensates losses from intermediary default, not market declines or poor investment decisions.
25. Parts XIII and XIV: the MMT and offences relating to dealings
Part XIII establishes the Market Misconduct Tribunal, a civil forum in which the SFC can directly institute proceedings. Part XIV creates criminal offences relating to dealings in securities and futures contracts. Sections 283 and 307 protect the same person from both market-misconduct proceedings and criminal proceedings for the same conduct. Distinguish these routes from separate licensing discipline or private civil compensation claims.
Example. Hypothetically, a manipulation scheme goes to the MMT or to court, but only one route may be taken.
Watch out. Assuming the SFC can run MMT proceedings and prosecution in parallel for the same conduct.
Self-check: Can the SFC pursue both routes for one act of manipulation?
Answer: No; the regime is an either/or choice between the civil MMT route and criminal prosecution.
26. Parts XIVA and XV: inside information and disclosure of interests
Part XIVA requires listed corporations to disclose inside information as soon as reasonably practicable, subject to safe harbours such as incomplete negotiations; this regime can carry its own civil consequences, distinct from market misconduct. Part XV requires directors and chief executives to disclose their interests and dealings, and substantial shareholders to disclose when interests cross prescribed thresholds.
Example. Hypothetically, a shareholder's stake crosses a Part XV threshold, requiring disclosure even though they are not a director.
Watch out. Assuming all non-public information needs immediate disclosure; safe harbours exist for matters like incomplete proposals.
Self-check: Must a listed company disclose unfinished negotiations immediately under Part XIVA?
Answer: Not necessarily; safe harbours apply to matters like incomplete proposals, so the analysis is whether an exception applies.
Topic 4: Licensing and registration, and subsidiary legislation
The licensing regime, fit and proper requirements, capital, client assets, records, contract notes, audit, regulated activities, OTC derivatives and OFCs.
27. Licensed corporations and registered institutions
The licensing regime controls who may carry on regulated activities. Corporations are licensed by the SFC for specific regulated activities; authorised institutions (banks) register instead, with the HKMA as front-line regulator for licensing-related matters while the SFC regulates conduct. Licensing is activity-specific, not general.
Example. Hypothetically, a firm licensed only for dealing in securities starts managing portfolios: an unlicensed regulated activity until licensed for it.
Watch out. Assuming one licence covers all activities, or that banks are licensed corporations.
Self-check: Why is managing portfolios without licence coverage a problem?
Answer: Licences specify regulated activities; asset management is distinct from dealing, so the firm must extend its licence first.
28. Boards, responsible officers and other key individuals
The board holds overall responsibility for a licensed corporation's compliance. Responsible officers are approved to supervise each regulated activity of a licensed corporation; executive officers are the approved supervisory individuals at registered institutions, with HKMA consent; licensed representatives carry on regulated activities for licensed corporations; relevant individuals are the individuals engaged by registered institutions to carry on regulated activity on their behalf, entered in the HKMA register; substantial shareholders' fitness is also assessed. Each regulated activity needs responsible officer or executive officer coverage.
Example. Hypothetically, a firm adds an advisory activity but has no RO approved for it, breaching supervisory requirements.
Watch out. Treating RO and executive officer as interchangeable, or assuming relevant individuals need a separate SFC licence; ROs supervise licensed corporations' activities, executive officers are the registered-institution counterpart approved by the HKMA, and relevant individuals need no separate SFC licence but must be fit and proper and entered in the HKMA register.
Self-check: Why does a new activity without an approved RO create a problem?
Answer: Each regulated activity requires responsible officer coverage with appropriate approval and competence for proper supervision.
29. Fit and Proper, Competence and CPT Guidelines
The Fit and Proper Guidelines set the SFC's criteria: honesty, financial soundness, competence, reputation and regulatory history, applying to corporations, ROs, representatives and substantial shareholders, and continuing after licensing. The Competence Guidelines set entry qualifications; the CPT Guidelines require ongoing annual training.
Example. Hypothetically, a post-licensing dishonesty conviction triggers fitness review, and a representative must still complete annual CPT hours.
Watch out. Assuming fitness is tested once at application, or that passing exams ends competence obligations.
Self-check: Why do competence obligations continue after passing the licensing exams?
Answer: CPT requires ongoing annual training; fitness and competence are continuing requirements, not one-time entry tests.
30. Capital requirements
The Securities and Futures (Financial Resources) Rules set minimum capital requirements for licensed corporations, calculated through a framework of components and deductions. Required levels vary with the regulated activities conducted and the firm's risk profile. Maintaining required financial resources is a continuing obligation, with shortfalls reported as required.
Example. Hypothetically, trading losses push a firm below its required level; it must address and report the shortfall.
Watch out. Assuming one fixed capital number for all firms; requirements are firm-specific under the framework.
Self-check: Why do two licensees' required capital levels differ?
Answer: The Financial Resources Rules calculate requirements from each firm's activities and risk profile, so levels are firm-specific.
31. Client securities
The Securities and Futures (Client Securities) Rules require client securities held by licensed corporations to be segregated from the firm's own assets through prescribed arrangements, so they are identifiable as client property and protected from the firm's creditors.
Example. Hypothetically, a firm holds client shares in its own account with meticulous records; this still breaches the segregation requirement.
Watch out. Assuming accurate bookkeeping satisfies the rules; prescribed segregation arrangements are required, not just records.
Self-check: Why does holding client shares in the firm's own account breach the rules?
Answer: It commingles client property with firm assets, exposing clients to the firm's creditors despite good records.
