The correct answer is that the depositary must ensure the fund manager has established and is consistently applying appropriate procedures for valuing the fund’s assets. According to the SFC’s Code on Unit Trusts and Mutual Funds, a key oversight responsibility of a depositary (or trustee) is to take reasonable care to ensure that the valuation and pricing of units are carried out in accordance with the scheme’s constitutive documents. This involves verifying the process and procedures, not performing the valuation itself. The depositary’s role is to act as an independent check on the fund manager’s activities to protect investor interests. The option to immediately substitute its own valuation is incorrect because the primary responsibility for asset valuation lies with the fund manager. The depositary’s function is oversight and verification of the manager’s process, not to usurp the valuation function. While the depositary must challenge questionable valuations, it does not unilaterally impose its own figure as the first step. Simply accepting the valuation because the fund manager’s internal team has approved it is also incorrect. This would represent a failure of the depositary’s duty of independent oversight. The depositary must exercise its own due care and diligence and cannot passively rely on the manager’s internal controls alone. Reporting the matter directly to the SFC without first investigating and challenging the fund manager would be a premature and inappropriate escalation. The depositary’s initial duty is to inquire with the fund manager, understand the basis for the valuation, and ensure proper procedures are followed. Reporting to the regulator is a step to be taken if a breach is identified and cannot be rectified.

The role of a depositary (often a trustee in the context of a unit trust) is primarily one of oversight and safekeeping, designed to protect the interests of the scheme’s investors. This role is distinct from the fund manager’s role of making investment decisions. According to the SFC’s Code on Unit Trusts and Mutual Funds, the depositary has several key oversight responsibilities. Statement I is correct because the depositary must ensure that the fund manager operates within the investment and borrowing limits prescribed in the fund’s offering documents. Statement II is also correct as the depositary is responsible for overseeing the process of unit creation (subscriptions) and cancellation (redemptions) to ensure it complies with the trust deed. Statement IV is a critical function; the depositary must verify that the Net Asset Value (NAV) is calculated correctly and in accordance with the methodology laid out in the fund’s constitutive documents. However, Statement III is incorrect. The depositary’s role is not to approve or second-guess the fund manager’s specific investment strategies or stock selections. The fund manager is responsible for the investment performance, while the depositary ensures compliance with the established rules. Therefore, statements I, II and IV are correct.

The correct answer is that the depositary must verify that the investment complies with the investment restrictions detailed in the fund’s offering documents and, if it does not, take appropriate action to ensure compliance. A fundamental responsibility of a depositary, as outlined in the SFC Code on Unit Trusts and Mutual Funds, is to exercise oversight over the fund manager. This includes ensuring that the fund is managed in accordance with the limitations and objectives stated in its constitutive documents. The depositary acts as a check on the fund manager to protect unitholders’ interests. Evaluating the potential profitability of an investment is the fund manager’s role, not the depositary’s; the depositary’s concern is compliance, not investment performance. Simply settling a non-compliant trade and reporting it afterwards would be a failure of the depositary’s duty to act with due care and diligence to prevent such breaches. While escalation to the regulator may be necessary, the primary duty is to ensure compliance with the fund’s rules first. The depositary’s formal communication channel is with the fund manager and the regulator, not directly with the fund’s unitholders regarding operational or compliance matters.

According to the SFC’s Code on Unit Trusts and Mutual Funds (UT Code), the depositary (or trustee) has a critical oversight role to protect the interests of the fund’s investors. This role involves ensuring the fund manager operates the scheme in accordance with the constitutive documents (e.g., the trust deed) and the offering documents. Statement I is correct as the depositary must verify that the fund’s investments adhere to the stated restrictions. Statement II is also a core duty; the depositary is responsible for ensuring the valuation of the fund and the calculation of unit prices are performed correctly. Statement IV is correct as monitoring the application of the fund’s income is part of the depositary’s cash flow monitoring and oversight responsibilities. However, Statement III is incorrect. The depositary’s role is one of oversight, not active management. The fund manager has the discretionary authority to make specific investment decisions. The depositary’s duty is to check that these decisions, in aggregate, comply with the fund’s rules, not to approve each individual transaction beforehand. Therefore, statements I, II and IV are correct.

