Under the Securities and Futures Ordinance (SFO), a temporary licence allows corporations that principally conduct their business overseas to engage in specific regulated activities in Hong Kong for a short duration. Statement I is incorrect because the maximum period for a temporary licence is three months, not six. Statement II is correct; a fundamental eligibility requirement is that the applicant corporation’s principal business is carried on outside of Hong Kong. Statement III is also correct, as representatives of temporarily licensed corporations can be granted temporary licences for the same purpose. Statement IV is incorrect because a temporary licence is granted for specified regulated activities (such as Type 1 Dealing in Securities or Type 4 Advising on Securities) and does not confer the right to conduct all types of regulated activities. Therefore, statements II and III are correct.

The explanation is that licensed corporations in Hong Kong have a strict legal and regulatory obligation to comply with sanctions lists promulgated by the United Nations Security Council (UNSC). When a firm identifies a prospective client, or a key controller of a client, as being on a UNSC sanctions list, the primary and overriding duty is to not establish a business relationship or conduct any transactions with or for them. This prohibition is absolute. The correct action is to refuse to onboard the client and cease all dealings. Filing a Suspicious Transaction Report (STR) with the Joint Financial Intelligence Unit (JFIU) may also be necessary, but it does not override the fundamental prohibition against dealing with a sanctioned party; proceeding with the relationship under any form of monitoring would be a serious breach. Reporting to the Securities and Futures Commission (SFC) to seek approval is incorrect as the SFC expects firms to comply with the law, not to seek exemptions from it. Similarly, onboarding the client and then freezing assets is the wrong sequence of actions; the relationship should not be initiated at all.

According to the regulations governing options trading for licensed corporations in Hong Kong, the options client agreement is a critical document that must contain specific provisions to protect both the client and the firm. Statement I is a mandatory requirement; the client must either confirm they are the ultimate beneficiary or disclose who is. This is crucial for anti-money laundering (AML) and know-your-client (KYC) obligations. Statement III is also a required disclosure, ensuring clients are aware of their potential recourse to the Investor Compensation Fund (ICF) should the licensed corporation default. Statement IV is a standard and necessary clause that outlines the firm’s right to take protective action, such as closing out positions, if a client fails to meet their obligations, most notably margin calls. Statement II is incorrect; while a licensed person must provide product specifications upon request, there is no regulatory requirement to provide daily market commentary or performance forecasts. Such a service would be a value-added offering, not a mandatory part of the client agreement. Therefore, statements I, III and IV are correct.

This question assesses the obligations of a licensed intermediary when dealing with a retail client who is new to trading complex derivative products like options, specifically a high-risk strategy such as writing uncovered calls. All four statements represent critical steps required under the SFC’s Code of Conduct for Licensed or Registered Persons.

Statement I is correct. Paragraph 5.1A of the Code of Conduct requires an intermediary to assess a client’s knowledge of derivatives before providing services related to them. This assessment can be based on the client’s work experience, prior trading experience, or relevant academic/professional qualifications.

Statement II is correct. Writing uncovered call options exposes the writer to potentially unlimited losses. The SFC requires intermediaries to provide clear, adequate, and specific risk disclosures for complex and high-risk products. A generic risk disclosure is insufficient; the warning must be tailored to the specific high-risk nature of the strategy.

Statement III is correct. As part of ensuring the client understands the risks, intermediaries are expected to obtain a client’s explicit acknowledgement, often in writing (e.g., a signed declaration in the client agreement addendum), confirming they have been informed of and understand the risks associated with derivative trading before the first transaction.

Statement IV is correct. This reflects the suitability obligation under Paragraph 5.2 of the Code of Conduct. The firm must determine if the product or strategy is suitable for the client. If it is deemed unsuitable, the firm must inform the client. If the client, despite the advice and warnings, insists on proceeding with the transaction in a non-discretionary account, the firm may execute the order but must document the advice given, the warnings provided, and the client’s rationale and instruction to proceed.

Since all four actions are integral parts of the regulatory requirements and best practices for handling such a client request, all statements are correct. Therefore, all of the above statements are correct.