32. Client money
The Securities and Futures (Client Money) Rules require client money to be held in separate trust accounts at authorised institutions, distinct from firm funds, within prescribed timelines. The rules define when money is client money and how it must be protected from the firm's creditors.
Example. Hypothetically, a firm parks client payments in its operating account intending to transfer them soon; this breaches the rules.
Watch out. Assuming temporary commingling is harmless; the rules prescribe how and when client money enters trust accounts.
Self-check: Why is parking client payments in the operating account problematic?
Answer: It commingles client money with firm funds, exposing clients to the firm's creditors regardless of transfer intentions.
33. Keeping of records
The Securities and Futures (Keeping of Records) Rules require licensed corporations to keep records of business, orders, transactions and client identities for prescribed periods, sufficient to show compliance and enable reconstruction of transactions. Records support SFC supervision, audit and investigation.
Example. Hypothetically, a firm cannot reconstruct a client's transaction history; this breaches the rules even without any client complaint.
Watch out. Assuming records are only for internal reference; they are regulatory obligations with prescribed retention periods.
Self-check: Why is inability to reconstruct transactions a regulatory problem?
Answer: The rules require records sufficient to demonstrate compliance and enable reconstruction for supervision and investigation.
34. Contract notes, statements and receipts
The Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules require timely prescribed documentation: contract notes for transactions, periodic statements of account and receipts for money or securities received. These give clients verifiable records of their dealings and holdings.
Example. Hypothetically, a firm confirms trades by phone only; verbal confirmation does not satisfy the documentary requirements.
Watch out. Assuming informal confirmation suffices; prescribed written documents within specified timelines are required.
Self-check: Why does phone confirmation of trades fail the rules?
Answer: The rules require written contract notes and periodic statements within specified timelines, which calls cannot replace.
35. Audit
The Securities and Futures (Accounts and Audit) Rules require licensed corporations to have accounts audited annually by qualified auditors and filed with the SFC. Auditors may report matters of concern to the SFC, making audit a regulatory oversight tool, not just a shareholder exercise.
Example. Hypothetically, an auditor identifies client money weaknesses; reporting mechanisms allow such matters to reach the SFC.
Watch out. Viewing audit as purely internal finance; for licensees it is a regulatory requirement linked to the SFC.
Self-check: Why is annual audit more than an internal matter for a licensee?
Answer: The Accounts and Audit Rules make it a regulatory requirement, with accounts filed and auditor reporting to the SFC.
36. Regulated activities under the licensing regime
Schedule 5 of the SFO defines the regulated activities, ranging from dealing in securities and futures, advising activities, asset management and credit rating services through to the newer client-clearing and depositary types. Each type has its own scope and specific requirements, and a firm needs licence coverage for every activity it carries on.
Example. Hypothetically, a firm advises on securities and separately advises on corporate finance: two distinct activities, each needing coverage.
Watch out. Assuming advising on securities covers corporate finance advice; they are separate regulated activities.
Self-check: Are advising on securities and advising on takeovers one activity or two?
Answer: Two; advising on corporate finance is distinct from advising on securities, so each requires its own licence coverage.
37. OTC derivative reporting, record keeping and clearing
Subsidiary legislation imposes reporting and record keeping obligations for specified OTC derivative transactions, with prescribed data reported to authorised repositories. Separate rules require specified standardised transactions to be cleared through authorised clearing houses. The regime creates transparency and reduces counterparty risk in the privately negotiated market.
Example. Hypothetically, a standardised swap within scope must be cleared, while a bespoke swap outside clearing scope may still face reporting duties.
Watch out. Assuming all OTC derivatives must be cleared, or that private contracts escape record keeping.
Self-check: Does falling outside mandatory clearing mean no OTC rules apply?
Answer: No; reporting and record keeping obligations may still apply depending on the transaction's scope under the legislation.
38. OFC subsidiary legislation
Subsidiary legislation supports the Part IVA OFC regime, detailing incorporation, operation and regulation of open-ended fund companies. Together with the OFC Code, these instruments complete a layered framework: statute, subsidiary legislation and code all govern OFCs.
Example. Hypothetically, a manager establishing an OFC must follow the subsidiary legislation's incorporation requirements and the OFC Code's standards.
Watch out. Citing Part IVA alone as the source of OFC rules; the framework has three layers.
Self-check: Why is compliance with Part IVA alone incomplete for an OFC?
Answer: Subsidiary legislation details operations and the OFC Code sets standards, so all three layers must be met.
Topic 5: Business conduct and client relations
The Code of Conduct's general principles and key requirements, plus the specialist codes: FMCC, CFA Code, CRA Code, OFC Code and Share Registrars Code.
39. The Code of Conduct: status and effect of breach
The Code of Conduct sets conduct standards for licensed and registered persons, and the SFC is guided by it when assessing fitness and properness. It is not legislation: breach does not by itself create court liability, but the Code is admissible in SFO proceedings and breach may reflect adversely on fitness and properness.
Example. Hypothetically, a firm calls the Code merely advisory; the SFC can still treat breaches as reflecting on fitness.
Watch out. Assuming the Code is legislation, or that breach is automatically a crime; neither is true.
Self-check: Is breaching the Code a criminal offence?
Answer: No; breach is not automatically criminal, but it is admissible in proceedings and can trigger fitness and disciplinary consequences.
40. The nine General Principles
The Code's numbered General Principles are: GP1 honesty and fairness; GP2 diligence; GP3 capabilities (adequate resources and procedures); GP4 information about clients; GP5 information for clients (adequate disclosure); GP6 conflicts of interest; GP7 compliance; GP8 client assets; GP9 responsibility of senior management. Learn the exact names; detailed paragraph numbers differ from GP numbers.
