HKSI Paper 1 Preview ( English ) Set Two

The Takeovers Appeal Committee, established under Section 8(1) of the Securities and Futures Ordinance (SFO), serves a specific and limited function. It reviews disciplinary rulings made by the Takeovers Panel, but its review is strictly confined to determining whether the sanctions imposed by the Panel are unfair or excessive, based on the Panel’s established findings of fact. The Appeal Committee does not re-evaluate the facts themselves; it accepts the Panel’s factual determinations as a given. The proceedings before the Takeovers Appeal Committee generally mirror those of the Panel, ensuring a consistent approach to procedural matters. Therefore, statement I is correct because the committee is indeed established under s. 8(1) of the SFO. Statement II is incorrect because the Takeovers Appeal Committee does not re-evaluate the facts; it only assesses the fairness or excessiveness of the sanctions. Statement III is correct as the proceedings are similar to those before the Panel. Statement IV is incorrect because the committee’s scope is limited to reviewing sanctions for fairness or excessiveness, not for errors in legal interpretation. Thus, the correct combination is I & III only.

The question concerns the grounds for compulsory winding-up of a company in Hong Kong, as governed by the Companies Ordinance (CO). A company can be compulsorily wound up by the court under several circumstances. Statement I is correct because a company’s inability to pay its debts is a fundamental ground for compulsory winding-up. This ensures that creditors are protected and that insolvent companies do not continue to operate, potentially increasing their liabilities. Statement II is also correct. If an event occurs that the memorandum or articles of association specifies as a trigger for dissolution, the court can order a compulsory winding-up. This respects the internal governance agreements of the company. Statement III is incorrect because the Financial Secretary can petition for winding up if it is in the public interest, not only when the company has no members. The Financial Secretary’s power extends to broader public interest concerns. Statement IV is correct. The Registrar of Companies can petition for winding up if the company has breached provisions of the CO or is being carried on for an unlawful purpose. This ensures compliance with legal and regulatory requirements. Therefore, the correct combination is I, II & IV only.

The layering stage of money laundering, as defined by the Financial Action Task Force (FATF) and relevant Hong Kong regulations, involves separating illicit proceeds from their origin through a series of financial transactions. This is done to obscure the audit trail and provide anonymity. Statement I accurately describes this process by highlighting the use of multiple transactions to conceal the source of funds. Statement II is also correct, as the liquidity of securities and futures markets facilitates the creation of complex trails to confuse law enforcement. Licensed corporations, according to the GAML, are indeed required to implement measures to check that their policies and procedures ensure their ability to comply with relevant laws and regulations. Such measures should be appropriate in the context of the size and risk profile of its business, making statement III correct. Statement IV is incorrect because while the GAML specifies the need for awareness and vigilance and the setting up of a system to report suspicious transactions, it requires licensed corporations to issue statements of policies and procedures to staff reflecting the provisions of the GAML, ensure that staff understand the GAML and maintain their awareness and vigilance, regularly review their anti-money laundering policies and procedures by their compliance and audit function, and appoint a money laundering reporting officer as a central reference point for reporting suspicious transactions. Therefore, the correct combination is I, II, and III.

The SFC’s emphasis on a broker’s duty to the market highlights the importance of ethical conduct and market integrity. A broker’s obligation extends beyond simply executing client instructions; it includes a responsibility to ensure that these instructions do not contribute to market manipulation. The scenario described, where a client directs a broker to purchase shares at a price exceeding the best execution price, raises red flags. This is because such an action could artificially inflate the price of the shares, misleading other investors and distorting the true market value.

According to the Securities and Futures Ordinance (SFO), engaging in activities that create a false or misleading appearance of active trading in securities, or that manipulate the price of securities, constitutes market misconduct. Brokers are expected to exercise due diligence and question any instructions that appear to be inconsistent with normal trading practices or that could potentially lead to market manipulation.

Failing to do so could result in disciplinary action by the SFC, including fines, suspension of licenses, or even criminal prosecution. The SFC’s focus on this issue underscores the importance of brokers acting as gatekeepers to prevent market misconduct and maintain the integrity of the Hong Kong securities market. Brokers must prioritize market integrity over simply fulfilling client orders, especially when those orders raise concerns about potential manipulation.