This question assesses understanding of the internal control guidelines for recruitment, training, and information management as stipulated by the SFC. Statement I is correct because a fundamental requirement for any licensed corporation is to implement procedures to ensure it employs ‘fit and proper’ persons, which includes verification before employment. Statement III is also correct, as the Management, Supervision and Internal Control Guidelines explicitly require that information management systems be designed to ensure data integrity and security, and that these systems are documented and regularly reviewed for adequacy and effectiveness. Statement II is incorrect because while meeting CPT requirements is mandatory, a firm’s training program must be much broader. It should be adequate for the specific duties of staff and also cover the intermediary’s internal policies and procedures, not solely focus on CPT hours. Statement IV is incorrect as it describes a major internal control weakness. A core principle of information security is restricting access to data and systems on a ‘need-to-know’ basis to prevent unauthorized access, modification, or leakage of sensitive information. Unrestricted access would be a severe breach of this principle. Therefore, statements I and III are correct.

The correct answer is that Dynamic Ventures Ltd. does not qualify as a Corporate Professional Investor because it fails to meet either of the required monetary thresholds. Under the Securities and Futures (Professional Investor) Rules, a corporation can be classified as a Professional Investor if it meets one of two criteria: having a portfolio of not less than HK$8 million, or having total assets of not less than HK$40 million. A ‘portfolio’ is specifically defined as consisting of securities, certificates of deposit issued by a regulated bank, or money. In this scenario, the company’s portfolio is calculated by adding its listed securities (HK$6 million) and its certificate of deposit (HK$1.5 million), for a total of HK$7.5 million. This amount is below the HK$8 million portfolio threshold. Concurrently, its total assets are HK$38 million, which is below the HK$40 million asset threshold. Since the company fails both tests, it cannot be classified as a Corporate PI. One incorrect option suggests that discretionary classification is possible if the value is close to the threshold; however, the rules are absolute and do not allow for such discretion. Another incorrect option implies that the asset and portfolio values can be combined or are related in a way that would grant qualification, which is a misinterpretation of the distinct ‘OR’ conditions. Finally, the suggestion that exemptions like waiving the prohibition on unsolicited calls can be applied even if the client does not qualify as a PI is incorrect; these specific exemptions are contingent upon the client meeting the formal PI classification.

Under the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules, a licensed corporation can be exempted from providing contract notes and statements of account to a Professional Investor (PI), but the specific requirements depend on how the client qualifies as a PI. The correct answer is that for a client who qualifies as a PI under the Securities and Futures (Professional Investor) Rules, the intermediary must obtain a written agreement from the client to waive the provision of these documents. Simply notifying the client and proceeding if they do not object is the procedure for PIs specified in Schedule 1 of the Securities and Futures Ordinance, which is a different category. The requirement is not related to the annual renewal of a general standing authority, as this is a specific waiver governed by the Contract Notes Rules. Furthermore, there is no need to seek approval from the SFC for this exemption, as the rules provide a direct mechanism for agreement between the firm and the client.

Under the Securities and Futures Ordinance (SFO), insider dealing includes not only trading on inside information but also disclosing such information to another person. This is often referred to as ‘tipping-off’. In this scenario, the executive director is a ‘connected person’ with the listed company. The information about the impending acquisition at a premium is specific, not generally known to the public, and is likely to materially affect the company’s share price, thus qualifying as ‘inside information’. By disclosing this information to his portfolio manager friend, knowing or having reasonable cause to believe that the friend will use it for the purpose of dealing, the director has committed insider dealing. The correct answer is that the executive has engaged in insider dealing by disclosing inside information to another person. The option suggesting price rigging is incorrect because price rigging involves creating a false or misleading appearance of active trading or price levels, which did not happen here. The suggestion that this is disclosure of false or misleading information is also incorrect, as the information provided by the director was true, not false. The argument that no misconduct occurred because the director did not personally trade is a common misconception; the act of disclosing inside information with the expectation that the recipient will trade is, in itself, a form of market misconduct under the SFO.

Statement I is correct. This describes the ‘tick rule’ as implemented by the Stock Exchange of Hong Kong (SEHK). A short sale order for a designated security can only be executed at a price that is not below the best current ask price. The SEHK’s trading system automatically enforces this rule for orders marked as short sales.

Statement II is correct. To comply with the Securities and Futures Ordinance (SFO) and avoid engaging in illegal naked short selling, a seller must have a ‘presently exercisable and unconditional right to vest the securities in the purchaser’. A legally enforceable stock borrowing and lending agreement in place before the short sale is the standard mechanism to fulfill this requirement.