Example. Hypothetically, a candidate labels KYC as GP5; KYC sits under GP4 (information about clients), while GP5 concerns disclosure to clients.
Watch out. Mixing up GP3 with diligence or client assets, or GP5 with KYC; the labels are specific.
Self-check: Which GP covers having adequate resources and procedures?
Answer: GP3, capabilities; diligence is GP2 and client asset safeguarding is GP8.
41. Know your client, suitability and client agreements
The Code requires intermediaries to seek client information on financial situation, experience and objectives, and to ensure recommendations are suitable for each client. Written client agreements with prescribed contents are required before conducting relevant business. Suitability is client-specific, not product-generic.
Example. Hypothetically, a firm recommends a high-risk derivative to a retired conservative client without reasonable grounds; suitability is breached.
Watch out. Assuming a well-regarded product suits everyone, or that an account form replaces a compliant client agreement.
Self-check: Why can recommending a well-regarded product still breach suitability?
Answer: Suitability is assessed against the individual client's profile; without matching grounds, the requirement is breached.
42. Information for clients and disclosure
The Code requires adequate disclosure of relevant material information to clients: information about the firm, prompt confirmations, disclosure of monetary and non-monetary benefits, transaction-related information and corporate action information. This disclosure duty is distinct from the duty to gather client information.
Example. Hypothetically, a firm fails to disclose commissions received for recommending a fund, breaching disclosure obligations regardless of advice quality.
Watch out. Assuming disclosure duties stop at the client agreement; ongoing confirmations and benefit disclosures are also required.
Self-check: Why is failing to disclose a monetary benefit a Code breach?
Answer: GP5 and the detailed provisions require adequate disclosure of relevant material information, including benefits.
43. Conflicts of interest
The Code requires intermediaries to avoid conflicts where possible and, where they cannot be avoided, to ensure clients are fairly treated, with appropriate disclosure and management. This applies to conflicts between firm and client and between different clients.
Example. Hypothetically, a firm advises a client to buy while its proprietary desk sells the same stock; the conflict must be managed and disclosed fairly.
Watch out. Assuming disclosure alone cures a conflict; some conflicts must be avoided or managed, with clients treated fairly.
Self-check: Is disclosure enough if the firm still acts against client interests?
Answer: No; disclosure does not permit acting against client interests, which must be prioritised.
44. Order handling and client priority
The Code requires prompt execution on best available terms, prompt and fair allocation to client accounts, proper order recording, and priority for client orders over the firm's own interests. Front-running client orders for the firm's benefit breaches these standards.
Example. Hypothetically, a desk buys a stock just before executing a large client order that will move the price.
Watch out. Assuming prompt execution alone suffices; fair allocation, priority and no front-running are equally required.
Self-check: Why is trading ahead of a client order improper even if the order is executed promptly?
Answer: It exploits the client's order information for the firm's benefit, breaching priority and fair treatment requirements.
45. Client assets, compliance and senior management responsibility
GP8 requires client assets to be promptly and properly accounted for and adequately safeguarded, going beyond segregation to operational controls preventing misuse. GP7 requires compliance with all applicable regulatory requirements, and GP9 makes senior management primarily responsible for maintaining standards of conduct and adherence to proper procedures.
Example. Hypothetically, a firm segregates assets but lets unauthorised staff access client accounts; safeguarding expectations are still breached.
Watch out. Assuming asset protection means segregation alone, or that compliance is only the compliance department's job.
Self-check: Why is segregation without internal access controls still a conduct failure?
Answer: GP8 requires adequate safeguarding, including controls preventing misuse; segregation alone does not protect assets.
46. Fund Manager Code of Conduct
The FMCC applies to managers of CISs and discretionary accounts, adding fund-specific requirements beyond the general Code: management and structure, independence, dealings with connected persons on arm's length terms, fair allocation of investment opportunities and proper valuation. It reflects the fiduciary position of discretionary managers.
Example. Hypothetically, a manager allocates a sought-after IPO allocation to a connected fund instead of fairly among client funds, breaching FMCC allocation requirements.
Watch out. Assuming the general Code suffices for fund managers; the FMCC adds allocation, connected-dealing and valuation standards.
Self-check: Why does the FMCC capture unfavourable connected-person dealings?
Answer: It requires such dealings at arm's length and in clients' interests, protecting discretionary clients.
47. CFA Code, CRA Code, OFC Code and Share Registrars Code
Specialist codes tailor conduct standards to specific roles. The CFA Code governs corporate finance advisers, addressing independence and conflicts in listings and takeovers. The CRA Code governs credit rating services, protecting rating integrity and independence from rated entities. The OFC Code sets requirements for open-ended fund companies; the Share Registrars Code governs register maintenance.
Example. Hypothetically, a rated entity pressures an analyst to improve its rating; the CRA Code's independence requirements prohibit such influence.
Watch out. Assuming one code fits all; each specialist code matches its role's distinct conflicts and duties.
Self-check: Why does a sponsor follow the CFA Code rather than only the general Code?
Answer: Corporate finance advisory raises distinct independence and conflict issues that the CFA Code specifically addresses.
Topic 6: Business operations and practices
Internal control guidelines, senior management responsibility, AML/CFT, electronic trading, data privacy, corporate governance, insurance and the CRS.
