HKSI Paper 3 (Regulation of Derivatives) English Free Trial

According to the Securities and Futures Ordinance (SFO) and its subsidiary legislations, licensed individuals are mandated to adhere to the Code of Conduct set by the Securities and Futures Commission (SFC). Failure to disclose material information regarding risks associated with derivatives constitutes a breach of the Code of Conduct. Consequently, Mr. Y may face disciplinary actions such as fines, suspension, or revocation of his license by the SFC.

Incorrect Answers:

(b) This option is incorrect. The obligation to disclose material information exists regardless of the investment outcome. The SFO emphasizes transparency and investor protection, irrespective of profitability.

(c) This option is incorrect. Mr. Y’s liability is not contingent upon the client filing a lawsuit. The SFC can take regulatory actions against licensed individuals for breaches of conduct, independent of civil litigation.

(d) This option is incorrect. While suspension of license is a possible consequence for misconduct, it is not an automatic action. The SFC conducts investigations and follows due process before imposing such penalties.

According to the Securities and Futures Commission’s guidelines, registered representatives are required to promptly acknowledge and address client complaints. Informing the client about initiating an internal investigation demonstrates commitment to resolving the issue and upholding regulatory standards of accountability and transparency.

Incorrect Answers:

(b) This option is incorrect. Disregarding the complaint without proper investigation disregards the client’s concerns and violates regulatory obligations regarding client protection and dispute resolution.

(a) This option is incorrect. Delaying response to the complaint and aligning statements with colleagues may give the impression of collusion or lack of transparency, undermining the integrity of the investigation process.

(d) This option is incorrect. Denying any wrongdoing without investigation or resolution exacerbates the conflict and disregards the client’s right to a fair and timely resolution of their concerns.

According to the regulations on Prevention of Money Laundering and Terrorist Financing, legitimate sources of income, including large cash deposits, are not inherently suspicious. However, financial institutions are required to monitor and report transactions that deviate from established patterns or lack economic rationale, which may indicate potential money laundering or terrorist financing activities.

Incorrect Answers:

(b) This option is incorrect. Transferring substantial funds to offshore accounts without economic rationale raises suspicion as it may be indicative of attempts to conceal the source of funds or evade regulatory scrutiny.

(c) This option is incorrect. Conducting transactions deliberately below the reporting threshold to avoid detection is a classic red flag for potential money laundering. Such behavior is considered evasive and requires scrutiny by financial institutions.

(d) This option is incorrect. Inconsistent behavior with a customer’s financial profile during a transaction, such as sudden changes in transaction patterns or unexplained wealth, is often considered a potential indicator of suspicious activity and should be reported by financial institutions.

The Code of Conduct for Persons Licensed by or Registered with the SFC serves to establish ethical standards, conduct requirements, and obligations for licensed individuals and registered entities operating in the securities industry. It outlines principles of integrity, fairness, and professionalism, emphasizing investor protection and market integrity.

Incorrect Answers:

(a) This option is incorrect. While the Code of Conduct may specify penalties for misconduct, its primary purpose is to set forth standards of behavior and obligations for industry participants rather than solely focusing on punitive measures.

(c) This option is incorrect. The Code of Conduct primarily addresses conduct and ethical standards in the securities industry and does not pertain to tax reporting or broader financial regulations.

(d) This option is incorrect. Trading hours and market operation protocols are typically governed by exchange rules and regulations rather than the Code of Conduct, which focuses on professional conduct and ethical standards.

Sharing sensitive customer information with third-party marketing agencies poses significant risks related to data privacy and confidentiality, potentially violating regulatory requirements and compromising customer trust. This practice is not aligned with the principles of confidentiality and data protection under anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.

Incorrect Answers:

(a) This option is incorrect. Implementing customer due diligence (CDD) procedures to verify the identity of customers and beneficial owners is a fundamental requirement for compliance with AML and CTF regulations, aimed at mitigating the risk of identity fraud and money laundering.

(b) This option is incorrect. Maintaining comprehensive records of transactions and customer interactions is essential for audit trails and regulatory reporting, ensuring transparency and accountability in compliance efforts.