The SFC’s responsibilities regarding MPF products are clearly defined. Statement I is correct because the SFC Code on MPF Products mandates the vetting and authorization of MPF products and related marketing materials. This ensures compliance with regulatory standards and protects investors. Statement II is also correct; the SFC is responsible for registering and approving investment managers involved in MPF products and continuously monitoring their conduct to maintain the integrity of investment management. Statement III is correct as the SFC supervises investment advisers and securities dealers offering services related to MPF products, ensuring they adhere to ethical and professional standards. Statement IV is also correct; the SFC investigates alleged breaches of the SFC Code on MPF Products and relevant ordinances and takes enforcement actions to address non-compliance. The MOUs between the MPFA and the SFC facilitate coordination and efficient performance of their respective functions. The Securities and Futures Ordinance (SFO) provides the legal framework for these regulatory activities. Therefore, all the statements accurately reflect the SFC’s responsibilities concerning MPF products.

The question addresses the expected conduct and liabilities of directors under Hong Kong law, specifically focusing on the degree of skill and care required, the need for continuous attention, and the permissibility of delegating duties. Let’s analyze each statement:

Statement I is correct. Directors must exercise the skill that can be reasonably expected from a person of their knowledge and experience. This aligns with the duty of care and skill, a fundamental aspect of directors’ responsibilities under Hong Kong law. This is supported by common law principles and is reflected in how courts assess director liability.

Statement II is also correct. Directors are not required to give continuous attention to the affairs of the company. This acknowledges the practical limitations of a director’s role, especially in larger organizations where directors may have other commitments. However, this does not absolve them of their duty to stay informed and exercise oversight.

Statement III is correct. Directors are justified in relying on an official to whom proper delegation of some duties has been made. This recognizes the principle of delegation within corporate governance. Directors cannot be expected to handle every task personally and are entitled to rely on the expertise and competence of delegated officials, provided the delegation is reasonable and appropriate.

Statement IV is incorrect. While the court may grant relief to a director who acted honestly and reasonably, ratification by a majority of members in a general meeting is also required after full disclosure of the material facts. The court’s discretion to grant relief is not solely based on honesty and reasonableness but also considers whether the members have ratified the breach after being fully informed.

Therefore, the correct combination is I, II & III only.

The establishment of an independent audit function is crucial for intermediaries to ensure compliance with legal and regulatory requirements, as well as their own internal policies and procedures. This function provides an objective assessment of the intermediary’s management, internal controls, and operations. According to regulatory guidelines and best practices, the audit function should be independent and free from operating responsibilities, reporting directly to senior management or the audit committee. This independence ensures that the audit findings are unbiased and credible. The individuals performing the audit, whether internal staff or external consultants, must possess the necessary technical competence and experience to conduct thorough and effective reviews. The terms of reference for the audit should be clearly defined, outlining the scope, objectives, approach, and reporting requirements. This clarity helps to ensure that the audit is focused and achieves its intended purpose. While senior management can prescribe terms of reference for the external audit, it’s important to recognize that external auditors have broader responsibilities to shareholders, regulators, and clients, which cannot be limited by management’s directives. The roles and responsibilities of internal and external auditors should be clearly defined, and a collaborative working relationship should be established to avoid duplication of effort and ensure comprehensive coverage. The external auditors will generally be prepared to divide the work only if they are satisfied with the competence and independent authority of the internal audit staff. This collaboration enhances the overall effectiveness of the audit process and contributes to the intermediary’s compliance and risk management efforts. The audit function plays a vital role in identifying weaknesses in internal controls and operational processes, enabling the intermediary to take corrective actions and improve its overall performance. Regular audits help to maintain a culture of compliance and accountability within the organization.

The Securities and Futures Ordinance (SFO) empowers the SFC to issue intervention notices under specific circumstances to protect investors and maintain market integrity. Section 204 of the SFO allows the SFC to restrict the business activities of a licensed corporation or prohibit it from carrying out specified activities if the corporation has contravened the SFO or had its license suspended or revoked. Section 205 enables the SFC to prohibit the disposal of client or corporate property. Section 210 clarifies that intervention notices remain valid even if a license is suspended or revoked. Therefore, statements I, II, and III accurately reflect the SFC’s powers regarding intervention notices. Statement IV is incorrect because the SFC can apply to the Court of First Instance to order compliance with a notice under section 211 of the SFO, not directly enforce it.