48. Internal Control Guidelines and senior management supervision
The ICG sets the SFC's expectations for internal control across key areas such as management oversight, segregation of duties, information management and operational risk, with firms designing controls proportionate to their business. Senior management bears direct responsibility for establishing controls, fostering compliance culture and supervising the business.
Example. Hypothetically, one person takes orders, executes them and confirms settlement; segregation-of-duties objectives flag this weakness.
Watch out. Assuming the ICG prescribes one fixed checklist, or that compliance can be delegated away entirely.
Self-check: Why does blaming the compliance officer not answer systemic control failures?
Answer: The ICG makes senior management accountable for controls and supervision; compliance staff support but do not replace that accountability.
49. AML/CFT legislation and obligations
Hong Kong's AML/CFT framework, including the AML/CFT ordinance and SFC guidelines, requires intermediaries to conduct customer due diligence, monitor transactions on an ongoing basis and report suspicious transactions. The regime aims to prevent the financial system being used for money laundering or terrorist financing.
Example. Hypothetically, a client deposits funds with no clear source and resists questions; the firm must scrutinise and consider reporting the suspicion.
Watch out. Assuming AML ends at onboarding identity checks; ongoing monitoring and suspicious transaction reporting are core duties.
Self-check: Why is onboarding KYC alone incomplete AML compliance?
Answer: Because ongoing monitoring and suspicious transaction reporting are equally core obligations throughout the relationship.
50. Risk-based approach to AML/CFT
The risk-based approach requires firms to assess ML/TF risks across customers, products, channels and jurisdictions, including risks arising through third parties, and to calibrate controls to the assessed risk: enhanced measures for higher risk, simpler measures for lower. Risk assessments must be documented.
Example. Hypothetically, a client introduced by a third party in a higher-risk jurisdiction warrants enhanced due diligence, not standard checks.
Watch out. Assuming RBA means minimal checks everywhere; it means matching control intensity to risk, which can mean more scrutiny.
Self-check: Why does applying identical due diligence to every client fail the RBA?
Answer: Controls must be calibrated to assessed risk; uniform treatment ignores higher-risk situations and is not genuinely risk-based.
51. Electronic trading and alternative liquidity pools
Electronic trading raises regulatory concerns about system reliability, order handling and controls over algorithms, including pre-trade risk checks and safeguards against erroneous orders. Alternative liquidity pools, as venues outside the traditional exchanges, raise transparency and fair access issues, with SFC guidelines governing both areas.
Example. Hypothetically, a faulty algorithm floods the market with erroneous orders; the guidelines' system control expectations target exactly this risk.
Watch out. Assuming normal order handling rules suffice; algorithmic systems need specific safeguards like pre-trade checks.
Self-check: Why do electronic trading guidelines matter when an algorithm malfunctions?
Answer: They require adequate system controls, including pre-trade risk checks and safeguards against erroneous orders.
52. Personal Data (Privacy) Ordinance
The PDPO governs personal data handling through principles including lawful collection, accuracy, retention limits, use limitation and security. Intermediaries must collect only necessary data, use it for notified purposes, keep it secure and not retain it longer than needed.
Example. Hypothetically, a firm uses account-opening data to market unrelated third-party products without consent, breaching use limitation.
Watch out. Assuming collected data can be used freely; new purposes require the prescribed consent or an exemption.
Self-check: What does the PDPO require before using data for a new purpose?
Answer: Use is limited to the original or a directly related purpose unless prescribed consent or an exemption applies.
53. Corporate governance
Corporate governance concerns how companies are directed and controlled: accountability, transparency and the balance between board, management and shareholders. Mechanisms include independent directors, board committees and disclosure. For listed companies, expectations are embedded in external requirements such as the Listing Rules and the Corporate Governance Code.
Example. Hypothetically, a listed company with no independent directors or audit committee fails external governance expectations, not just internal policy.
Watch out. Assuming governance is only internal policy; listed companies face regulatory governance requirements.
Self-check: Why do external mechanisms matter beyond a listed company's articles?
Answer: The Listing Rules and Corporate Governance Code impose accountability and oversight requirements protecting investors.
54. Insurance requirements
Under the Securities and Futures (Insurance) Rules, prescribed insurance is a regulatory obligation for certain licensed corporations — notably those dealing in securities or futures contracts that are, or intend to be, exchange participants, which take out insurance under the approved master policy. Insurance provides a layer of protection for clients against certain losses and sits alongside capital requirements and client asset rules as one safeguard among several.
Example. Hypothetically, an employee misappropriates client assets; required insurance can provide a recovery source alongside other protections.
Watch out. Assuming insurance substitutes for client asset controls; it complements but does not replace them.
Self-check: Can holding required insurance justify relaxing client asset controls?
Answer: No; insurance may provide recovery after loss but does not prevent misuse, so all protective obligations remain.
55. Common Reporting Standard
The CRS is an international standard for automatic exchange of financial account information between jurisdictions, developed to combat offshore tax evasion. Hong Kong participates, so intermediaries as financial institutions must identify reportable accounts and collect and report prescribed information for exchange with partner jurisdictions.
Example. Hypothetically, a client tax-resident overseas opens an account; the firm identifies it as potentially reportable and collects prescribed data.
Watch out. Assuming CRS is securities regulation; it is a tax transparency standard that intermediaries operationalise.
Self-check: Why does a securities exam cover CRS?
Answer: Because intermediaries are financial institutions with CRS identification, collection and reporting obligations.
Topic 7: Participating in the Hong Kong exchanges
Exchange and clearing structures, dealing rules on SEHK and HKFE, traded options, position limits and marketing of listed structured products.