According to the SFC’s Code on Unit Trusts and Mutual Funds, the depositary (trustee/custodian) has a crucial oversight role to protect the interests of fund investors. This role is distinct from the fund manager’s investment decision-making function. Statement I is correct as the depositary must ensure the Net Asset Value (NAV) is calculated in accordance with the fund’s constitutive documents. Statement II is also correct; the depositary is responsible for ensuring that the fund’s income is properly collected and applied as stipulated in the trust deed. Statement IV is a core duty, as the depositary must oversee the processes for issuing, redeeming, and cancelling units to ensure they comply with the fund’s rules and are executed at the correct price. However, Statement III is incorrect. The depositary’s role is to ensure the fund manager adheres to the investment restrictions and policies outlined in the constitutive documents, not to approve specific investment selections based on their potential performance. The selection of individual securities is the sole responsibility of the fund manager. Therefore, statements I, II and IV are correct.

The role and responsibilities of a depositary (or trustee for a unit trust) for an SFC-authorized collective investment scheme are primarily outlined in Chapter 10 of the Code on Unit Trusts and Mutual Funds (UT Code). Statement I correctly describes the core safekeeping duty, which requires the depositary to take custody of or control the scheme’s assets and ensure they are properly registered (UT Code 10.3(a)). Statement II accurately reflects the depositary’s oversight function, which involves ensuring the management company adheres to the investment and borrowing limitations set out in the fund’s constitutive documents (UT Code 10.3(c)). Statement IV correctly identifies the cash flow monitoring responsibility, a critical function to ensure all monies are properly accounted for within the scheme (UT Code 10.3(b)). Statement III is incorrect; a depositary is not a guarantor of the fund’s investment performance and does not protect investors from market risk. Its duty is to protect the assets and oversee the fund’s operations, not to underwrite investment outcomes. Therefore, statements I, II and IV are correct.

The depositary of an SFC-authorized collective investment scheme has several key oversight responsibilities as mandated by the Code on Unit Trusts and Mutual Funds. These duties are designed to protect investors’ interests by ensuring the fund is managed in accordance with its constitutive documents and regulatory requirements. Statement I is correct; the depositary must ensure that the process for issuing and redeeming units by investors is handled correctly as per the fund’s trust deed or articles of association. Statement II is also a core duty; the depositary is required to monitor the fund’s portfolio to verify that the fund manager’s investment activities and any borrowing adhere to the restrictions and limitations set out in the offering documents. Statement IV is correct as well; the depositary must ensure that any income generated by the fund’s assets (e.g., dividends, interest) is calculated and distributed or reinvested in line with the fund’s established policies. Statement III is incorrect because the depositary’s role is one of oversight, not co-management or performance assurance. The fund manager retains the responsibility for making investment decisions, and the depositary does not pre-approve individual trades or guarantee their profitability. Its function is to check for compliance after the fact, not to direct investment strategy. Therefore, statements I, II and IV are correct.

The correct answer is that the depositary must inquire with the fund manager to ensure the investment complies with the restrictions outlined in the fund’s constitutive documents. Under the SFC’s Code on Unit Trusts and Mutual Funds, a depositary has a fundamental oversight responsibility that goes beyond mere asset custody. This duty includes monitoring the fund manager’s activities to ensure they adhere to the investment objectives, policies, and restrictions set out in the fund’s offering document and trust deed. If a potential breach is detected, the depositary’s first step is to seek clarification from the fund manager to verify compliance. Simply processing the transaction without question would neglect this critical investor protection role. Immediately reporting the matter to the SFC is a potential subsequent step if a breach is confirmed and not rectified, but it is not the initial action. Focusing only on the operational settlement of the trade ignores the depositary’s broader fiduciary and regulatory compliance duties.

The role of a depositary for a collective investment scheme, particularly an SFC-authorized unit trust, is primarily focused on investor protection through asset safeguarding and independent oversight. Statement I is correct as monitoring the fund’s cash flows is a fundamental duty to ensure all monies are properly reconciled and accounted for. Statement II is correct because the safekeeping of scheme property, ensuring it is properly registered and held in custody, is a cornerstone of the depositary’s function. Statement IV is also correct; the depositary has an oversight responsibility to ensure the fund manager operates within the rules set out in the fund’s constitutive documents, such as the trust deed, especially concerning the pricing and dealing of units. Statement III is incorrect because making investment decisions is the exclusive role of the fund manager. The depositary must remain independent and oversee the manager’s activities, not perform them. A depositary making investment decisions would create a significant conflict of interest. Therefore, statements I, II and IV are correct.

