The correct answer is that the representative should immediately call the office’s telephone recording system to log the time of receipt and the specific details of the client’s order. The Code of Conduct for Persons Licensed by or Registered with the SFC establishes clear procedures for handling client orders received via telephone to ensure accuracy and create a verifiable audit trail. While receiving orders on mobile phones is prohibited in certain areas like the trading floor, it is permissible when the representative is outside these restricted locations. In such cases, the primary and required method for recording the order is to promptly call into the firm’s official telephone recording system. This action ensures the order is time-stamped and its details are captured accurately as per regulatory requirements. Simply writing the order details down for later entry is only acceptable if the telephone recording system is inaccessible, which is not the situation described. Informing the client that mobile orders are not accepted is incorrect, as the rules provide a specific procedure for this exact scenario when outside the office. Relaying the order via a text message to an assistant does not comply with the formal recording requirements and fails to create the necessary official record.

The correct answer is that the firm has not fulfilled its obligations because the documentation must be kept for a period of not less than two years after the system ceased to be used. The Code of Conduct for Persons Licensed by or Registered with the SFC specifies this minimum retention period. In the scenario, the system was decommissioned on 15 March 2022. The inspection occurred on 20 March 2024, which is after the two-year anniversary. The phrase ‘not less than’ implies the records must be available for at least this period and potentially longer if required for regulatory review. Destroying them on the day immediately following the two-year mark means they were unavailable for the inspection, thus violating the requirement. Stating that a seven-year retention period is required is incorrect; while seven years is a standard retention period for other documents like client account records, the specific rule for electronic trading system risk management documentation is two years post-cessation. The assertion that meeting the two-year period exactly is sufficient is incorrect as it misinterprets the ‘not less than’ requirement. The claim that only audit logs need to be kept is also false, as the rule explicitly includes comprehensive documentation of risk management controls.

Statement I is correct. Under the Securities and Futures Ordinance (SFO), any person who actively markets, from a place outside Hong Kong, any services to the public in Hong Kong which would constitute a regulated activity if provided in Hong Kong, is required to be licensed by the SFC. The targeted online advertisements constitute ‘active marketing’. Statement II is correct. Providing a facility for persons to trade futures contracts falls under the definition of Type 2 (Dealing in Futures Contracts). Giving advice or issuing analyses concerning futures contracts, even if automated, falls under Type 5 (Advising on Futures Contracts). Statement III is incorrect. A fundamental requirement for a licensed corporation is that it must have at least two Responsible Officers for each regulated activity it conducts, not just one. At least one of these must be an executive director. Statement IV is correct. The definition of ‘futures contracts’ under the SFO is broad and explicitly includes options on futures contracts. Therefore, statements I, II and IV are correct.

This question tests the ability to identify entities that are automatically classified as ‘Professional Investors’ (specifically, Institutional Professional Investors) under the Securities and Futures (Professional Investor) Rules.

Statement I is correct. An insurer authorised under the Insurance Ordinance is explicitly listed as a category of Professional Investor.

Statement II is correct. A registered scheme as defined in the Mandatory Provident Fund Schemes Ordinance is also explicitly listed as a category of Professional Investor.

Statement III is incorrect. This describes a potential ‘Corporate Professional Investor’. To qualify, a corporation must have either a portfolio of at least HK$8 million or total assets of at least HK$40 million. Since the company’s total assets are HK$35 million, it fails to meet the asset threshold, and no information is provided about its portfolio. Therefore, it cannot be automatically classified as a Professional Investor based on the information given.

Statement IV is correct. A multilateral agency, such as the World Bank or the Asian Development Bank, is another specified category of Professional Investor.

Entities in statements I, II, and IV are considered Institutional Professional Investors and qualify by their nature, without needing to meet the monetary thresholds applicable to Corporate Professional Investors. Therefore, statements I, II and IV are correct.