56. Market infrastructure and cross-border trading
Hong Kong's infrastructure comprises exchanges (trading), clearing houses (managing obligations and counterparty risk, including novation and margining) and settlement systems (transferring securities and funds). Cross-border arrangements with the Mainland route orders through local brokers to the other market, with designated clearing, rather than open direct access.
Example. Hypothetically, a Mainland investor buys a Hong Kong stock through a local broker routing the order, with designated cross-border clearing.
Watch out. Equating clearing with settlement; clearing manages obligations before settlement transfers securities and funds.
Self-check: Why is cross-border trading not the same as direct SEHK access?
Answer: Orders route through local intermediaries with designated clearing, a distinctive structure rather than open direct access.
57. SEHK dealing rules and participants
SEHK's operational rules govern securities dealing on the exchange: trading sessions, order types and the conduct of Exchange Participants, who must comply with exchange rules alongside the SFO regime. Exchange rules operate within the SFO framework under SFC oversight.
Example. Hypothetically, an Exchange Participant breaches a SEHK trading rule; this is an exchange discipline matter, though the same facts might also breach the SFO.
Watch out. Assuming exchange rules and SFO obligations are identical; they are distinct regimes that can both apply.
Self-check: Is a SEHK rule breach necessarily an SFO breach too?
Answer: Not necessarily; exchange rules are enforced through exchange discipline, though the same conduct may also breach the SFO.
58. HKFE rules and futures dealing
HKFE's rules govern futures and options trading on the futures exchange: contract specifications, sessions, position management and participant conduct, with clearing through the recognised clearing house. SFO obligations, including statutory position limits and licensing, apply alongside exchange rules.
Example. Hypothetically, a trader holds large futures positions; both HKFE position rules and SFO-based statutory limits are relevant.
Watch out. Assuming futures trading is governed only by exchange rules; the SFO adds statutory limits and licensing.
Self-check: Which two layers constrain a large futures position?
Answer: HKFE's exchange rules and the statutory position limits under the SFO framework, applying alongside each other.
59. Traded options on SEHK
SEHK trades options on stocks and indices under operational rules covering specifications, exercise, margining and positions. An option gives the holder the right, but not the obligation, to buy (call) or sell (put) at a strike price; only the writer is obligated if the holder exercises.
Example. Hypothetically, a holder pays a premium for a call and lets it expire unexercised, losing only the premium.
Watch out. Treating option holders as obligated like futures parties; holders have rights, writers have obligations.
Self-check: What is the holder's maximum loss if an option expires unexercised?
Answer: The premium paid, because the holder may choose not to exercise the right.
60. Position limits and large position reporting
Position limits cap holdings in specified futures and options contracts under the SFO framework, while large position reporting applies above prescribed thresholds. Both aim to prevent concentration and manipulation and give regulators visibility of large positions. Limits and reporting thresholds are distinct requirements.
Example. Hypothetically, a position exceeds a reporting threshold but stays under the limit; the reporting obligation still applies.
Watch out. Assuming staying under the limit removes reporting duties; the two requirements are separate.
Self-check: What applies when a position crosses a reporting threshold but not the limit?
Answer: The large position reporting obligation, since reporting thresholds and position limits are distinct requirements.
61. Marketing listed structured products such as warrants
Listed structured products like derivative warrants are leveraged, time-limited products marketed to retail investors. Marketing requirements emphasise clear, balanced risk disclosure, including the product's leveraged nature and expiry, using prescribed disclosure documents such as product key facts statements.
Example. Hypothetically, a firm markets a warrant highlighting only potential returns; this fails the balanced risk disclosure standards.
Watch out. Assuming exchange-traded products need no special marketing disclosure; listed structured products carry specific requirements.
Self-check: Why is highlighting only returns in warrant marketing deficient?
Answer: Marketing standards require clear, balanced risk disclosure covering leverage and time limitation for retail investors.
Topic 8: Accessing public capital
Listing Rules purposes and requirements, listing process participants, notifiable and connected transactions, takeovers and buy-backs, SFC authorised products and virtual assets.
62. Purposes of the Listing Rules
The Listing Rules govern securities listed on SEHK, aiming to ensure issuer quality, adequate investor information, fair and orderly markets and investor protection. They cover entry requirements and continuing obligations throughout a company's listed life. SEHK administers the Rules with SFC oversight.
Example. Hypothetically, a listed company assumes obligations ended after its IPO; continuing obligations on disclosure and transactions still apply.
Watch out. Assuming the Rules apply only at listing; they impose continuing obligations on listed issuers.
Self-check: Do Listing Rules obligations end once the IPO completes?
Answer: No; continuing obligations cover disclosure, transactions and corporate actions throughout the listed life.
63. Roles in the listing process
Listing involves defined roles: sponsors advise the applicant and carry due diligence responsibility; overall coordinators and other capital market intermediaries manage bookbuilding and distribution; compliance advisers provide post-listing advice; authorised representatives handle liaison; directors and controlling shareholders bear their own obligations, including lock-ups for controlling shareholders.
Example. Hypothetically, a controlling shareholder plans to sell everything immediately after listing; Listing Rules lock-up requirements restrict this.
Watch out. Treating sponsors and CMIs as interchangeable; sponsors carry listing due diligence responsibility, CMIs focus on the offering.
Self-check: Why can a controlling shareholder not exit entirely right after listing?
Answer: Listing Rules impose lock-up arrangements on controlling shareholders to ensure continuity after listing.