The correct answer is that the depositary must ensure the fund is managed in accordance with the provisions of its constitutive documents. A core responsibility of a depositary, as outlined in the SFC’s Code on Unit Trusts and Mutual Funds, is to exercise oversight over the fund manager’s activities. This includes verifying that investment decisions, such as the acquisition of assets, align with the investment objectives, policies, and restrictions detailed in the fund’s offering documents. An investment in an asset class or geographical region explicitly excluded by the fund’s mandate represents a breach that the depositary is obligated to identify and act upon to protect investors’ interests. An incorrect action would be to focus solely on the valuation of the new assets. While NAV calculation is a key function, it is secondary to the primary duty of ensuring compliance with the fund’s investment mandate. The breach of mandate must be addressed first. It is also incorrect to suggest the depositary’s role is limited to safekeeping. Modern regulatory frameworks, including Hong Kong’s, require the depositary to perform active oversight and monitoring functions, acting as a crucial check on the fund manager’s power. Finally, approving the transaction based on the fund manager’s rationale is inappropriate. The depositary’s duty is to enforce the established rules of the fund, not to make a subjective judgment on the potential merits of a non-compliant investment.

A depositary’s core responsibilities for an SFC-authorized fund, as outlined in the Code on Unit Trusts and Mutual Funds, include cash flow monitoring and general oversight of the fund manager’s activities. Statement I is correct because the depositary has a duty to monitor the fund’s cash accounts and ensure all significant transactions are consistent with the fund’s operations and constitutive documents. Unexplained outflows must be investigated. Statement II is correct as the depositary has an escalating duty of care. If the fund manager fails to provide a satisfactory explanation for irregularities, the depositary must escalate the issue internally and, if necessary, report the potential breach to the SFC to protect unitholders’ interests. Statement III is incorrect; a depositary does not typically have the unilateral power to suspend redemptions. This action is usually initiated by the fund manager, subject to conditions in the trust deed and regulatory approval, to protect all investors fairly. Statement IV is incorrect because the depositary’s role is one of oversight and safekeeping, not investment management. It cannot make investment decisions or instruct the sale of assets; this would be a clear overreach of its mandate and a conflict with the fund manager’s role. Therefore, statements I and II are correct.

Under the SFC’s Code on Unit Trusts and Mutual Funds, the depositary (or trustee) has a critical oversight role to protect the interests of the fund’s investors. This role is distinct from the fund manager’s role of making investment decisions. The depositary’s duties include ensuring the fund operates in accordance with its constitutive documents and regulatory requirements.

Statement I is correct: The depositary must exercise reasonable care and diligence to ensure that the method of calculating the Net Asset Value (NAV) is as prescribed in the constitutive documents and that the NAV is calculated correctly and on the required frequency.

Statement II is correct: A key oversight function is to monitor the fund manager’s activities to ensure compliance with the investment and borrowing limitations set out in the fund’s offering documents and the Code.

Statement III is incorrect: The selection of securities and the day-to-day management of the fund’s portfolio are the exclusive responsibilities of the fund manager. The depositary’s role is to oversee these activities, not to perform them. Performing this function would create a significant conflict of interest.

Statement IV is correct: The depositary is responsible for ensuring that the sale, issue, repurchase, and cancellation of units are carried out in accordance with the provisions of the constitutive documents. Therefore, statements I, II and IV are correct.

The correct answer is that the depositary must refuse to settle the transaction and inform the fund manager that the instruction violates the fund’s investment restrictions. A core responsibility of a depositary for a collective investment scheme, as outlined in the SFC’s Code on Unit Trusts and Mutual Funds, is to exercise oversight over the fund manager. This includes ensuring that the fund is managed in accordance with the limitations and restrictions specified in its offering and constitutive documents. Executing a trade that is clearly outside the permitted investment scope would constitute a failure of this fundamental oversight duty. The depositary’s primary role in this context is to act as a check and balance to prevent such breaches and protect the interests of the unitholders. Simply settling the trade and reporting it later to the regulator fails to prevent the breach from occurring in the first place. Seeking an indemnity from the fund manager does not absolve the depositary of its own regulatory responsibilities to enforce the fund’s rules. Proceeding with the transaction and then informing the investment committee would be reactive rather than proactive, and would still result in the fund holding an unauthorized investment, which is a direct breach of the depositary’s duty.