The correct answer is that the US regulatory framework, overseen by the CFTC, mandates a strict segregation model where a Futures Commission Merchant (FCM) must hold all client funds in accounts separate from the firm’s own capital. This is a cornerstone of client protection in the US futures industry. The Commodity Exchange Act and CFTC regulations require FCMs to segregate all money, securities, and property deposited by customers to margin, guarantee, or secure their trades. These funds cannot be commingled with the FCM’s own funds or used to margin the trades of other customers or the firm itself. This provides a significant safeguard in the event of the FCM’s insolvency. One of the incorrect statements suggests that European regulations require co-mingling client funds with firm capital, which is fundamentally wrong; European rules, such as those under MiFID II, also mandate the segregation of client assets to protect them. Another incorrect statement claims that the US clearing house directly holds funds for every individual retail client. In reality, the clearing house holds positions and funds for its clearing members (the FCMs), not for the individual clients of those members. Finally, the assertion that the US and Europe have identical government-backed insurance schemes for futures is inaccurate. While various investor protection schemes exist, their coverage, limits, and applicability differ significantly between jurisdictions, and they are not identical. For instance, the SIPC in the US protects securities accounts but does not cover commodity futures accounts.

The correct answer is that the SFC’s intervention upholds its objective to provide protection for the investing public. The Securities and Futures Ordinance (SFO) sets out the SFC’s regulatory objectives. Requiring prominent, plain-language risk warnings for complex products targeted at retail investors is a direct measure to ensure that investors understand the potential dangers before committing their funds. This empowers them to make informed decisions and protects them from unwittingly taking on unsuitable risks. While the other options are also statutory objectives of the SFC, they are less directly addressed in this specific scenario. Promoting a fair and orderly market relates more to market structure, trading rules, and overall transparency, which is a broader concept than specific product disclosures. Minimizing crime and misconduct is about tackling illegal activities like insider dealing or fraud, which is different from ensuring adequate risk disclosure for a legitimate product. Assisting in maintaining financial stability is a macro-prudential objective concerned with systemic risk to Hong Kong’s financial system, whereas this action is focused on protecting individual investors.

According to the SFC’s Management, Supervision and Internal Control Guidelines (ICG) and related circulars on algorithmic trading, a licensed corporation is wholly responsible for the orders generated by its systems. Statement I is correct because automated pre-trade controls (e.g., price collars, size limits) are a fundamental requirement to prevent clearly erroneous orders from reaching the market. Statement II is correct as real-time monitoring is essential for detecting unintended consequences or manipulative behaviour from an algorithm that may not be caught by pre-trade checks. Statement IV is also correct; the SFC expects rigorous pre-deployment testing and a formal change management process to ensure the algorithm’s stability and integrity. Statement III is incorrect because while the exchange has its own market surveillance functions, the primary regulatory responsibility for the orders generated by an algorithmic trading system lies with the licensed corporation that operates it. The firm cannot delegate this responsibility. Therefore, statements I, II and IV are correct.

The correct answer is that the firm must give written notice of the breach to the SFC within one business day of becoming aware of it. The Securities and Futures (Keeping of Records) Rules explicitly state this requirement. Becoming aware of the non-compliance triggers an immediate obligation to report to the regulator. While conducting an internal investigation is a prudent step for the firm’s own governance, it does not supersede or delay the mandatory reporting timeline set by the SFC. The idea that no notification is needed because the data loss was an administrative error without fraudulent intent is incorrect; the rules distinguish between penalties for different types of breaches, but the obligation to report non-compliance applies regardless of the cause. Finally, there is no automatic requirement to cease all business operations; such a drastic measure would typically be directed by the SFC if deemed necessary, but it is not the firm’s prescribed initial action under the Keeping of Records Rules.

This question tests the understanding of when a clearing obligation arises under the OTC Derivatives Clearing Rules, focusing on the interaction between counterparty types (‘prescribed persons’ and ‘financial services providers’) and the clearing threshold.

Statement I is correct. For a transaction between two prescribed persons (such as two Hong Kong licensed corporations), a clearing obligation only arises if BOTH parties have crossed the clearing threshold. If neither has crossed it, the transaction is not subject to clearing.

Statement II is correct. When a prescribed person that has crossed the clearing threshold transacts with a designated financial services provider (FSP), the transaction is subject to the clearing obligation. The clearing threshold is effectively zero for an FSP, so only the prescribed person’s status matters.