Statement III is incorrect. The threshold for a ‘reportable short position’ in specified shares (which are not interests in a Collective Investment Scheme, CIS) is the lower of HK$30 million or 0.02% of the value of the total number of the specified shares issued. The statement incorrectly implies the threshold is always HK$30 million, ignoring the 0.02% test which could result in a lower reporting threshold for large-cap stocks.

Statement IV is incorrect. The standard reporting frequency under the Short Position Reporting Rules is weekly. The report must be submitted to the SFC within two business days after the reporting day (which is typically the last trading day of the week). The one-business-day reporting deadline only applies when the SFC has invoked its power to require daily reporting, usually during periods of perceived market instability, which is not a ‘standard’ market condition. Therefore, statements I and II are correct.

Under the Securities and Futures Ordinance (SFO), it is a form of market misconduct to disclose or disseminate information that is likely to induce the sale or purchase of securities or affect their price, if the person knows, or is reckless or negligent as to whether, the information is false or misleading. The correct answer is that Leo has likely engaged in market misconduct because he was, at a minimum, negligent in not verifying the information from an unconfirmed source before publishing it. His failure to perform due diligence on a market-moving rumour constitutes recklessness or negligence regarding its truthfulness. This falls under the market misconduct provisions in either Part XIII (for negligence) or Part XIV (for recklessness) of the SFO. The other options are incorrect. The ‘conduit’ defence applies to entities like printers or live broadcasters who transmit information in good faith without creating or endorsing the content; it does not protect a blogger who actively authors and publishes an analytical article. Furthermore, a specific intention to defraud individuals is not a necessary element for the offence of disseminating false information; recklessness or negligence is a sufficient mental state. Lastly, whether Leo personally profited from the situation is irrelevant to determining if his actions constitute market misconduct; the act of distorting the market is the offence itself.

Statement I is correct. A key feature of Exchange Traded Funds (ETFs) is their intra-day tradability on a stock exchange, just like common stocks. Their market price is determined by supply and demand throughout the trading day. Statement II is also correct. This describes the unique creation and redemption mechanism of ETFs. Large institutional investors, known as participating dealers or authorized participants, interact directly with the ETF issuer in the primary market to create or redeem large blocks of units (Creation Units), typically by exchanging a basket of the underlying securities. Statement III is incorrect. This describes the objective of a leveraged product, which aims to deliver a multiple of the daily return of the underlying index. A standard, non-leveraged ETF aims to track the performance of its underlying index on a one-to-one basis, not amplify it. Statement IV is incorrect. The requirement to distribute at least 90% of net after-tax income as dividends is a specific rule for Real Estate Investment Trusts (REITs) under the SFC’s Code on Real Estate Investment Trusts, not for ETFs. While some ETFs may distribute dividends, it is not a mandatory requirement at this level. Therefore, statements I and II are correct.

The correct answer is that the transaction is reported to the Exchange but is concluded outside the automatic order matching system. This scenario describes a ‘direct business transaction’, commonly known as a cross trade, where a single Exchange Participant acts for both the buyer and the seller in a pre-arranged trade. According to the Rules of the Exchange, such transactions are exceptions to the standard automatic order matching process within the AMS/3 system. They are reported directly to the SEHK for transparency and settlement but do not interact with the central limit order book. Entering the buy and sell orders into the system for automatic matching is incorrect because it would expose the orders to the public order book, and they might be executed against orders from other market participants, which is not the intention of a pre-arranged trade. Breaking the transaction into smaller parts is a method for handling orders that exceed the maximum size limit, not the standard procedure for a direct business transaction. The odd-lot trading facility is specifically for handling trades of quantities smaller than a standard board lot and is not relevant for a large block transaction.

Under the Securities and Futures (Financial Resources) Rules (FRR), the calculation of liquid assets is strictly defined to ensure a licensed corporation can meet its liabilities.

Statement I is correct. Cash and bank deposits with a maturity not exceeding six months are considered highly liquid and can be included at their full value (i.e., with a 0% haircut).

Statement II is incorrect. Real estate, such as office premises, is a fixed asset. Fixed assets are considered illiquid because they cannot be converted to cash quickly. Therefore, they are given a 100% haircut and are valued at zero for the purpose of calculating liquid assets.