According to the SFC’s Code on Unit Trusts and Mutual Funds, the depositary (or trustee/custodian) has a critical oversight function to protect the interests of fund investors. This role is distinct from the fund manager’s investment decision-making responsibilities. Statement I is correct as the depositary must ensure that the dealing of fund units (issuance, sale, repurchase, cancellation) is conducted in strict accordance with the fund’s constitutive documents (e.g., the trust deed or articles of association). Statement III is also correct; the depositary is responsible for ensuring that the fund’s income is calculated and applied correctly as stipulated in these documents. Conversely, Statement II describes the primary function of the fund manager, who is responsible for formulating and executing the investment strategy. The depositary oversees these actions but does not make the investment decisions. Statement IV is incorrect because a depositary’s role does not extend to guaranteeing the investment performance of the fund. The depositary’s duty is to safeguard assets and ensure compliance, not to underwrite investment outcomes. Therefore, statements I and III are correct.

According to the SFC’s Code on Unit Trusts and Mutual Funds, a depositary (or trustee) has a critical oversight function over the management of a collective investment scheme. This role is distinct from that of the fund manager. Statement I is correct because a primary duty of the depositary is to ensure that the fund manager’s investment decisions comply with the investment restrictions and objectives outlined in the fund’s offering documents. Statement II is also correct as the depositary is responsible for overseeing the valuation of the fund’s assets to ensure the Net Asset Value (NAV) is calculated fairly and accurately, which includes verifying the appropriateness of valuation methodologies for all assets, especially complex ones. Statement III is incorrect; the depositary does not have the authority to make or veto investment decisions based on its own market view or performance expectations. That responsibility lies with the fund manager. The depositary’s role is to ensure compliance, not to co-manage the portfolio. Statement IV is incorrect because the depositary is not a mere order executor. It has a fiduciary duty to act as a gatekeeper and must ensure instructions from the fund manager are compliant with regulations and the fund’s constitutive documents before acting upon them. Therefore, statements I and II are correct.

The correct answer is that the depositary must verify that the proposed investment complies with the investment objectives and restrictions detailed in the fund’s offering document and take appropriate action if it does not. A fundamental responsibility of a depositary for an SFC-authorized collective investment scheme, as outlined in the Code on Unit Trusts and Mutual Funds, is to provide independent oversight of the fund manager’s activities. This includes ensuring that the fund is managed in accordance with the investment limitations and policies stated in its constitutive documents. If a fund manager attempts to make an investment that falls outside these defined parameters, the depositary has a duty to intervene to protect the interests of the investors. This intervention may involve challenging the fund manager, refusing to settle the trade, and, if the issue is not resolved, reporting the breach to the Securities and Futures Commission (SFC). The other options are incorrect. It is not the depositary’s role to assess the potential financial return of an investment; that is the responsibility of the fund manager. The depositary’s concern is compliance, not performance. While the depositary is responsible for facilitating transactions by ensuring cash is available, this operational duty is secondary to its primary oversight function of ensuring the transaction is permissible in the first place. Facilitating a non-compliant transaction would be a dereliction of its oversight duty. Finally, while investors must be kept informed, the depositary’s immediate obligation in the event of a compliance breach is to address it with the fund manager and, if necessary, the regulator, not to undertake direct mass communication with all unit holders as a first step.

A depositary’s core responsibilities under the SFC Code on Unit Trusts and Mutual Funds include cash flow monitoring, safekeeping of assets, and oversight of the fund manager. Statement I is correct because the depositary must ensure that all payments from the fund’s account are consistent with its investment objectives and restrictions as laid out in the constitutive documents. This is a fundamental oversight duty. Statement II is correct as it reflects the depositary’s responsibility to ensure that for every payment made for an asset purchase, the corresponding asset is properly received and placed into custody for the fund. This links the cash monitoring and safekeeping functions. Statement III is incorrect; the depositary is not responsible for evaluating the investment merit or commercial wisdom of a transaction. That is the role of the fund manager. The depositary’s role is to check for compliance, not performance potential. Statement IV is also incorrect. The depositary does not have the authority to interfere with the commercial terms of a transaction, such as the price, unless the price itself constitutes a breach of a specific rule or limit (e.g., a limit on concentration or a related-party transaction rule). The fund manager is responsible for best execution. Therefore, statements I and II are correct.