Statement III is correct. The clearing obligation for a transaction between a prescribed person and an FSP falls on the prescribed person, but only if that prescribed person has crossed the clearing threshold. If Alpha Asset Management has not crossed the threshold, the condition is not met, and no clearing obligation arises for this transaction.

Statement IV is incorrect. As explained for Statement I, when the transaction is between two prescribed persons, the clearing obligation is only triggered if BOTH have crossed the clearing threshold. It is not sufficient for only one of them to have crossed it. Therefore, statements I, II and III are correct.

Statement I is correct. Under the Keeping of Records Rules, if an intermediary becomes aware that it does not comply with the specified provisions, it must give written notice to the SFC within one business day of becoming aware of the non-compliance. Statement II is correct. The Securities and Futures Ordinance (SFO) specifies severe penalties for breaches involving an intent to defraud. Falsifying any record carries a maximum penalty, upon conviction on indictment, of a fine of HK$1 million and imprisonment for seven years. Statement III is correct. The Keeping of Records Rules permit records to be kept in a non-written manner, such as electronically, provided they can be readily accessed and converted into a written (e.g., printed) format. Statement IV is incorrect. The general requirement under the Keeping of Records Rules is to retain records for a period of not less than seven years. The two-year retention period is a specific exception for certain records, such as client orders and instructions, and does not apply to account opening documents or general transaction records, which fall under the seven-year rule. Therefore, statements I, II and III are correct.

The correct answer is that HKEX must prioritise the interests of the investing public and the maintenance of a fair and orderly market, even if it means forgoing potential revenue. Under Section 63 of the Securities and Futures Ordinance (SFO), a recognised exchange controller like HKEX is required to act in the interests of the public, with particular regard to the interests of the investing public. The Ordinance explicitly states that where such interests conflict with the commercial interests of the exchange controller, the public interest shall prevail. Therefore, if a product poses an unacceptable risk to market stability or investor protection, HKEX’s primary duty is to prevent that harm, superseding its own financial goals. The option suggesting a launch with investor education programs is incorrect because while education is a useful tool, it does not absolve HKEX of its fundamental duty to prevent the introduction of a product that could destabilise the market. The option suggesting a ‘balance’ between commercial and public interests is incorrect because the SFO mandates a clear hierarchy, not a balance; the public interest is paramount. Finally, the option to defer responsibility to the SFC is incorrect because HKEX has its own distinct statutory obligations as a front-line regulator and market operator which it must discharge independently.

The correct answer is that funds received and held by a licensed corporation’s overseas office for trading on foreign markets are not subject to Hong Kong’s Client Money Rules. The Securities and Futures (Client Money) Rules specifically apply to client money that is received or held in Hong Kong. One of the key exemptions is for money that is received and remains entirely outside of Hong Kong. In this case, the funds are deposited into and held by the London office, never entering the Hong Kong financial system, thus falling outside the SFC’s jurisdiction for these particular rules. On the other hand, a dividend payment received in Hong Kong on behalf of a client is considered client money and must be handled according to the rules, regardless of which internal account it was initially credited to. Similarly, a cash deposit made in Hong Kong for a futures margin call is client money; while there are specific provisions for imminent margin payments, the funds themselves are still governed by the rules. An electronic transfer from a client’s personal account to the firm’s designated client account in Hong Kong is the standard method of receiving client money and is fundamentally covered by the rules.

The Market Misconduct Tribunal (MMT) operates under Part XIII of the Securities and Futures Ordinance (SFO) and conducts civil proceedings. Its powers are distinct from those of a criminal court. Statement I is correct; the MMT can disqualify a person from being a director of a corporation for a period of up to 5 years. Statement II is also correct; the MMT can order the disgorgement of any profit gained or loss avoided as a result of the misconduct, payable to the Government. Statement IV is correct as well; the MMT has the authority to make a disciplinary referral, recommending that a relevant professional body take action against the individual. However, Statement III is incorrect. The MMT does not have the power to impose criminal sanctions such as fines or imprisonment. Such penalties can only be imposed by a court of law following criminal prosecution. Therefore, statements I, II and IV are correct.