The correct answer is ‘I, II & IV only’. Let’s break down why:

* **Statement I:** This is correct. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTRPO) indeed requires individuals who suspect property is related to drug trafficking to report it to an authorized officer or the JFIU as soon as reasonably possible. Failure to do so is an offense, although a reasonable excuse for the failure can be a defense. This aligns directly with the DTRPO’s aim to combat money laundering associated with drug trafficking.

* **Statement II:** This is also correct. The Organized and Serious Crimes Ordinance (OSCO) grants the police the power to obtain court orders compelling individuals to provide information or materials related to organized crime investigations, and to conduct searches. These powers override duties of secrecy and confidentiality, ensuring that investigations are not hindered by professional obligations.

* **Statement III:** This is incorrect. While the UNATMO does address terrorist financing, it does not explicitly state that a person making a disclosure to the authorities is excused from any resulting breach of any contract or professional obligation and will not be liable for any loss or damage arising from the disclosure. This specific provision is more closely associated with the DTRPO and OSCO in the context of drug trafficking and organized crime, respectively.

* **Statement IV:** This is correct. The UNATMO makes it a criminal offense to supply funds or make funds or, inter alia, to provide financial services available to terrorists or their associates; permits terrorist property to be frozen and/or forfeited; and requires a person to report knowledge or suspicions of terrorist property to an authorized officer, and makes it an offence to fail to do so. This is a core component of the UNATMO’s purpose.

Therefore, statements I, II, and IV are accurate reflections of the legal requirements outlined in the DTRPO, OSCO, and UNATMO, respectively.

The correct answer is ‘I & II only’.

Statement I is correct because common law indeed refers to the body of law developed in courts, not created by statutes or sovereign authority. Its authority stems from long usage and judicial interpretation, forming a system of precedent. This is a fundamental aspect of common law systems, including that of Hong Kong, as detailed in legal textbooks and academic discussions on the subject.

Statement II is also correct. Equity emerged to provide remedies where common law or statute law resulted in unfair outcomes. The Court of Chancery offered ‘fair and just’ remedies, and equity developed its own case law parallel to common law. In cases of conflict, equity generally prevails, ensuring fairness and justice are upheld. This principle is a cornerstone of legal systems that incorporate both common law and equity.

Statement III is incorrect because it inaccurately describes the relationship between common law and statute law. Common law is not subordinate to statute law in all instances. While statutes can modify or override common law, common law principles continue to apply in areas not covered by statute. The interaction between common law and statute law is more nuanced than a simple hierarchical relationship.

Statement IV is incorrect because customary law, while part of Hong Kong law, is not the primary source of legal principles for commercial disputes. Common law, equity, and statutory law are the main sources applied in such cases. Customary law typically applies to specific areas, such as land rights in the New Territories, and is not generally the basis for resolving broader commercial disputes. Therefore, only statements I and II accurately reflect the nature and interaction of common law and equity within Hong Kong’s legal framework.

A ‘notifiable transaction’ is a broad term encompassing several transaction types, each defined by percentage ratio tests outlined in the Main Board Listing Rules (MBLR). These classifications dictate the level of disclosure and shareholder approval required. A share transaction, where a listed issuer acquires assets (excluding cash) using securities for which listing is sought, falls under this category if all percentage ratios are below 5%. Discloseable transactions involve ratios between 5% and 25%, while major transactions range from 25% to 100% for acquisitions and 25% to 75% for disposals. Very substantial disposals occur when any ratio is 75% or higher, and very substantial acquisitions involve ratios of 100% or more. Reverse takeovers, as determined by the SEHK, are acquisitions designed to circumvent new listing requirements. Connected transactions, governed by MBLR Chapter 14A, aim to protect shareholder interests by preventing directors, chief executives, or substantial shareholders from exploiting their positions. These transactions are subject to disclosure, reporting, and shareholder approval unless exempted. The SEHK retains the power to suspend dealings in securities to protect investors and maintain market order, as well as in cases of non-compliance with Listing Rules, insufficient public shareholding, or inadequate operations or assets. Understanding these classifications and regulations is crucial for listed issuers to ensure compliance and protect shareholder interests.