64. Basic listing requirements for equity securities
The Listing Rules set entry requirements for equity listings: issuer suitability, financial standards and track record, management continuity and a prescribed public float so enough shares circulate for an orderly market. The Rules also cover share schemes and price stabilisation practices in offerings.
Example. Hypothetically, a profitable company plans a tiny public float; listing can be refused because the float requirement fails.
Watch out. Assuming listing is purely commercial with SEHK; regulatory requirements under the Rules apply, with SFC oversight.
Self-check: Why might a profitable company still be refused a listing?
Answer: Failing the public float or other entry requirements means the application does not meet the Rules.
65. Notifiable and connected transactions
The Rules classify transactions by size into notifiable categories requiring announcement and, for larger ones, shareholder approval. Connected transactions with directors, substantial shareholders and their associates face stricter procedures: independent board and shareholder approval and independent financial advice, because of the conflict of interest.
Example. Hypothetically, a listed company buys assets from its controlling shareholder; the connected person's vote is excluded and independent shareholders must approve.
Watch out. Assuming commercially reasonable connected deals follow normal procedures; the conflict triggers stricter safeguards regardless.
Self-check: Why do connected transaction rules apply even to fairly priced deals?
Answer: They manage the inherent conflict of interest, protecting minority shareholders through independent approvals.
66. Halts, suspensions, cancellation and discipline
The Listing Rules and related arrangements provide for trading halts (short pauses), suspensions (longer stops) and, in serious cases, cancellation or withdrawal of listing, plus disciplinary action against issuers and their officers. Consequences escalate with the severity and persistence of non-compliance.
Example. Hypothetically, a company delays publishing results; SEHK can suspend trading, and prolonged non-compliance can escalate towards cancellation.
Watch out. Treating suspension and cancellation as the same; suspension is temporary, cancellation removes the listing.
Self-check: Does suspension mean listing will be cancelled?
Answer: Not necessarily; suspension is usually temporary and can end once the issue is resolved.
67. Other listed securities
Beyond ordinary shares, the Listing Rules contain tailored chapters for derivative warrants, CBBCs, debt securities, depositary receipts and other products, each reflecting the security's nature and risks. Equity requirements do not automatically apply to these securities.
Example. Hypothetically, an issuer lists a debt security; the debt regime differs from equity requirements on issuer quality and float.
Watch out. Applying equity listing requirements to every listed security; each type has its own regime.
Self-check: Why can the same requirements not apply to listed shares and listed debt?
Answer: The Rules tailor regimes to each security type, reflecting their different natures and risks.
68. Takeovers Code and Share Buy-backs Code
The Takeovers Code regulates takeover and merger activity for Hong Kong public companies, with general principles including equal treatment of shareholders, adequate information and time to decide, and fairness. The Share Buy-backs Code applies analogous fairness to listed companies buying back shares, with shareholder approval for off-market buy-backs.
Example. Hypothetically, an acquirer offers selected shareholders a higher price; the equal treatment principle prohibits discriminatory offers within a class.
Watch out. Assuming the Codes are legislation like the SFO; they are codes applied through the takeovers regime.
Self-check: Which principle does offering different prices to same-class shareholders breach?
Answer: Equal treatment; shareholders of the same class must receive equivalent treatment.
69. Mandatory, voluntary and comparable offers
A mandatory offer is triggered when an acquisition takes an investor and concert parties to 30% or more of voting rights, or by the creeper rule for holdings from 30% through 50%, unless a waiver applies. Mandatory offers require cash or a cash alternative at the Rule 26.3 minimum, based on purchases during the offer period and preceding six months. Voluntary offers have their own conditions. Where there are different equity classes, offers must be comparable: equal treatment does not mean ignoring different class rights.
Example. Hypothetically, an acquisition increases an investor's holding to 22% while concert parties hold 8%. The combined 30% reaches the mandatory-offer threshold, even though the investor individually remains below it.
Watch out. Counting only the acquirer's own holdings; concert party holdings aggregate for the threshold test.
Self-check: Is a mandatory offer triggered if concert parties push the total over the threshold?
Answer: Yes, if the acquisition reaches the applicable trigger and no waiver applies. Aggregate the concert parties' voting rights and then apply the mandatory-offer requirements, including the minimum offer-price rule.
70. SFC authorised products: CISs, SIPs and advertising
Under the SFO, the SFC authorises collective investment schemes and structured investment products for public offering. Authorisation confirms the product meets regulatory requirements on structure, disclosure and management; it is not an endorsement of performance or suitability. Advertisements are also regulated, and parties across the product chain bear their own requirements.
Example. Hypothetically, a distributor calls a fund SFC-approved and therefore safe; this misrepresents authorisation, and suitability still depends on each client.
Watch out. Treating authorisation as a safety guarantee; it confirms regulatory compliance, not investment merit.
Self-check: What does SFC authorisation actually signify?
Answer: Compliance with regulatory requirements on structure, disclosure and management, not a guarantee of performance or suitability.
71. Product codes framework and the MPFA
Authorised products are governed by type-specific codes: the Handbook for unit trusts and mutual funds, ILAS and unlisted SIPs, alongside the UT Code, OFC Code, SIP Code and Code on REITs, each with tailored requirements. The MPFA regulates MPF retirement schemes; the SFC's role centres on product authorisation where the regimes intersect.
Example. Hypothetically, a candidate applies UT Code requirements to a REIT; the Code on REITs is the correct regime.
Watch out. Assuming one code covers all authorised products, or that the SFC regulates MPF schemes.
Self-check: Which regulator oversees MPF schemes themselves?