The correct answer is that the exemption is lost for both jurisdictions as the aggregate position exceeds the 10% threshold, and any subsequent uncleared transactions will breach the clearing obligation. The Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules provide an exemption from the clearing obligation for transactions booked in an exempt jurisdiction. However, this exemption is contingent on continuous compliance with specific position limits. A prescribed person’s positions in any single exempt jurisdiction must not exceed 5% of its total position, and the aggregate positions across all its exempt jurisdictions must not exceed 10% of its total position. In this scenario, the position in Jurisdiction Y (7%) breaches the 5% individual limit. Furthermore, the combined positions of Jurisdiction X (4%) and Jurisdiction Y (7%) total 11%, which breaches the 10% aggregate limit. According to the rules, the exemption is lost immediately when these underlying requirements are no longer satisfied, irrespective of whether a cessation notice has been submitted. This loss applies to all jurisdictions for which an exemption was claimed. Therefore, the firm is in breach of the clearing rules for any new transactions that are not cleared. The option suggesting only Jurisdiction Y loses its exemption is incorrect because the breach of the aggregate limit affects all claimed exempt jurisdictions. The option about submitting a cessation notice is also incorrect in this context; while a cessation notice is required when a firm anticipates a future breach, it does not prevent the immediate and automatic loss of the exemption once a breach has occurred. Finally, the suggestion of a grace period to rectify the position is incorrect as the rules do not provide for such a period; compliance must be continuous.

The correct answer is that the firm may pledge the client’s securities as collateral to secure a loan for its own financing purposes. Under the Securities and Futures (Client Securities) Rules, a client can provide a written standing authority to a licensed corporation. This authority allows the corporation to deal with the client’s securities, such as by pledging, lending, or transferring them, to secure financial accommodation for the firm itself. This is a key exception to the general rule that client assets must be strictly segregated and protected. However, this authority must be properly obtained, with the risks explained to the client, and it must be renewed at least annually. Selling the securities to fund the firm’s operational expenses is incorrect. A standing authority does not grant the firm the right to liquidate client assets for its own revenue or operating cash flow; this would constitute misappropriation. Using one client’s securities to cover the margin shortfall of another client is a serious breach of regulations. Client assets must be segregated and cannot be used to satisfy the obligations of other clients. Each client’s account and assets are distinct. Transferring the securities to the firm’s house account to be held as a long-term investment for the firm is also incorrect. This action would be a misuse of the authority, as it amounts to converting client assets into firm assets for proprietary investment, which is not the intended purpose of securing financial accommodation.

The correct answer is that the representative must, as soon as reasonably practicable, disclose their suspicion to their firm’s designated reporting officer or directly to the Joint Financial Intelligence Unit (JFIU). Under Hong Kong’s anti-money laundering and counter-terrorist financing regime, specifically the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRPO), the Organised and Serious Crimes Ordinance (OSCO), and the United Nations (Anti-Terrorism Measures) Ordinance (UNATMO), there is a statutory obligation to report knowledge or suspicion that property is connected to criminal activities. Failure to do so is a criminal offence. The other options are incorrect. Directly questioning the client about the suspected criminal origin of the funds could constitute ‘tipping off’, which is a separate offence designed to prevent suspects from being alerted to an investigation. Immediately terminating the client relationship without filing a report fails to meet the legal disclosure requirement and does not absolve the representative or the firm of their obligations. Waiting to gather conclusive proof before reporting misunderstands the legal standard; the obligation to report is triggered by ‘suspicion’, not certainty or concrete evidence. Delaying a report after a suspicion has been formed can be a breach of the law.

This question assesses the application of General Principle 1 (Honesty and Fairness) and General Principle 2 (Diligence) from the SFC Code of Conduct in a practical scenario. Statement I is correct because under the Prevention of Bribery Ordinance, an employee must not solicit or accept an advantage without the permission of their employer. The ‘educational grant’ is an advantage, and accepting it without the firm’s consent would be a breach. This aligns with GP 1’s requirement to act honestly. Statement II is correct as it reflects the core of both GP 1 and GP 2. The representative must act in the client’s best interests and with due skill, care, and diligence, meaning the recommendation must be based on suitability analysis, not personal gain. Statement III is correct and directly relates to GP 2, which requires that transactions executed for clients be allocated promptly and fairly. This prevents favouring certain clients over others. Statement IV is incorrect because describing any investment, even one in government bonds, as ‘risk-free’ is a misleading representation, which is a violation of GP 1. All investments carry some form of risk (e.g., interest rate risk, inflation risk, credit risk). Therefore, statements I, II and III are correct.