Statement III is correct. The FRR specifically allows for the inclusion of net amounts receivable from clients arising from securities transactions on a cash-against-delivery basis, subject to certain conditions (such as being less than the market value of securities held for the client after haircut).

Statement IV is incorrect. Assets that a licensed corporation beneficially owns but has pledged or provided as security for its own liabilities or obligations are generally excluded from the calculation of liquid assets. Since the portfolio of stocks is pledged as collateral, it cannot be included. Therefore, statements I and III are correct.

Part IX of the Securities and Futures Ordinance (SFO) grants the Securities and Futures Commission (SFC) the authority to take disciplinary action against a ‘regulated person’ (which includes a licensed representative) who is found to be guilty of misconduct or is not a fit and proper person. The available disciplinary actions are of a regulatory nature. Statement I is correct as the SFC can issue a public or private reprimand. Statement II is also correct, as the SFC has the power to suspend or revoke a licence. Statement IV is correct; the SFC can impose a pecuniary penalty not exceeding the greater of HK$10 million or three times the amount of profit gained or loss avoided by the person as a result of the misconduct. Statement III is incorrect because imprisonment is a criminal sanction. While certain misconduct may also constitute a criminal offence under Part XIV of the SFO, the imposition of a prison sentence is a matter for the criminal courts, not a disciplinary action that the SFC can impose directly. Therefore, statements I, II and IV are correct.

This question assesses the understanding of ‘Chinese walls’ as required by the SFC’s Internal Control Guidelines (ICG). A Chinese wall is an information barrier designed to prevent the leakage of confidential, price-sensitive information from one department (e.g., corporate finance) to another (e.g., dealing or proprietary trading) within the same firm. Statement I correctly identifies the primary objective of a Chinese wall: to prevent the misuse of non-public, price-sensitive information. Statement II describes a critical and practical control measure, which is restricting access to sensitive information, both physically and electronically. This is a fundamental component of an effective information barrier. Statement IV outlines a necessary surveillance procedure. Monitoring staff trading activity is essential to detect any potential breaches of the Chinese wall and ensure its effectiveness. Statement III is incorrect; requiring the corporate finance department to pre-approve client orders would be operationally impractical, could delay client orders improperly, and would fundamentally breach the principle of separation that the Chinese wall is meant to establish. The dealing function should operate independently based on client instructions, firewalled from the advisory side. Therefore, statements I, II and IV are correct.

Statement I is correct. As a SEOCH Participant, the firm is subject to the capital requirements stipulated in the SEOCH Clearing Rules. This includes maintaining liquid capital that is not less than its variable required liquid capital (VRLC), which is calculated by SEOCH based on the participant’s risk exposure.

Statement II is correct. The SFC’s Code of Conduct and related guidelines require licensed corporations engaging in OTC derivatives to establish and maintain a comprehensive risk management framework. This framework must be able to identify, measure, monitor, and control risks, including counterparty credit risk, and should incorporate regular stress testing to assess the impact of extreme but plausible market events.

Statement III is incorrect. While SEOCH has Market Makers, being a SEOCH Participant does not automatically impose an obligation to act as one. Market making is a specific role undertaken by firms that are registered as such with the exchange. They have specific obligations, such as providing continuous two-sided quotes, in return for certain benefits. A general clearing participant does not have these obligations.

Statement IV is correct. Engaging in OTC derivatives business necessitates sophisticated IT infrastructure. Regulatory expectations, as outlined by the SFC, require firms to have systems capable of performing complex tasks such as daily mark-to-market valuations of positions, calculating potential future exposure to counterparties, and generating accurate risk reports for internal management and regulatory purposes. Therefore, statements I, II and IV are correct.

The correct answer is that the entity must be a company incorporated in Hong Kong or an overseas company registered with the Companies Registry. Under the Securities and Futures Ordinance (SFO), any entity seeking to be licensed for Type 10 regulated activity (providing credit rating services) must be a corporate body. The SFC will not grant a Type 10 license to other business structures such as general partnerships or sole proprietorships. While licensed corporations are required to appoint Responsible Officers, this requirement is separate from and does not substitute the fundamental legal structure requirement. Therefore, suggesting that a partnership or sole proprietorship is acceptable if the individuals involved are licensed is incorrect. The initial and most critical step is establishing the correct corporate form before applying for the license and appointing the necessary personnel.