(d) This option is incorrect. Conducting ongoing monitoring of customer accounts and transactions is a key component of AML and CTF compliance, enabling financial institutions to detect and report suspicious activities promptly.

The Securities and Futures Commission (SFC) prohibits licensed representatives from accepting gifts from clients to prevent conflicts of interest or perceptions of undue influence. Mr. Z should reject the gift politely and communicate the regulatory prohibition to the client, maintaining professionalism and adherence to regulatory standards.

Incorrect Answers:

(a) This option is incorrect. Accepting the gift and disclosing it in the annual compliance report does not mitigate the potential conflict of interest or comply with the SFC’s prohibition on receiving gifts from clients.

(c) This option is incorrect. Accepting the gift discreetly without informing the SFC does not absolve Mr. Z from violating regulatory guidelines, as the prohibition on receiving gifts applies regardless of the gift’s influence on professional judgment.

(d) This option is incorrect. Consulting with colleagues does not alter the regulatory prohibition on receiving gifts from clients. Mr. Z should adhere to the SFC’s guidelines independently and reject the gift to avoid conflicts of interest.

The Securities and Futures Appeals Tribunal (SFAT) serves as an independent body responsible for reviewing decisions made by the Securities and Futures Commission (SFC) and hearing appeals against disciplinary sanctions imposed by the SFC. SFAT plays a crucial role in ensuring fairness and transparency in the regulatory process within the securities and futures industry.

Incorrect Answers:

(a) This option is incorrect. While SFAT operates independently, its primary function is not advisory but rather judicial, focusing on reviewing decisions and hearing appeals related to regulatory matters.

(b) This option is incorrect. SFAT does not provide legal assistance to individuals involved in disputes; instead, it functions as a tribunal to review decisions and adjudicate appeals concerning disciplinary actions imposed by the SFC.

(d) This option is incorrect. SFAT does not oversee the registration process for securities and futures industry professionals; this responsibility lies with the SFC and other relevant regulatory bodies.

Politically exposed persons (PEPs) are individuals who hold prominent public positions or have close associations with such individuals. Transactions involving PEPs pose higher risks of money laundering and corruption. Therefore, processing a large cash deposit from a PEP into a personal savings account would require enhanced due diligence (EDD) measures to mitigate these risks and ensure compliance with regulations for preventing money laundering and terrorist financing.

Incorrect Answers:

(a) This option is incorrect. A one-time low-value transaction conducted by a long-standing corporate client with a verified track record may not necessarily trigger the need for enhanced due diligence (EDD) measures, as the risk level associated with such transactions is typically lower.

(b) This option is incorrect. Opening a new account for an individual customer with a stable residential address and regular employment may require standard due diligence procedures but may not warrant enhanced due diligence (EDD) unless specific risk factors are present.

(d) This option is incorrect. Routine withdrawal of funds from a business account for operational expenses by a small-scale retail business does not inherently raise the need for enhanced due diligence (EDD) measures, as long as the transactions align with the customer’s established business activities and risk profile.

The Securities and Futures Commission (SFC) strictly prohibits the use of insider information for trading or recommending investments. Licensed representatives like Ms. A are required to adhere to ethical standards and securities laws, which prohibit insider trading. Ignoring the insider information is the appropriate course of action to avoid involvement in unlawful activities and maintain integrity.

Incorrect Answers:

(a) This option is incorrect. Using insider information to inform clients and recommend investment strategies constitutes insider trading, which is illegal and violates securities regulations enforced by the SFC.

(b) This option is incorrect. While disclosing insider information to the Securities and Futures Commission (SFC) may mitigate legal implications to some extent, the primary obligation is to refrain from using or trading on such information in the first place.

(d) This option is incorrect. Trading on insider information to capitalize on market advantages is a clear violation of securities laws and regulations, leading to potential legal sanctions and disciplinary actions by the SFC.

Client agreement requirements for licensed intermediaries serve to establish clear and transparent terms and conditions governing the relationship between the client and the intermediary. These agreements outline rights, obligations, and responsibilities of both parties, including but not limited to trading procedures, fees, and disclosure of risks.