The correct answer is that the licensed corporation must immediately notify the SFC in writing of the deficit. The Securities and Futures (Financial Resources) Rules (FRR) are designed to ensure the financial stability of intermediaries and protect the market. A key requirement under these rules is that if a licensed corporation’s required liquid capital falls below the specified amount, it has an immediate and absolute obligation to inform the Securities and Futures Commission (SFC) in writing. This notification allows the regulator to take prompt action to safeguard client assets and maintain market integrity. Delaying notification to attempt rectification first is a breach of the rules, as the SFC must be made aware of the financial instability immediately. There is no provision for a grace period, such as one business day, for this type of critical notification. While ceasing business activities might be a subsequent step, the primary and most urgent regulatory duty is to report the capital deficiency to the SFC without delay.

The Securities and Futures (Professional Investor) Rules provide licensed corporations with exemptions from certain requirements under the Code of Conduct when dealing with clients who qualify as Professional Investors (PIs). However, these exemptions do not override fundamental regulatory obligations such as those related to Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT). Statement I is incorrect because Customer Due Diligence (CDD) is a mandatory requirement under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) and the SFC’s AML Guideline for all clients, regardless of their PI status. Statement II is correct; under paragraph 15.4 of the Code of Conduct, if a client is a PI, the intermediary is exempt from the requirement to assess the client’s knowledge and experience for a specific transaction. Statement III is also correct; the suitability obligations, which include establishing a client’s financial situation and investment objectives as per paragraph 5.2 of the Code of Conduct, can be waived for PIs, provided the intermediary has explained the consequences and the client has provided written consent. Statement IV is incorrect because while suitability obligations may be waived, the fundamental duty to provide adequate risk disclosure, particularly for complex products, is not entirely removed. The intermediary must still act with due skill, care and diligence and ensure the client understands the risks involved. Therefore, statements II and III are correct.

The correct answer is that the firm must notify the SFC in writing within one business day of discovering the breach, and it may face disciplinary action or a fine. Under section 12 of the Client Securities Rules, an intermediary is required to give written notice to the SFC of non-compliance with specified provisions, including the requirement to deposit client securities into a segregated account, within one business day of becoming aware of the failure. This duty is absolute and not dependent on the presence of fraudulent intent or client complaints. A breach of the Client Securities Rules, even if committed without intent to defraud but without a reasonable excuse, constitutes an offence and can lead to penalties such as fines. Furthermore, the SFC may take disciplinary action under section 194 of the SFO. Simply documenting the incident for an annual return is insufficient as it violates the immediate reporting timeline. While informing clients is a good practice, it does not substitute the mandatory regulatory reporting obligation. Reporting to the police is generally reserved for cases involving suspected criminal fraud, whereas the primary regulator for this type of operational breach is the SFC.

Under the Securities and Futures Ordinance (SFO), there is a dual regulatory regime. Corporations that are not authorized financial institutions are licensed by the Securities and Futures Commission (SFC) as Licensed Corporations (LCs). In contrast, authorized financial institutions (i.e., banks) are registered with the Hong Kong Monetary Authority (HKMA) as Registered Institutions (RIs) if they wish to conduct regulated activities. Individuals employed by RIs to conduct such activities are known as ‘Relevant Individuals’ and are registered with the HKMA, not licensed by the SFC. Therefore, statement I is incorrect. The bank, as the RI, is responsible for ensuring its employees are fit and proper and for notifying the HKMA of their appointment to conduct regulated activities. This makes statement II correct. The HKMA maintains a public register of all Relevant Individuals of RIs, which includes their name and the specific regulated activities they are registered to carry on. This makes statement III correct. While RIs have periodic reporting obligations (e.g., financial resources returns), there is no general requirement for individual Relevant Individuals to submit monthly activity reports of their trades directly to the SFC. This responsibility lies with the institution’s compliance and reporting functions. Therefore, statements II and III are correct.