Answer: The MPFA; the SFC's role concerns authorising products, such as funds MPF schemes may invest in.
72. Alternative capital-raising and virtual assets
Beyond IPOs, companies raise public capital through rights issues, open offers and placements, each within regulatory frameworks. The SFC has also developed a regulatory approach to virtual assets, including a licensing regime for virtual asset trading platforms and requirements for funds and intermediaries dealing in virtual asset-related products.
Example. Hypothetically, a platform serving the public with virtual asset trading must be licensed and meet custody and systems requirements.
Watch out. Assuming virtual assets sit entirely outside regulation; dedicated regimes apply within the SFC's remit.
Self-check: Why can virtual asset trading require a licence even if the assets are not securities?
Answer: The SFC's dedicated regime covers virtual asset trading platforms and related activities regardless of traditional securities definitions.
Topic 9: Market misconduct and improper trading practices
Market misconduct types, the MMT vs criminal prosecution distinction, consequences, private civil actions, unsolicited calls, improper practices and enforcement.
73. The dual regime: MMT proceedings versus criminal prosecution
Market misconduct can be addressed through civil proceedings before the Market Misconduct Tribunal or criminal prosecution in the courts. For the same conduct, the SFO's double-jeopardy safeguards (sections 283 and 307) mean only one route may be pursued: once one route is pending or has been concluded, the other is barred for that conduct. The routes differ in forum, standard of proof and consequences; civil, criminal and disciplinary routes have distinct elements and procedures.
Example. Hypothetically, after investigating suspected insider dealing, the SFC refers the case to the MMT or prosecutes, but cannot do both.
Watch out. Assuming MMT and criminal proceedings can run in parallel for the same conduct.
Self-check: What constrains the SFC's choice between the two routes?
Answer: For the same conduct only one route may be pursued: MMT civil proceedings or criminal prosecution.
74. The MMT: role, procedures and orders
The MMT is an independent civil tribunal hearing market misconduct cases referred by the SFC, deciding facts on the civil standard. Under section 257 it may order disqualification from director or management roles (covering listed and unlisted companies), cold-shoulder orders restricting dealings in the Hong Kong financial market, cease-and-desist orders, disgorgement of profit or loss avoided, and costs, and may recommend disciplinary referral.
Example. Hypothetically, the MMT orders profit disgorged plus a cold-shoulder order, with no criminal conviction resulting.
Watch out. Adding a free-standing fine to MMT orders, or reading a cold-shoulder order as merely an account-opening ban.
Self-check: Is an MMT finding a criminal conviction?
Answer: No; MMT proceedings are civil, with orders such as disgorgement and cold-shoulder restrictions, not imprisonment or a criminal record.
75. Insider dealing
Insider dealing occurs when a person connected with a corporation deals in its listed securities using inside information, or incites or counsels another to deal. Inside information is specific information not generally known that would likely materially affect price. Even non-connected persons can be liable in specified circumstances, such as receiving information from a connected person.
Example. Hypothetically, a CFO trades before an unannounced contract win; a friend who trades on the tip is also exposed.
Watch out. Assuming only directors and employees can be insiders; tippers and tippees can both be liable.
Self-check: Why can a friend with no company connection face insider dealing exposure?
Answer: Receiving inside information from a connected person and trading on it falls within the regime.
76. False trading and price rigging
False trading includes creating a false or misleading appearance of active trading or with respect to the market or price, and wash sales (transactions without a genuine change in beneficial ownership) or matched orders, with applicable intention or recklessness elements and statutory deeming and defence provisions. Price rigging has its own distinct elements: wash sales affecting price, or fictitious or artificial transactions or devices engaged in with the applicable intention or recklessness as to maintaining, increasing, reducing or stabilising price or causing fluctuations.
Example. Hypothetically, two accounts with one owner trade back and forth, creating volume and price movement without real ownership change.
Watch out. Demanding intent to move price in every false trading case, or treating price rigging as identical false trading.
Self-check: Can a loss-making wash trade be market misconduct?
Answer: Yes; the misconduct lies in the artificial transactions, not in any profit made.
77. Stock market manipulation
Stock market manipulation involves two or more transactions in securities that increase, reduce, or maintain or stabilise the price of securities (or are likely to do so), carried out with the intention of inducing others to buy, sell or subscribe, or to refrain from doing so, as applicable to each limb. Its transaction elements distinguish it from misconduct based only on publishing information.
Example. Hypothetically, a trader and an associate execute coordinated transactions creating an appearance of demand, intending others to buy.
Watch out. Assuming publishing a fabricated takeover rumour is automatically stock market manipulation; that fits the false or misleading information category instead.
Self-check: Why is a fabricated takeover rumour not automatically stock market manipulation?
Answer: Manipulation requires the transaction elements; publishing false information inducing transactions is its own misconduct category.
78. Disclosure misconducts: prohibited transactions and false or misleading information
Two categories concern disclosure. Disclosing information about prohibited transactions means saying a price is likely to be affected by prohibited manipulative dealing, with conditions about participation or benefit; it does not cover any forced sale, confidential order or fictitious transaction. Disclosing false or misleading information likely to induce transactions covers matters like fabricated rumours.
Example. Hypothetically, a person publishes a fabricated takeover rumour that induces buying; this falls under false or misleading information inducing transactions.
Watch out. Treating disclosure about prohibited transactions as covering any ordinary liquidation or rumour; specific conditions apply.
Self-check: Which category covers publishing a fabricated takeover rumour?