Incorrect Answers:

(a) This option is incorrect. While client agreements may involve ownership transfer of securities and futures contracts, their primary objective is to establish the contractual relationship and terms of engagement between the client and the intermediary rather than legal ownership.

(c) This option is incorrect. While client agreements may include provisions for complaint resolution and dispute handling, their primary objective is to establish the contractual framework governing the client-intermediary relationship rather than providing avenues for compensation.

(d) This option is incorrect. While client agreements may specify commission rates and fees charged by the intermediary, their primary objective extends beyond fee disclosure to encompass broader terms and conditions governing the client-intermediary relationship.

The primary objective of the Securities and Futures Ordinance (SFO) regarding the regulation of market misconduct in Hong Kong is to protect investors and uphold the integrity and stability of the securities and futures markets. This includes preventing fraudulent activities, insider trading, market manipulation, and other forms of misconduct that could undermine investor confidence and market fairness.

Incorrect Answers:

(a) This option is incorrect. While promoting market competition and fair trading practices is an important aspect of market regulation, the primary focus of the SFO regarding market misconduct is investor protection and market integrity.

(c) This option is incorrect. Maximizing profits for industry participants and minimizing regulatory oversight are not primary objectives of the SFO. Regulatory oversight is essential for maintaining market integrity and investor protection.

(d) This option is incorrect. While enhancing market liquidity and efficiency are desirable outcomes, encouraging speculative trading activities is not a primary objective of the SFO. The focus is on ensuring fair and orderly markets for all participants.

Conducting customer due diligence (CDD) involves verifying the identity of customers, assessing the risk of money laundering and terrorist financing associated with each customer, and obtaining information about the nature and purpose of the business relationship. This process helps financial institutions identify and mitigate the risks posed by their customers.

Incorrect Answers:

(a) This option is incorrect. While conducting background checks may be part of customer due diligence, it is not necessary for all customers and should be based on the risk assessment of each customer.

(c) This option is incorrect. While monitoring customer transactions is essential for detecting suspicious activities, it is not the primary requirement for customer due diligence. CDD focuses on verifying customer identity and assessing associated risks.

(b) This option is incorrect. Sharing customer information with third-party service providers for marketing purposes is not a fundamental requirement for customer due diligence. CDD is primarily concerned with risk assessment and verification of customer identity.

Enhanced due diligence (EDD) is a risk-based approach that involves conducting more comprehensive background checks and ongoing monitoring for customers identified as posing higher money laundering and terrorist financing risks. This includes gathering additional information about the customer’s source of funds, business activities, and beneficial ownership structures to mitigate associated risks effectively.

Incorrect Answers:

(a) This option is incorrect. EDD is not primarily focused on identifying low-risk customers but rather on applying enhanced scrutiny to high-risk customers to detect potential money laundering and terrorist financing activities.

(b) This option is incorrect. While EDD may involve additional compliance efforts, its primary objective is not to streamline processes or reduce costs but rather to address the higher risks posed by certain customers.

(d) This option is incorrect. EDD does not facilitate faster account opening procedures but rather involves more thorough checks and monitoring for customers with higher money laundering and terrorist financing risks.

Mr. X should refrain from trading based on the confidential information to avoid engaging in insider trading, which is prohibited under the Securities and Futures Ordinance (SFO). Instead, he should report the situation to the compliance department to ensure proper handling of the information and adherence to regulatory requirements.

Incorrect Answers:

(c) This option is incorrect. Proceeding with trading based on confidential information constitutes insider trading, which violates securities laws and regulations enforced by the SFO.

(b) This option is incorrect. Disclosing confidential information to select clients for their investment advantage would also constitute insider trading and breach regulatory requirements.

(d) This option is incorrect. Sharing confidential information with colleagues does not absolve Mr. X from potential insider trading violations. He should refrain from trading and report the situation to compliance professionals for guidance.