The correct answer is that the client’s authority must be confirmed annually, which can be achieved by notifying the client that the authority will be automatically renewed unless revoked in writing. The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission requires that a client’s written authority for a discretionary account be confirmed on an annual basis. To facilitate this, the Code permits an intermediary to notify the client before the expiry date that the authority will be automatically renewed. The authority continues unless the client explicitly revokes it in writing before that date. This process ensures the client is aware of the ongoing mandate without creating an unnecessary administrative burden. One of the incorrect options suggests that the client must physically visit the firm’s office each year to re-sign the mandate. This is not required by the Code of Conduct, which allows for the more practical automatic renewal notification method. Another incorrect option states that senior management must re-approve the authority semi-annually. Senior management approval is a one-time requirement for the initial opening of the account, not a recurring event for its maintenance. The annual requirement is for confirmation with the client, not re-approval from management. The final incorrect option suggests that verbal instructions to modify restrictions can be acted upon immediately. This is incorrect and dangerous; the discretionary authority and its specific terms must be in writing to be valid and enforceable, and any amendments should also be properly documented in writing.

The correct answer is that the SFC should apply to a magistrate for a warrant to enter the premises, search for, and seize the relevant documents. Under section 191 of the SFO, if there is a reasonable cause to believe that documents relevant to an inspection or investigation are on certain premises and that they might be concealed, removed, or destroyed, the SFC can seek a warrant. This allows authorized persons, with police assistance, to enter premises, if necessary by force, and secure the evidence. This is the most effective and powerful tool to use when there is an immediate risk of evidence destruction and a lack of cooperation. While appointing an investigator under section 182 is a logical step to escalate a routine inspection into a formal investigation, it does not in itself grant the power to forcibly enter and seize documents to prevent their immediate destruction. Requiring the senior officer to provide a statutory declaration is a power available under both section 180 (inspection) and section 183 (investigation), but it does not physically secure the documents and is ineffective if the officer is determined to obstruct the process. Imposing a fine for non-cooperation is a potential penalty for an offence, but it is a punitive measure applied after the fact and does not solve the urgent problem of securing the at-risk evidence.

Under Section 103 of the Securities and Futures Ordinance (SFO), any advertisement or document inviting the public to invest in securities or other investment products must be authorized by the Securities and Futures Commission (SFC) unless an exemption applies. This provision extends to materials published on the Internet. The key determinant for whether SFC authorization is required for online content is whether it is ‘targeted at’ the Hong Kong public. The correct answer is that the firm must include a clear disclaimer that the fund is not available to the public in Hong Kong and implement reasonable procedures to prevent Hong Kong residents from subscribing. This action creates a ‘safe harbour’ as outlined in SFC guidance. By explicitly stating the intended audience and taking practical steps (like checking addresses or phone numbers on application forms) to enforce this, the firm demonstrates that it is not targeting Hong Kong residents, thereby not triggering the authorization requirement under SFO s.103. Submitting the website for SFC authorization would only be necessary if the firm intended to market the fund to the Hong Kong public. Ensuring the web server is located outside Hong Kong is irrelevant, as the regulations are concerned with the audience being targeted, not the location of the information’s source. While blocking all IP addresses from Hong Kong is a possible ‘reasonable step,’ it is an extreme measure and not the fundamental requirement; the disclaimer itself is the primary component of the safe harbour, which must be coupled with reasonable preventative steps.

According to Schedule 8 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, which governs the operation of Alternative Liquidity Pools (ALPs), an ALP operator has several key responsibilities. Statement I is correct because the operator must establish written internal policies ensuring at least one responsible officer or executive officer is responsible for the overall management and supervision of the ALP. Statement II is correct as a fundamental access requirement; operators must implement measures to ensure that only qualified investors are accepted as users and that only orders placed or originated by qualified investors are routed to the ALP. Statement IV is also correct, as the operator is required to set up a formalized governance process with input from its risk and compliance functions. However, Statement III is incorrect. An ALP operator is permitted to allow transactions to be placed into and transacted in the ALP at such times as it considers appropriate, and is not restricted to the trading hours of the Stock Exchange of Hong Kong. Therefore, statements I, II and IV are correct.