This question assesses the understanding of specific rules regarding order handling and telephone recording under the SFC’s Code of Conduct. Statement I is correct because when a client order is received on a mobile phone outside restricted areas (like the trading floor or office), the licensed person must immediately record the order details by calling the office’s telephone recording system. Statement II is correct as the Code of Conduct explicitly requires licensed corporations to have a written policy prohibiting staff from receiving client orders via mobile phones in designated areas such as the trading floor or trading room. Statement III is also correct; it describes the contingency plan. Only if the firm’s telephone recording system is inaccessible may other formats, such as writing, be used as a last resort to record the order details. Statement IV is incorrect. The required minimum retention period for telephone recordings of client orders is at least 6 months, not two years. Therefore, statements I, II and III are correct.

Statement I is correct. Paragraph 3.5 of the SFC Code of Conduct requires a licensed person dealing in futures contracts for a client to comply with and enforce the margin and variation adjustment requirements of the Hong Kong Futures Exchange (HKFE) as though the client were an exchange participant. This means the intermediary (Apex Futures) must be as diligent in collecting margin from its client (Global Alpha) as the exchange would be with its own members. Statement III is also correct. A key feature that distinguishes regulated futures trading from unlawful gambling or wagering (under the Gambling Ordinance) is the system of margining. By requiring clients to post margin, the intermediary ensures that participants have a genuine financial commitment and the capacity to cover potential losses, rather than simply betting on price movements. This enforces financial substance in the transaction. Statement II is incorrect. The obligation to meet margin calls is immediate. Granting an extension, especially for reasons related to the client’s own operational issues in collecting funds from its underlying clients, would be a breach of the intermediary’s duty of diligence and could expose the firm to excessive risk. Statement IV is incorrect. The intermediary’s contractual relationship is with its client, Global Alpha, which operates the omnibus account. The account is treated as a single entity for margin purposes. The intermediary has no direct relationship with or obligation to the underlying clients and cannot selectively liquidate parts of the position based on the internal affairs of its client. The entire account is at risk of liquidation if the margin call is not met. Therefore, statements I and III are correct.

Under the Securities and Futures Ordinance (SFO), carrying on a business of advising on futures contracts requires a Type 5 licence. However, several exemptions exist. Statement I describes a financial columnist providing general advice through public media, which is a specific exemption under the SFO as their income is not directly tied to the advice and it is disseminated to the general public. Statement II describes a Type 2 licensed representative giving advice that is ‘wholly incidental’ to their primary activity of dealing in futures contracts, which is another statutory exemption. Statement III describes a certified public accountant providing advice that is ‘wholly incidental’ to their professional practice, which is also a specific exemption for designated professionals. Statement IV, however, describes an analyst whose firm’s core business is to issue analyses and reports on futures contracts for a fee. This activity falls squarely within the definition of Type 5 regulated activity and is not covered by any exemption. Therefore, statement IV is correct.

This question assesses the specific requirements under the SFC Code of Conduct regarding investor characterisation, particularly for clients’ knowledge of derivatives.
Statement I is incorrect. The SFC guidance explicitly states that a licensed person should not merely rely on a client’s self-declaration of knowledge. They must make appropriate enquiries and gather relevant information to make their own assessment and keep records of this process.
Statement II is incorrect. The method for assessing a corporate client’s knowledge depends on its structure. For a small private company where the owner is the sole investment decision-maker, the assessment should focus on the owner’s knowledge. The approach of assessing a dedicated investment function applies to larger, more structured corporate clients.
Statement III is correct. According to the Code of Conduct, if a client without sufficient knowledge wishes to transact in an unlisted (non-exchange-traded) derivative product that the firm assesses as unsuitable, the firm must warn the client. The firm may only proceed with the transaction if doing so is determined to be in the client’s best interests, and all communications must be documented.
Statement IV is incorrect. The guidance clarifies that once a client is determined to have knowledge of derivatives during the initial KYC process, the licensed person is not required to conduct this specific assessment continuously or on an annual basis. Therefore, statement III is correct.