A licensed corporation’s policies and procedures regarding anti-money laundering (AML) must encompass several key areas. Firstly, the identification and reporting of suspicious transactions are paramount. This involves establishing clear guidelines for staff to recognize unusual or potentially illicit financial activities, as outlined in the Guidance on Anti-Money Laundering and Counter-Terrorist Financing (GAML) issued by the Securities and Futures Commission (SFC). These guidelines should cover various red flags, such as unusually large transactions, transactions with no apparent business purpose, or transactions involving high-risk jurisdictions.

Secondly, the policies must address new and emerging money laundering methods. This requires ongoing training and awareness programs to keep staff informed about the latest techniques used by money launderers, including the use of virtual assets, shell companies, and complex financial instruments. The level of detail required in this training should be tailored to the specific roles and responsibilities of the staff members. For example, front-line staff need to be able to identify suspicious customer behavior, while compliance officers need to understand the intricacies of AML regulations and reporting requirements.

Thirdly, the policies should incorporate a risk-based approach to customer due diligence (CDD), as mandated by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). This means that the level of CDD should be proportionate to the assessed risk of money laundering associated with a particular customer or transaction. Higher-risk customers, such as politically exposed persons (PEPs) or those from high-risk jurisdictions, should be subject to enhanced due diligence measures. Therefore, statements I, II and III are correct.

Securities borrowing and lending (SBL) plays a crucial role in facilitating market efficiency and liquidity in Hong Kong’s financial markets. Understanding the regulatory framework surrounding SBL, particularly concerning collateral requirements and reporting obligations, is essential for Exchange Participants. The requirement to collect collateral of at least 100% of the value of securities loaned (or 105% if the borrowing is for short selling) mitigates the risk of default by the borrower and protects the lender. This collateralization ensures that the lender has recourse in the event that the borrower fails to return the securities. Furthermore, the daily mark-to-market requirement ensures that the value of the collateral is adjusted to reflect current market prices, thereby maintaining the appropriate level of risk mitigation. The Short Position Reporting Rules mandate that market participants report any reportable short positions to the SFC. A reportable short position is defined as a net short position value that is equal to or more than the threshold specified as the lower of $30 million or 0.02% of the value of the total number of the specified shares issued by the corporation concerned. This reporting requirement enhances transparency in the market and allows regulators to monitor short selling activity, which can be a source of market instability if not properly regulated. These regulations are in place to maintain market integrity and protect investors.

The closing price calculation on the SEHK is determined by taking the median of five nominal prices in the last minute of the continuous trading session. This method aims to provide a fair representation of the stock’s value at the close of trading. Direct business refers to transactions where an Exchange Participant acts for both the buyer and the seller, either as principal or agent. These transactions are subject to specific rules, including the timely input of transaction details. The SEHK charges levies on securities transactions, including a Transaction Levy and an Investor Compensation Levy, which are paid by both the buyer and the seller. However, the Investor Compensation Levy has been suspended since December 19, 2005. Brokerage fees for initial public offering (IPO) transactions are currently set at 1% of the application money. Therefore, statements I and II are correct, while statements III and IV are incorrect. The correct combination is I & II only.

The Securities and Futures Ordinance (SFO) stipulates the composition and roles within the Securities and Futures Commission (SFC). The SFO mandates that the majority of the SFC’s directors, excluding the Chairman and CEO, must be non-executive directors. These individuals are typically drawn from prominent positions within the financial industry, legal and accountancy professions, or other leadership roles in the securities and futures sector. This requirement ensures that the SFC benefits from a diverse range of expertise and perspectives, promoting balanced decision-making and preventing undue influence from any single interest. The non-executive directors play a crucial role in providing independent oversight and guidance to the SFC’s executive management. They contribute to the formulation of policies, the review of operational performance, and the maintenance of high standards of corporate governance. Their presence helps to ensure that the SFC acts in the best interests of the investing public and the integrity of the Hong Kong financial markets. The specific number of executive and non-executive directors may vary over time, but the principle of maintaining a majority of non-executive directors remains a cornerstone of the SFC’s governance structure, as enshrined in the SFO. This structure is designed to foster transparency, accountability, and public confidence in the SFC’s regulatory activities.

The correct answer is ‘I & II only’.