Under Section 174 of the Securities and Futures Ordinance (SFO), it is an offence for an intermediary to perform certain acts during an unsolicited call, such as inducing a person to enter into an agreement to acquire a financial product. Statement III is correct because the representative’s action of persuading Mr. Chan to purchase the structured product during the unsolicited call falls under this prohibition. Statement I is also correct because Section 175 of the SFO grants a person who enters into an agreement as a result of a prohibited unsolicited call the right to rescind that agreement by giving written notice. Statement II is incorrect as it misstates the time limit for rescission; the notice must be given within 28 days of entering the agreement or within 7 days of discovering the contravention, whichever is the earlier period, not the longer one. Statement IV is incorrect because the right of rescission is based on the contravention of the unsolicited call provisions itself, and is not affected by the subsequent assessment of the product’s suitability for the client. Therefore, statements I and III are correct.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a licensed person must handle client complaints appropriately. Statement I is correct as General Principle 4 and Paragraph 4.3 require firms to handle complaints in a timely and appropriate manner, which includes investigation and a prompt response. Statement II is correct because Paragraph 4.3 also specifies that if a complaint’s subject matter raises issues of broader concern (such as a potential systemic issue with an employee’s conduct affecting multiple clients), the firm must investigate and remedy the matter, even if other clients have not complained. Statement III is correct as Paragraph 12.5(a) mandates that a licensed person must report to the SFC immediately upon discovery of any suspected material breach of any rules, regulations, and codes administered by the SFC. Churning and suitability breaches would be considered material. Statement IV is incorrect because it contradicts the requirement for immediate notification. The duty to report arises ‘upon discovery’ of a suspected breach, not after the conclusion of an internal investigation. Delaying the report would itself be a breach of the Code. Therefore, statements I, II and III are correct.

The senior management of a licensed corporation holds the ultimate responsibility for establishing and maintaining an adequate and effective internal control system. Statement I is correct because the SFC’s Internal Control Guidelines (ICG) and the Code of Conduct emphasize that risk management is an ongoing process, requiring periodic evaluation to ensure its continued effectiveness in a changing business environment. Statement III is also correct as a fundamental regulatory requirement is to establish robust procedures and systems for the proper handling and segregation of client assets to protect client interests. Statement II is incorrect because while the compliance function plays a crucial role, the ultimate responsibility for the adequacy and effectiveness of the internal control system rests with the senior management and cannot be fully delegated. Statement IV is incorrect because the SFC’s Internal Control Guidelines (ICG) provide guidance on expected standards; they are not legally binding rules themselves. While licensed corporations are expected to meet the standards outlined in the ICG, the guidelines are intended to assist them in designing their own systems, for which they remain ultimately responsible. Therefore, statements I and III are correct.

This question assesses the understanding of the duties of senior management, including Responsible Officers (ROs), as stipulated in the SFC’s Code of Conduct. Senior management of a licensed corporation bears the primary responsibility for ensuring the firm’s compliance with all applicable rules and regulations.

Statement I is correct. General Principle 8 of the Code of Conduct explicitly states that a licensed corporation should ensure that it has and effectively employs the resources and procedures needed for the proper performance of its business activities. This includes implementing and maintaining effective internal controls and risk management procedures.

Statement II is correct. The Code of Conduct and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC emphasize that senior management, including ROs, has the primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the firm.

Statement III is incorrect. While a material breach must be reported, the primary regulator for a Type 1 licensed corporation is the Securities and Futures Commission (SFC), not the Hong Kong Monetary Authority (HKMA), unless the firm is also a registered institution. Furthermore, a ‘potential gap’ is an internal control issue that needs to be rectified, but it does not automatically constitute a ‘material breach’ requiring immediate external reporting, especially since no actual breach has occurred.

Statement IV is incorrect. While senior management can delegate tasks, they cannot delegate their ultimate responsibility. An RO must ensure proper oversight of any delegated functions and remains accountable for the outcome. Delegating the entire responsibility without further oversight would be a failure of their supervisory duties. Therefore, statements I and II are correct.

According to the Securities and Futures (Financial Resources) Rules (FRR), a licensed corporation must correctly identify and include all ranking liabilities when calculating its liquid capital. Ranking liabilities generally encompass all of the corporation’s liabilities as determined by generally accepted accounting principles, with certain adjustments.