The correct answer is that the external auditors must be satisfied with the demonstrated competence of the internal audit staff and the structural independence of their function. According to regulatory guidelines, while internal and external auditors can coordinate to divide work, the external auditors retain ultimate responsibility for their audit opinion. They will only rely on the work of an internal audit function if they have assessed it to be sufficiently competent, professional, and, crucially, independent from the operational management of the business. This independence ensures objectivity in the internal review process. An internal audit function that reports to an operational head, for example, may be perceived as lacking the necessary independence. The other options are incorrect for several reasons. While detailed terms of reference are important for defining the internal audit’s scope, they are drafted by senior management and do not supersede the external auditor’s professional judgment or responsibilities. The external auditor’s primary concern is the quality and objectivity of the work, not the management-defined scope. The potential for cost reduction is a commercial consideration for the licensed corporation, not a valid professional basis for the external auditor to determine the level of reliance on internal work; their duty is to shareholders and regulators. Finally, while unrestricted access to records is a necessary precondition for any audit, it is not the most critical factor for reliance. A team could have full access but lack the competence or independence to perform a reliable review.

The correct answer is that the licensed corporation must give written notice to the SFC of the non-compliance within one business day of its discovery. According to the Securities and Futures (Client Money) Rules, a licensed corporation has a strict obligation to report any breach of specified provisions, such as the failure to deposit client money into a segregated account, to the SFC. This notification must be made in writing and within one business day of the moment the firm becomes aware of the non-compliance. The purpose is to ensure immediate regulatory oversight. While rectifying the error by transferring the funds is a necessary corrective action, it does not replace the mandatory reporting duty. Conducting an internal investigation to determine intent is important for understanding the root cause and potential severity, but it must not delay the required notification to the SFC. The reporting obligation is to the regulator and is not dependent on first informing the client or awaiting their instructions.

According to the HKFE Rules (Chapter V), there are several general and continuing obligations for HKFE Participants. Statement I is correct because Rule 530 explicitly requires every Non-Clearing Participant to have an agreement with a General Clearing Participant of HKCC to clear all its contracts. Statement II is also correct as HKFE Participants must be limited companies incorporated in Hong Kong and hold a business registration certificate. Statement III is incorrect; the basic methodology for matching orders in HKATS is price/time priority, meaning orders are first prioritized by the best price and then by the time they were entered. Time is only the secondary factor. Statement IV is incorrect because the HKFE Rules require a Participant to notify HKFE immediately in writing of the bankruptcy of any of its directors, without any condition related to its impact on the Financial Resources Rules (FRR). Therefore, statements I and II are correct.

The correct answer is that the SFC must obtain the written consent of the Financial Secretary. According to Part III of the Securities and Futures Ordinance (SFO), the SFC is empowered to recognise an exchange controller. However, this power is not unilateral. A critical condition for this recognition is securing the prior written consent of the Financial Secretary. The SFC must also be satisfied that granting the recognition is either in the interest of the investing public or the public interest, or that it is appropriate for the proper regulation of the futures market. Approval from the Hong Kong Monetary Authority is not the specified prerequisite for this particular process under the SFO. While a company’s financial standing is important, a specific three-year profitability mandate is not the stipulated legal requirement for recognition. Similarly, the decision-making authority rests with the SFC and the Financial Secretary, not with existing market participants through a voting process.

The correct answer is that the representative must verify the third party’s identity and obtain a written authorization from the client before accepting any instructions. According to the SFC’s Code of Conduct, before a licensed person accepts orders from a third party for a client’s account, they must take reasonable steps to establish the true and full identity of that third party and, crucially, obtain a written authorisation from the client for the third party to operate the account. Acting on verbal permission from an unverified third party is a breach of this requirement. While assessing the suitability of the investment is a vital part of the advisory process, it is a subsequent step that can only be considered after the authority to give instructions has been properly established. Requesting the identity of the ultimate client would be relevant if the client themselves were acting as an agent, but here the issue is a third party operating the account, not a hidden principal. Executing the trade based on a verbal instruction from an unauthorized individual would be a serious compliance failure, as proper authorization must precede any transaction.