The correct answer is that the depositary must ensure the fund manager’s investment decisions adhere to the rules and restrictions stipulated in the fund’s constitutive documents. Under the SFC’s Code on Unit Trusts and Mutual Funds, a depositary has a critical oversight responsibility. This duty involves monitoring the fund manager’s activities to ensure they comply with the investment objectives, policies, and restrictions detailed in the offering documents (such as the trust deed or prospectus). If a transaction appears to breach these rules, the depositary is obligated to intervene and seek clarification or rectification from the fund manager. Simply providing an independent valuation of the investment, while a necessary function, does not fulfill the primary oversight duty concerning the appropriateness of the transaction itself. The depositary’s role is not to approve or veto investment strategies based on performance, but to act as a check on compliance. Reporting the matter directly to the SFC would typically occur only after the depositary has failed to resolve the breach with the fund manager.

The correct answer is that the depositary must independently assess whether the proposed investment aligns with the fund’s stated investment objectives, policies, and restrictions as detailed in its constitutive documents. Under the SFC’s Code on Unit Trusts and Mutual Funds, a depositary has a crucial oversight responsibility that goes beyond simple custody. This duty requires the depositary to ensure the fund is managed in accordance with its offering documents and regulatory requirements. If an investment type is not explicitly mentioned, the depositary must still verify its consistency with the fund’s overall mandate before proceeding. Simply executing the trade because the fund manager is responsible for investment decisions would be a failure of this oversight duty; the depositary acts as a critical check and balance. Providing an opinion on the market risk or suitability of the investment oversteps the depositary’s role and enters the domain of investment advice, which is the fund manager’s function. Immediately reporting the fund manager to the SFC is an extreme step that would typically only be taken after internal queries are unsatisfied and a clear breach is identified, not as a first response to an ambiguous situation.

The correct answer is that the depositary must ensure the fund manager’s actions comply with the fund’s constitutive documents and that proper valuation procedures are established for the assets. Under the SFC Code on Unit Trusts and Mutual Funds, a depositary has a critical oversight duty. This duty requires it to take reasonable care to ensure the fund is managed in accordance with its offering documents and the relevant regulations. When a fund manager proposes to invest in complex or illiquid assets like private equity, the depositary’s primary oversight role is to first verify if such investments are permitted by the fund’s trust deed and offering memorandum. Secondly, it must ensure that the fund manager has a robust, independent, and appropriate methodology for valuing these assets, as they do not have a ready market price. This is fundamental to calculating an accurate Net Asset Value (NAV) and protecting investor interests. The other options describe related but distinct responsibilities. While ensuring secure custody of the investment assets is a core function (safekeeping), the oversight duty in this specific scenario is more immediate and foundational; it addresses whether the investment should be made at all and how it will be valued, which precedes the act of custody. The depositary’s role is not to make investment decisions or assess the commercial viability of the private equity stakes; that is the fund manager’s responsibility. The depositary’s function is to check for compliance, not to co-manage the portfolio. Finally, although monitoring cash flows is a key responsibility, the primary oversight concern when a new, complex asset class is introduced is the upfront verification of its permissibility and valuation framework, rather than just the transactional cash movements.

The explanation teaches the concept of a depositary’s oversight responsibility. The correct answer is that the depositary must ensure the fund’s investments comply with the investment restrictions detailed in its offering documents. Under the SFC’s Code on Unit Trusts and Mutual Funds, a key duty of the depositary (or trustee/custodian) is to take reasonable care to ensure that the fund is managed in accordance with the provisions of its constitutive documents. If a fund manager makes an investment that appears to contravene the stated investment objectives, such as investing in unlisted derivatives when the mandate is for listed equities, the depositary has a duty to investigate and, if necessary, intervene to protect unitholders’ interests. The depositary’s role is not to evaluate the commercial merit or potential profitability of an investment; that is the fund manager’s responsibility. Its focus is on compliance. While ensuring proper settlement and custody of the assets is a function of the depositary, it is secondary to the primary oversight duty of ensuring the investment was permissible in the first place. Seeking unitholder approval after the fact does not remedy a breach of the investment mandate; such changes typically require prior notification and approval.