Statement I is correct. A provision for current tax liabilities, such as Hong Kong profits tax payable for the current period, is a known obligation and must be included as a ranking liability.

Statement II is correct. A provision for a contingent liability, such as a legal claim, must be included as a ranking liability if it meets the accounting recognition criteria. This means it is probable that an outflow of economic resources will be required to settle the obligation, and the amount of the obligation can be reliably estimated. The legal counsel’s advice confirms these conditions are met.

Statement III is incorrect. A contingent liability that is only a remote possibility does not meet the criteria for recognition as a provision. Therefore, it would not be included as a ranking liability in the FRR calculation, although it might be disclosed in the financial statements’ notes.

Statement IV is incorrect. Deferred tax liabilities, which represent future tax obligations arising from temporary differences between accounting and tax treatments, are specifically required to be treated as ranking liabilities under the FRR. Therefore, statements I and II are correct.

This question assesses the ability to identify suspicious transactions that may indicate money laundering, as outlined in the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (GAML). Statement I describes a classic money laundering technique known as ‘structuring’ or ‘smurfing,’ where small amounts of cash are used to purchase securities, which are then liquidated and sent to a third party to obscure the original source of funds. Statement II highlights a significant red flag where the client’s financial activity is inconsistent with their known profile and the source of funds is unclear and poorly documented, especially when originating from a high-risk jurisdiction. Statement III points to the suspicious use of a securities account as a temporary repository for idle funds without any apparent investment purpose, which could be a method to layer or hold illicit proceeds. Statement IV, however, describes a rational investment decision based on public information (a positive earnings report) and is not, in itself, a red flag for money laundering. Therefore, statements I, II and III are correct.

Statement I is incorrect. If no default notice is published by the Investor Compensation Company (ICC), an aggrieved investor must lodge a claim within six months of first becoming aware of the default, not from the date the default occurred. The trigger is the investor’s awareness. Statement II is incorrect. The exemption from the Securities and Futures (Insurance) Rules applies only if a licensed corporation meets two conditions: it has a licensing condition that it may not hold client assets AND it is not an exchange participant of either the SEHK or HKFE. Exchange participant status is a critical factor. Statement III is correct. The Insurance Rules explicitly provide that SEHK exchange participants must take out and maintain insurance under the master policy approved by the SFC. Statement IV is correct. The mandatory insurance policy for a specified licensed corporation is designed to cover risks of loss of client assets, which specifically includes losses resulting from forged or fraudulent instructions relating to those assets. Therefore, statements III and IV are correct.

The correct answer is that the rules and laws of the Shenzhen Stock Exchange and the relevant Mainland China authorities apply. A fundamental principle of the Stock Connect scheme is the application of ‘home market’ rules. This means that while the order is placed through a Hong Kong intermediary, the actual trading, clearing, and settlement of the security occurs on the exchange where it is listed. For Northbound trading, this is the Shanghai or Shenzhen Stock Exchange. Therefore, the rules and regulations of the Mainland China market govern the transaction’s execution. While the Hong Kong intermediary is regulated by the SFC for its conduct and client dealings, this does not change the governing law for the trade itself on the Mainland exchange. There is no unique, separate set of cross-border regulations that supersedes local market rules, nor do the rules of both markets apply equally to the trade execution; the ‘home market’ principle is what dictates jurisdiction.

The correct answer is that the investigator can require a specific director to attend a formal interview at a designated time and place to answer questions. Under section 183 of the Securities and Futures Ordinance (SFO), a person subject to a formal investigation must, among other things, attend before the investigator at a time and place required in writing and answer questions. This is a compulsory power that compels attendance and testimony, which is a significant step up from the initial inquiries made during a routine inspection under section 180. Failure to comply without a reasonable excuse constitutes an offence. The other options are incorrect. The power to request documents during an investigation is not limited to those physically on the firm’s premises; the investigator can require the production of any relevant document in the person’s possession or control. The authority of an investigator is not restricted to only licensed persons; under section 182, the SFC can investigate any person it has reason to believe has information relevant to the investigation. Finally, an investigator cannot unilaterally freeze the personal bank accounts of employees; such an action would typically require a separate legal process, such as obtaining a restriction notice or a court order under different provisions of the SFO.