Statement I is correct because, according to the FRR, if a licensed corporation cannot comply with the specified capital requirements, the SFC may suspend the corporation’s license or allow it to continue operating under specific conditions. A breach of these conditions would constitute an offense.

Statement II is correct because the Securities and Futures (Client Securities) Rules, established under section 148 of the SFO, empower the SFC to create rules regarding the holding and dealing of client securities and collateral by an intermediary, its associated entity, or persons acting on their behalf. This ensures the safeguarding and control of client assets.

Statement III is incorrect because the notification requirement for non-compliance with FRR (other than capital requirements) is within one business day, not three.

Statement IV is incorrect because, while the SFC can ask a licensed corporation to demonstrate compliance with the FRR, the corporation commits an offense only if it fails to comply with the SFC’s financial resources requirements or continues to trade while in breach of the FRR without the SFC’s permission. Simply being asked to demonstrate compliance and being unable to do so does not automatically constitute an offense unless it leads to a breach of conditions imposed by the SFC or a failure to meet the FRR requirements.

The Securities and Futures (Insurance) Rules, established under Section 116(5) of the Securities and Futures Ordinance (SFO), mandate that licensed corporations maintain adequate insurance coverage or deposit security with the SFC as a prerequisite for licensing. These rules aim to protect client assets from potential losses due to fraud, theft, or other malpractices. However, the Insurance Rules do not apply universally to all licensed corporations. An exemption is granted to those corporations that are explicitly restricted from holding client assets as a condition of their license and are not exchange participants of either the Stock Exchange of Hong Kong (SEHK) or the Hong Kong Futures Exchange (HKFE). This exemption recognizes that the risk profile of these corporations is significantly lower due to their inability to handle client assets directly. The insurance coverage required under the Insurance Rules is specified in Schedule 2, which outlines the minimum insured amounts for various regulated activities. For instance, dealing in securities, dealing in futures contracts, and securities margin financing each require an insured amount of HK$15 million, with a deductible not exceeding HK$3 million in each case. This ensures that licensed corporations have sufficient financial resources to compensate clients in the event of losses covered by the insurance policy. The SFC retains the authority to approve master policies of insurance, ensuring that the terms and conditions of the policies meet the regulatory requirements and provide adequate protection for client assets. The maintenance of insurance cover is a critical aspect of the regulatory framework for licensed corporations in Hong Kong, contributing to the stability and integrity of the financial markets.

Section 111 of the Companies Ordinance (CO) mandates that a company’s first Annual General Meeting (AGM) must occur within 18 months of its incorporation. Subsequent AGMs should be held at intervals not exceeding 15 months. The primary functions of an AGM include reviewing the annual accounts, declaring dividends, electing directors to replace those retiring, and appointing auditors. Members have the right to question directors regarding the annual accounts and reports, including the directors’ report, and to question auditors on their report. Resolutions, as per section 116B of the CO, can generally be passed through circularization signed by all members. However, exceptions exist for the removal of auditors before their term expires (s. 131, CO) and the removal of a director before their term expires (s. 157B, CO), which necessitate a general meeting and an ordinary resolution. A special resolution, defined under section 116 of the CO, requires approval from at least 75% of members at a general meeting, with a minimum of 21 days’ notice specifying the intention to pass the resolution. Examples of matters requiring special resolutions include reducing share capital, winding up the company voluntarily or by court order, and altering the objects, articles of association, and conditions in memoranda of association that could have been included in the articles of association. A printed copy of a special resolution must be lodged with the Registrar of Companies within 15 days of its passage. An ordinary resolution, while not explicitly defined in the CO or Table A of the First Schedule, generally requires a simple majority of members present and voting at a meeting, with appropriate notice given.