Answer: Disclosure of false or misleading information likely to induce transactions, not automatically stock market manipulation.
79. Consequences: criminal penalties and private civil actions
Criminal prosecution for market misconduct offences proceeds in the courts on the criminal standard and can bring fines and imprisonment, with a conviction's lasting consequences. Separately, the SFO gives persons who suffered pecuniary loss from market misconduct a private right of civil action for compensation. A prior MMT or court finding is not a precondition: the claimant can establish the market misconduct in the civil action itself, but MMT or court findings are admissible evidence supporting the claim, and damages are payable only where it is fair, just and reasonable in the circumstances.
Example. Hypothetically, after an MMT finding of false trading, an investor who bought at the inflated price sues the wrongdoer for compensation.
Watch out. Assuming the same conduct can bring both MMT sanctions and criminal conviction, or that private compensation is automatic.
Self-check: What must exist before a private civil action can succeed?
Answer: Proof that the market misconduct occurred and caused the loss. A prior MMT or court finding is not required, though such a finding is admissible evidence supporting the claim.
80. Unsolicited calls, improper practices and enforcement
The SFO prohibits unsolicited calls offering securities or futures contracts to the public in specified circumstances, with exemptions such as recipients who indicated willingness to receive calls. Improper trading practices include front-running and matching orders without genuine market execution. The SFC enforces to protect investors, maintain integrity and deter misconduct, calibrating sanctions for cooperation and remediation.
Example. Hypothetically, a firm cold-calls the public with stock tips; the calls fall within the prohibition, unlike calls a client requested.
Watch out. Assuming all sales calls are prohibited, or that improper practices are always market misconduct; classification depends on the facts.
Self-check: Why may a self-reported, promptly remedied breach attract a lighter sanction?
Answer: Enforcement considers cooperation, self-reporting and remediation alongside seriousness, serving protective and deterrent purposes.
Turn your revision into a study plan
Adjust the pace to your starting knowledge and examination date. These are suggested revision stages, not an official preparation timetable.
| Stage | What to do |
|---|---|
| Stage 1: Orientation and framework building | Confirm the official guide version valid for your sitting. Make a one-page map of the SFC, HKMA, HKEX, MPFA and Insurance Authority, linking each regulator to its responsibilities. |
| Stage 2: Core regime study, topic by topic | Work through Topics 1 to 5 in order: regulatory overview, Hong Kong law and the Companies Ordinance, the SFO's parts, licensing and subsidiary legislation, and the conduct codes. For each topic, write your own summary of the key distinctions (for example, licensed corporation vs registered institution, MMT vs criminal route, ordinary vs special resolutions). Attempt each concept's self-check question before reading its answer. |
| Stage 3: Application topics and scenario practice | Study Topics 6 to 9, which are more applied: internal controls, AML/CFT, exchange participation, listing and takeovers, and market misconduct. For each, practise sorting hypothetical scenarios into the correct regime: is this a conduct breach, market misconduct, a Listing Rules issue or a Takeovers Code matter? Write out why each scenario turns on the rule it does, not just which rule applies. |
| Stage 4: Consolidation and exam-condition rehearsal | Review all trap lines from this guide as a checklist, re-attempting every self-check question you previously got wrong. Complete full practice sets under timed conditions matching the exam format (60 MCQs in 90 minutes), then review errors by topic to identify weak areas. In your final days, focus on the distinctions you still confuse rather than re-reading everything equally. |
Questions candidates ask
What is the format of the HKSI Paper 1 exam?
Paper 1 is 60 multiple-choice questions in 90 minutes, with a pass mark of 70%. Note that the pass mark is the score you need to pass; it is not the same as the pass rate, which is the proportion of candidates who pass and is a separate statistic.
Which study guide version should I use?
HKSI lists Paper 1 study guide version 3.5 for examinations from 30 June 2026. This article follows the public syllabus; use that official study guide for the full examinable detail and recheck the version notice before your sitting.
Is breaching the Code of Conduct a criminal offence?
No. The Code of Conduct is not legislation, and breach is not automatically criminal. Breach can be taken into account in disciplinary action against the licence. Similarly, not every SFO contravention is a criminal offence: only provisions expressly creating offences carry criminal liability, and many breaches lead to civil or disciplinary consequences instead.
Can the SFC pursue MMT proceedings and criminal prosecution for the same conduct?
No. For the same conduct, the regime operates as an either/or choice: the matter may go to the Market Misconduct Tribunal for civil proceedings or to criminal prosecution, but not both — sections 283 and 307 of the SFO provide double-jeopardy safeguards. This is a core Topic 9 distinction.
Does this guide cover everything I need to pass?
No guide can guarantee a pass, and this one is no exception. It provides 80 key revision concepts across the full syllabus with application practice, but you must study the official study guide for your exam version, as exam questions are based on the published study guide content. Use this guide alongside, not instead of, the official materials.
Official sources and further reading
- HKSI Paper 1 syllabus and learning outcomes (PDF)
- HKSI current study guide versions and effective dates
- HKSI examination format and study resources
- SFC Code of Conduct
- SFC: Market Misconduct Tribunal orders in false trading case
- SFC power to institute MMT proceedings directly (effective 4 May 2012)
- SFC: Types of intermediary and licensed individual
- SFC Codes on Takeovers and Mergers and Share Buy-backs
These independent revision notes explain the public syllabus through original examples. They do not reproduce the official study guide or examination questions. Use the official study guide valid for your examination date for the full examinable detail. HKSIDataBase is an independent provider and is not endorsed by the HKSI Institute.