Mr. Y should conduct a thorough investigation into the unusual transaction patterns observed in the client’s account to determine if they are indicative of potential money laundering or terrorist financing activities. He should document his findings and escalate any suspicious transactions to the relevant authorities, as required by anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.

Incorrect Answers:

(a) This option is incorrect. Ignoring unusual transaction patterns, especially those involving large cash deposits and wire transfers to offshore accounts, disregards potential risks of money laundering or terrorist financing and violates regulatory obligations.

(c) This option is incorrect. Informing the client about suspicious transaction patterns may compromise the investigation and give the client an opportunity to conceal illicit activities. Mr. Y should investigate independently and only engage with the client as necessary for clarification.

(d) This option is incorrect. Suspending the client’s account immediately may disrupt legitimate transactions and may not be necessary until a thorough investigation has been conducted and suspicious activities confirmed.

Mr. Z should inform the compliance department within his firm about the client’s complaint and follow internal procedures for handling client grievances as per Securities and Futures Commission (SFC) guidelines. This ensures that the complaint is properly documented, investigated, and resolved in accordance with regulatory requirements and industry best practices.

Incorrect Answers:

(a) This option is incorrect. While attempting to resolve the complaint directly with the client is commendable, if the client remains dissatisfied and insists on escalation, it may be necessary to involve appropriate internal channels and regulatory authorities.

(b) This option is incorrect. Reporting the client’s complaint to the Securities and Futures Commission (SFC) directly without following internal procedures within the firm may not be the most appropriate course of action initially. Internal resolution mechanisms should be exhausted before involving regulatory authorities.

(c) This option is incorrect. Advising the client to seek legal recourse through civil litigation should be considered a last resort after internal resolution attempts have been exhausted. It is not the primary responsibility of the licensed representative to suggest legal action to clients.

Mr. A should prioritize the client’s best interests and adhere to the principle of suitability under the Securities and Futures Ordinance (SFO) regulations. He should refuse to engage in trading activities that are not suitable for the client’s risk profile and financial situation, providing clear explanations for the decision to ensure transparency and compliance.

Incorrect Answers:

(a) This option is incorrect. Yielding to the client’s preferences for high-risk speculative trading strategies without considering suitability violates regulatory requirements and exposes the client to unnecessary risks.

(c) This option is incorrect. Encouraging the client to seek investment advice from unlicensed sources is unethical and may expose the client to fraudulent or unsuitable recommendations.

(d) This option is incorrect. Proceeding with trading activities according to Mr. A’s discretion without considering the client’s risk preferences or financial objectives disregards the principle of suitability and regulatory requirements under the SFO.

Ms. B should conduct further investigation into the client’s account activity to gather additional information and evidence to substantiate the suspicions raised in the suspicious transaction report (STR). This involves analyzing transaction patterns, verifying the source of funds, and identifying any potential red flags indicative of money laundering or terrorist financing activities.

Incorrect Answers:

(a) This option is incorrect. Disregarding the suspicious transaction report without conducting further investigation would neglect the compliance officer’s duty to address potential money laundering risks and violate regulatory obligations.

(c) This option is incorrect. Immediately freezing the client’s account and notifying law enforcement agencies should be considered after a thorough investigation and establishment of sufficient evidence to substantiate suspicions of money laundering activities.

(b) This option is incorrect. Informing the client about the suspicious transaction report may compromise the investigation and alert the client to potential detection efforts, allowing them to conceal illicit activities. Ms. B should prioritize gathering additional evidence before engaging with the client.

According to the Securities and Futures Ordinance (SFO) and its subsidiary legislation, licensed representatives are obligated to conduct customer due diligence (CDD) measures, especially enhanced due diligence (EDD) for high-risk clients, which includes those with a history of bankruptcy and loan defaulting. Opening a margin account for such clients without conducting proper EDD could expose the firm to various risks, including financial crime risks such as money laundering and terrorist financing. Therefore, option (b) is the correct answer as it aligns with the regulatory requirement of conducting enhanced due diligence on high-risk clients.

Option (a) is incorrect because merely maintaining sufficient margin does not address the regulatory requirement of conducting enhanced due diligence.