Solicitors and professional accountants, while often working in conjunction with licensed intermediaries, are subject to specific guidelines regarding their involvement in regulated activities. The Securities and Futures Ordinance (SFO) sets clear boundaries to ensure that individuals and firms conducting regulated activities are appropriately licensed and supervised by the SFC. Solicitors and accountants providing incidental advice related to securities or corporate finance matters, as part of their professional services, generally do not require a license. However, if their activities extend beyond incidental advice and involve actively soliciting clients for regulated activities, managing investment portfolios, or dealing in securities on behalf of others, they may be required to obtain the appropriate licenses. The SFC’s FAQs provide further clarification on these boundaries. Temporary licenses, as outlined in sections 117, 120, and 121 of the SFO, are designed for overseas corporations and their representatives to conduct specific regulated activities (excluding Type 3 and Types 7-9) in Hong Kong for a limited period. Provisional licenses may be granted to representative license applicants pending the SFC’s final decision. Furthermore, the SFO prohibits unlicensed individuals from using specified titles associated with regulated activities, such as “securities dealer” or “stockbroker,” as detailed in Schedule 6 of the SFO. The Licensing Information Booklet, available on the SFC website, provides comprehensive details on licensing requirements and application procedures. The fitness and properness of individuals seeking licenses is a crucial consideration for the SFC, ensuring the integrity and competence of those operating in the securities and futures industry.

The Codes on Takeovers and Mergers and Share Repurchases, while non-statutory, hold significant weight in Hong Kong’s regulatory framework. The courts recognize the Panel’s rulings and subject them to judicial review, ensuring fairness and adherence to natural justice principles. This is a crucial aspect of maintaining market integrity and investor confidence. Furthermore, the Listing Rules mandate compliance with the Codes, meaning a breach of the Codes constitutes a breach of the Listing Rules themselves, as stated in MBLR 13.23(2) and 14.78. This linkage to the Listing Rules elevates the Codes’ importance and enforceability. The Codes apply to public companies in Hong Kong, companies with a primary listing of their equity securities in Hong Kong, and REITs with a primary listing of their units in Hong Kong. The Executive of the SFC may grant waivers for companies with primary listings outside Hong Kong if Hong Kong shareholders are adequately protected. Therefore, statements I, II, and III are correct. Statement IV is incorrect because the Codes are not statutory, although they are given significant weight through the listing rules.

The core objective of risk management within a licensed intermediary, as outlined by the Securities and Futures Commission (SFC) in Hong Kong, is to establish and maintain effective policies and procedures that safeguard client interests and maintain market integrity. This encompasses several critical areas. Statement I is correct because disclosing material interests ensures transparency and allows clients to make informed decisions, aligning with the SFC’s emphasis on fair dealing. Statement II is also correct; fair handling of client orders, complete audit trails, and timely allocation are essential for maintaining market integrity and preventing manipulation, as detailed in the Codes of Conduct issued under the Securities and Futures Ordinance (SFO). Statement III is correct as well, because preventing the misuse of confidential information and insider trading is a cornerstone of market fairness and is strictly prohibited under the SFO. Statement IV is also correct, because protecting client assets from misappropriation and ensuring proper reconciliation procedures are in place are fundamental to maintaining client trust and complying with the Securities and Futures (Client Securities) Rules and Securities and Futures (Client Money) Rules. Therefore, all the statements are correct and reflect the comprehensive nature of risk management objectives for licensed intermediaries in Hong Kong.

Statement I is correct because paragraph 12.6 of the FDRS guidelines explicitly states that licensed or registered persons must make honest and diligent disclosures to mediators and arbitrators. This requirement ensures transparency and fairness in the dispute resolution process. Statement II is also correct. Paragraph 12.6 further requires licensed or registered persons to render all reasonable assistance to the FDRS, which includes providing necessary documentation and information promptly. This facilitates the efficient resolution of disputes. Statement III is incorrect. While General Principle 8 emphasizes the safeguarding of client assets, it does not directly address the cooperation required under the FDRS. These are distinct regulatory requirements, with Principle 8 focusing on asset protection and paragraph 12.6 focusing on dispute resolution cooperation. Statement IV is also incorrect. The Client Securities Rules and the Client Money Rules, which are subsidiary legislation related to General Principle 8, primarily concern the proper accounting and safeguarding of client assets, not the cooperation required during FDRS proceedings. Therefore, only statements I and II accurately reflect the cooperation requirements under the FDRS as outlined in paragraph 12.6.