The correct answer is that the depositary must verify that the investment instruction complies with the fund’s constitutive documents. A core responsibility of a depositary for an SFC-authorized scheme, as outlined in the Code on Unit Trusts and Mutual Funds, is to exercise oversight over the fund manager. This includes ensuring that the fund is managed in accordance with the investment objectives and restrictions detailed in its offering documents. An investment in a speculative, unlisted company, when the fund’s mandate is for publicly-listed companies, represents a clear potential breach. The depositary’s primary duty is to challenge this instruction and prevent the breach to protect unitholders’ interests. Evaluating the potential financial return of the investment is the role of the fund manager, not the depositary; the depositary’s focus is on compliance, not investment performance. Simply settling the trade as long as cash is available would mean failing the fundamental oversight duty, reducing the depositary to a mere transaction processor. While reporting breaches to the regulator is a duty, the primary obligation is to act proactively to prevent the breach from occurring in the first place, rather than settling the non-compliant trade and reporting it afterwards.

The correct answer is that the depositary must verify the transaction against the fund’s constitutive documents and, if a breach is confirmed, report it to the Securities and Futures Commission (SFC). Under the SFC’s Code on Unit Trusts and Mutual Funds, a depositary has a fundamental oversight responsibility to ensure the fund manager adheres to the investment restrictions and objectives outlined in the offering documents. This duty is a critical investor protection mechanism. When a potential breach is detected, the depositary’s primary obligation is to make inquiries with the fund manager to confirm the facts. If the investment is indeed outside the permitted scope, the depositary must report this material breach to the SFC without undue delay. Simply instructing the fund manager to sell the investment oversteps the depositary’s authority; its role is oversight and reporting, not investment management. While the depositary is responsible for ensuring the fund’s assets are properly valued, recalculating the NAV is a subsequent operational task, not the primary response to a compliance failure. Merely documenting the breach for the next compliance review is a passive and inadequate action that fails to meet the proactive oversight standards required to protect unitholders’ interests.

According to the SFC’s Code on Unit Trusts and Mutual Funds, a depositary (or trustee) has a primary fiduciary duty to act in the best interests of the scheme’s unitholders. Statement I is correct as this is the cornerstone of the depositary’s role. Statement II is also correct; a key oversight function of the depositary is to ensure the fund manager’s investment decisions are compliant with the investment objectives and restrictions outlined in the fund’s offering documents. Statement IV correctly identifies the depositary’s responsibility to ensure that any potential conflicts of interest are identified, managed, and disclosed appropriately to protect unitholders. Statement III is incorrect because the depositary’s role is not to automatically veto transactions where a potential conflict exists. Instead, the depositary must conduct enhanced due diligence to ensure the transaction is conducted at arm’s length, is on normal commercial terms, and is in the best interests of the unitholders. An outright veto without proper assessment would be an overstep and potentially detrimental to unitholders if the investment is a good opportunity. Therefore, statements I, II and IV are correct.

The correct answer is that the depositary must notify the fund manager of the potential breach and, if it is not rectified, report the matter to the Securities and Futures Commission (SFC). The depositary’s core oversight function, as mandated by the Code on Unit Trusts and Mutual Funds, is to ensure the fund manager complies with the investment restrictions set out in the offering documents. This duty involves identifying potential breaches, seeking clarification from the manager, and escalating the issue to the regulator if the breach is confirmed and not corrected. This process protects the interests of the unitholders by ensuring the fund is managed as promised. Unilaterally unwinding the derivative positions is incorrect because the depositary does not have the authority to make investment decisions or manage the fund’s portfolio; that is the role of the fund manager. Immediately informing all unitholders is also incorrect as the prescribed channel for such serious compliance issues is reporting to the SFC, which will then determine the appropriate course of action, including potential disclosures. Making a provision for potential losses in the NAV calculation is an accounting function that might occur later, but it is not the primary and immediate oversight responsibility, which is to address the compliance breach itself.

A depositary has a fundamental duty of oversight and cash flow monitoring under the SFC’s Code on Unit Trusts and Mutual Funds. Statement I is correct because the depositary must ensure any investment, particularly a significant and unusual one like a private equity pre-payment, is permissible under the fund’s constitutive documents (e.g., the prospectus). This is a core part of its oversight function. Statement II is correct as part of the cash flow monitoring duty; the depositary must understand the nature and destination of significant cash outflows and verify the legitimacy of the recipient entity. Statement III is also a key aspect of cash flow monitoring, ensuring that payments are consistent with the fund’s operational activities and properly reconciled. Statement IV is incorrect because a depositary must not blindly follow a fund manager’s instructions. Its role is to act as an independent check and to challenge, delay, or refuse a transaction if it raises concerns about compliance, investor protection, or the proper use of fund assets. Therefore, statements I, II and III are correct.