According to the SFC’s guidelines and the Code of Conduct, licensed or registered persons have a primary obligation to ensure the suitability of investment products for their clients, especially concerning derivatives. This obligation is not shifted to the client. When a client with limited or no knowledge of derivatives wishes to invest in such products, the licensed person must explain the risks involved. If the product isn’t exchange-traded, appropriate advice must be given. The licensed person should document warnings and communications. If the transaction is unsuitable, it can only proceed if it’s in the client’s best interest, aligning with the Code of Conduct’s general principles. The SFC emphasizes that mis-selling is unacceptable and considers non-compliance with suitability obligations when assessing a licensed person’s fitness and propriety. Client agreements must be written, in the client’s preferred language (Chinese or English), and highlight relevant risks. The agreement should include the full names and addresses of both parties, undertakings to notify material changes, a description of services and charges, and risk disclosure statements as specified in Schedule 1 of the Code of Conduct. The agreement must not remove or restrict the client’s legal rights or the licensed person’s legal obligations. The licensed person must know the client’s identity, financial position, investment experience, and investment objectives. They must also know the identity of the ultimate originator of an order instruction and the ultimate beneficiary.

The Securities and Futures Ordinance (SFO) outlines the SFC’s regulatory objectives, which include maintaining fairness, efficiency, competitiveness, transparency, and orderliness in the securities and futures industry. This aligns with the SFC’s broader mandate to foster a healthy and reliable financial market in Hong Kong. Promoting public understanding of financial services is also a key objective, ensuring that investors are well-informed and can make sound decisions. Protecting the investing public is paramount, and the SFC actively works to minimize crime and misconduct within the industry. Reducing systemic risks is crucial for maintaining financial stability, and the SFC takes proactive measures to identify and mitigate potential threats. Finally, the SFC assists the Financial Secretary in maintaining Hong Kong’s financial stability by taking appropriate steps related to the securities and futures industry. Therefore, all the statements (I, II, III, and IV) accurately reflect the regulatory objectives of the SFC as outlined in the SFO.

The question addresses the duties and potential liabilities of directors under Hong Kong law, specifically focusing on the standard of care expected, the need for continuous attention, and the justification for delegation.

Statement I is correct because directors are expected to exercise the skill and care that can be reasonably expected from a person with their knowledge and experience. This aligns with the principle that directors must act with due care and skill, a key aspect of their duties as outlined in Hong Kong company law.

Statement II is incorrect. While directors are not expected to micro-manage, they are required to maintain a reasonable level of oversight and engagement with the company’s affairs. Complete lack of continuous attention would be a breach of their duty of care.

Statement III is correct. Directors are justified in relying on officials to whom duties have been properly delegated, provided they have exercised reasonable care in selecting and overseeing those officials. This reflects the principle that directors can delegate tasks but remain responsible for overall governance.

Statement IV is incorrect. While the majority of members can ratify a breach of duty, this is not an automatic process. It requires full disclosure of all material facts related to the breach. Without full disclosure, ratification is not valid.

Therefore, the correct combination is I & III only.

Section 103 of the Securities and Futures Ordinance (SFO) directly addresses the misrepresentation of government or SFC endorsement by intermediaries or their representatives. This provision is crucial for maintaining the integrity of the financial market in Hong Kong and protecting investors from misleading claims. The core principle is that no intermediary should create the impression that their abilities, qualifications, or services have been officially sanctioned or guaranteed by the government or the Securities and Futures Commission (SFC). Such misrepresentations can lead investors to believe that an intermediary is more trustworthy or competent than they actually are, potentially resulting in poor investment decisions based on false pretenses. The prohibition extends to both express statements and implied suggestions. For instance, an intermediary cannot explicitly state, “The SFC guarantees my investment advice.” Similarly, they cannot imply endorsement by using official logos or making statements that suggest a special relationship with the SFC or government bodies without proper authorization. The rationale behind this regulation is to prevent intermediaries from exploiting the perceived authority and credibility of government entities to gain an unfair advantage or mislead investors. By clearly separating the regulatory oversight role of the SFC from any form of endorsement, the SFO aims to ensure that investors make informed decisions based on the intermediary’s actual qualifications and performance, rather than on misleading claims of official approval. This provision is rigorously enforced to uphold market confidence and protect the interests of the investing public in Hong Kong.

The question concerns the regulatory requirements for licensed or registered persons in Hong Kong regarding the receipt of money or cash rebates. According to the guidelines, several conditions must be met. Statement I is correct because licensed or registered persons must describe their practices regarding rebates and obtain written consent from the client to receive and retain those rebates. This is often included in the client agreement. Statement II is also correct, as the brokerage rates should not exceed customary full-service rates. This ensures that clients are not overcharged to fund the rebates. Statement III is correct as well; the rebates and their approximate values must be disclosed to the client, at least twice annually or in each contract note, providing transparency. Statement IV is incorrect because while a client exercising their right under a cooling-off mechanism should receive a full refund including sales commission, the licensed or registered person may deduct a reasonable administrative charge if it was disclosed to the client at or prior to the point of sale and does not contain any profit margin. Therefore, all statements except IV are correct.

In physical delivery contracts, the settlement process involves the seller delivering the underlying instrument and the buyer providing cash payment. Statement I accurately reflects this fundamental aspect of physical delivery contracts. The seller’s obligation is to transfer ownership of the asset, while the buyer’s obligation is to remit the agreed-upon cash amount. Statement II is incorrect because it reverses the roles of the buyer and seller in a physical delivery contract. The buyer does not deliver the underlying instrument; instead, they provide the cash payment. Statement III is also incorrect. While margin requirements are common in futures contracts to mitigate risk, they are not the primary method of settling physical delivery contracts. The final settlement still requires the physical transfer of the underlying asset and the corresponding cash payment. Statement IV is incorrect because it describes cash-settled contracts, not physical delivery contracts. Cash settlement involves a payment based on the difference between the contract price and the market price at settlement, without the actual transfer of the underlying asset. Therefore, only statement I is correct.

According to HKFE rules, an HKFE Participant can transact for established clients even without advance collateral in limited situations. For a new position, the Participant must issue a call for the minimum margin by the close of that business day and advise the client as soon as practicable, but no later than the next business day. The Participant cannot allow the client to establish new positions if minimum margin calls are overdue. However, an HKFE Participant cannot transact a day trade on behalf of an established client if the client has a history of transacting day trades exclusively, until the client provides adequate collateral to cover minimum requirements. HKCC calculates margin on a gross or net basis according to the account type. Margin cash or collateral must be deposited by the HKCC participant for each open position (long or short) held at the end of each day’s trading. The margining mechanism provides immediate assurance that market participants have the financial ability to support their market activities. HKCC participants trading for their own accounts must also post the required margin deposits on a net position basis. Maintenance margin requirement levels represent the minimum amount of protection against potential losses at which the HKFE Participant will allow its customers to carry a position or portfolio. Should the margin requirement on deposit fall below the maintenance level, the HKFE Rules require that the account be re-margined back to the initial margin requirement level. HKCC will determine the variation adjustment in respect of all open futures and options positions, using the mark-to-market system. At the end of each trading day, each open position is deemed to have been closed out and a new contract opened at the closing quotation. The resulting profits or losses from the assumed closing out will be credited or debited respectively to the account of HKCC participants. In times of extreme price volatility, HKCC has the authority to perform additional intra-day mark-to-market calculations on open positions and to call for immediate payment of variation adjustment. HKFE’s mark-to-market system does not allow losses to accumulate beyond one business day. The method of delivery for futures contracts depends on the mechanism detailed in the contract specification for each product. Essentially, this can only be either cash settlement or physical delivery of the underlying instrument. Hence, cash settled contracts shall be settled by payment of cash.

The Securities and Futures (Keeping of Records) Rules mandate specific record-keeping practices for licensed corporations to ensure transparency and accountability.

Statement I is correct. Licensed corporations are indeed required to maintain records in a manner that allows for prompt retrieval and reconstruction of transactions. This is crucial for regulatory oversight and investor protection, aligning with the SFC’s aim to maintain market integrity.

Statement II is incorrect. While electronic storage is permitted, it must adhere to stringent standards ensuring data integrity and accessibility. Simply storing records without proper backup and security measures would violate the rules.

Statement III is correct. The minimum retention period for most records is seven years, as stipulated by the Securities and Futures (Keeping of Records) Rules. This duration allows sufficient time for investigations, audits, and dispute resolution.

Statement IV is incorrect. While the SFC may request records, the licensed corporation is not obligated to provide them *immediately*. The SFC will provide a reasonable timeframe for the corporation to comply with the request, taking into account the volume and complexity of the records required. Therefore, the correct combination is I & III only.