The correct answer is that the depositary must verify that the fund manager’s instructions are consistent with the fund’s constitutive documents. A core responsibility of a depositary for a collective investment scheme, as outlined in the SFC’s Code on Unit Trusts and Mutual Funds, is to exercise oversight over the fund manager’s activities. This includes ensuring that the fund is managed in accordance with the rules laid out in its offering documents and trust deed. When an instruction appears to contradict these rules, such as an investment falling outside the permitted strategy, the depositary has a duty to intervene. The first and most critical step is to challenge the instruction and seek clarification from the fund manager before any assets are committed. This preventative action is fundamental to protecting investors’ interests. Executing the instruction and reporting it later would fail this primary oversight duty, as the potential harm to the fund would have already occurred. Similarly, simply noting the discrepancy without taking action is insufficient. While reporting to the regulator is a potential escalation path, it is not the immediate first step; the depositary should first attempt to resolve the issue with the fund manager.

A depositary’s key responsibilities for a collective investment scheme, such as an SFC-authorized unit trust, are outlined in the Code on Unit Trusts and Mutual Funds. These duties include safekeeping of assets, cash flow monitoring, and general oversight of the fund manager’s activities. Statement I is correct as a primary oversight function is to ensure the fund manager adheres to all investment restrictions stipulated in the fund’s offering and constitutive documents. Statement II is also correct because monitoring cash flows, especially in relation to the fund’s ability to meet its liabilities like investor redemptions, is a core duty. Statement IV correctly describes the escalation procedure; if the depositary identifies a material breach or a significant issue that is not being rectified by the fund manager, it has a duty to report this to the fund’s governing body and ultimately to the regulator (the SFC). Statement III is incorrect because the depositary’s role is one of oversight, not investment management. The depositary cannot instruct the fund manager on specific investment decisions, such as directing the sale of particular assets. Doing so would overstep its mandate and create a conflict of interest. The depositary’s role is to identify and report issues, not to manage the portfolio. Therefore, statements I, II and IV are correct.

The correct answer is that the depositary must verify that the proposed investment aligns with the investment policies and restrictions stipulated in the fund’s constitutive documents. A core responsibility of a depositary, as outlined in regulations like the SFC’s Code on Unit Trusts and Mutual Funds, is to provide oversight of the fund manager’s activities. This includes ensuring that all investment decisions comply with the rules set out in the fund’s offering documents (e.g., trust deed or articles of association). Before any other action is taken, the depositary must confirm if the investment is permissible under the fund’s mandate. Conducting an independent market risk assessment is primarily the fund manager’s role; the depositary’s duty is to ensure the manager has an adequate risk management process, not to duplicate the risk analysis itself. While confirming the fund manager’s operational capability is important, it is a secondary consideration to the fundamental question of whether the investment is permitted. Immediately reporting the proposal to the SFC would be premature; the depositary’s first step is to perform its own compliance check to determine if a potential breach exists.

The depositary plays a critical oversight role to protect the interests of investors in a collective investment scheme. This role is distinct from that of the fund manager. Statement I is correct because a core duty of the depositary is to ensure that the fund manager complies with the investment restrictions and policies as stipulated in the fund’s constitutive documents (e.g., the trust deed and offering document). This is a fundamental aspect of its oversight function under the SFC Code on Unit Trusts and Mutual Funds. Statement III is also correct; the depositary is responsible for verifying that the fund’s Net Asset Value (NAV) is calculated in accordance with the methodology prescribed in the constitutive documents. This ensures fairness and accuracy for subscribing and redeeming investors. Statement II is incorrect because the depositary’s role is one of oversight, not pre-approval. The fund manager is responsible for making investment decisions, and the depositary’s duty is to check that these decisions, once made, comply with the rules, not to approve them in advance. Requiring pre-approval would blur the lines of responsibility and impede the fund manager’s function. Statement IV is incorrect as the responsibility for preparing the fund’s annual financial statements lies with the fund manager, which are then audited by an independent auditor. The depositary’s role is to provide necessary information and records concerning the fund’s assets, but not to prepare the financial statements themselves. Therefore, statements I and III are correct.