Option (c) is incorrect because ignoring the client’s past financial history violates the obligation to perform proper due diligence.

Option (d) is incorrect because requesting only basic identification documents is insufficient for high-risk clients and does not fulfill the obligation of conducting enhanced due diligence.

The Securities and Futures Commission (SFC) is the statutory regulatory authority responsible for regulating the securities and futures markets in Hong Kong. Its primary role, as mandated by the Securities and Futures Ordinance (SFO), is to ensure the fair, orderly, and transparent operation of the securities and futures markets. This includes safeguarding the interests of investors, maintaining market integrity, and reducing systemic risks. Option (a) correctly reflects the core functions of the SFC as outlined in the relevant regulations and ordinances.

Option (b) is incorrect because the SFC is not a self-regulatory organization; rather, it is a statutory body established by law.

Option (c) is incorrect because the SFC’s mandate is to regulate the market in the public interest, not to maximize profits for market participants.

Option (d) is incorrect because the SFC’s regulatory authority extends to both listed and unlisted securities, covering a broad spectrum of market activities.

Licensed representatives have a duty to address client complaints promptly and thoroughly. In accordance with regulatory requirements under the Securities and Futures Ordinance (SFO) and related codes, licensed representatives must investigate complaints of unauthorized trading and provide a detailed response to the client within a reasonable timeframe. Option (b) aligns with these regulatory obligations by emphasizing the importance of investigating and responding to client complaints in a timely manner to ensure client protection and market integrity.

Option (a) is incorrect because disregarding the complaint without investigation violates the duty of care owed to clients.

Option (c) is incorrect because delaying response without justification may escalate the issue and breach regulatory obligations.

Option (d) is incorrect because resolving client complaints is primarily the responsibility of the securities firm and its licensed representatives, although clients can escalate unresolved complaints to the SFC if necessary.

Enhanced customer due diligence (EDD) measures are required for high-risk clients, such as politically exposed persons (PEPs), due to their susceptibility to financial crime risks, including money laundering and terrorist financing. As per the regulatory requirements outlined in the Securities and Futures Ordinance (SFO) and relevant codes, securities firms must implement EDD when dealing with PEPs, especially when they request to open accounts for trading high-risk products like futures contracts. Option (c) correctly identifies a scenario that necessitates the implementation of enhanced customer due diligence measures.

Option (a) is incorrect because opening a cash account for trading stocks does not typically require enhanced due diligence.

Option (b) is incorrect because although the client’s refusal to disclose the source of funds raises concerns, it does not specifically mandate enhanced due diligence unless other risk factors are present.

Option (d) is incorrect because opening a retirement savings account for a client with no prior trading history does not inherently pose a high risk necessitating enhanced due diligence.

In accordance with the requirements set forth in the Prevention of Money Laundering and Terrorist Financing regulations and guidelines, licensed representatives are obligated to conduct enhanced due diligence (EDD) when processing transactions involving high-risk factors, such as substantial funds transferred to offshore accounts with limited financial information provided. Option (d) is the correct answer as it aligns with the regulatory mandate of conducting further due diligence to mitigate the risk of money laundering and terrorist financing associated with such transactions.

Option (a) is incorrect because proceeding with the transfer without conducting additional due diligence may expose the firm to regulatory scrutiny and financial crime risks.

Option (c) is incorrect because declining the transfer solely based on internal transaction limits without assessing the underlying risk factors does not fulfill the obligation of mitigating money laundering and terrorist financing risks.

Option (b) is incorrect because transferring funds without proper scrutiny contradicts the regulatory requirement of conducting enhanced due diligence on high-risk transactions.

Licensed representatives have a duty to conduct proper client suitability assessments and to ensure that client orders are legitimate and consistent with their investment objectives. In this scenario, the sudden large volume of trades that deviates from the client’s typical behavior raises concerns about potential market manipulation or unauthorized trading. Therefore, Ms. C should contact the client to verify the legitimacy of the order, gather additional information, and assess whether the order aligns with the client’s investment objectives and risk tolerance. Option (b) is the correct answer as it reflects the regulatory obligation to exercise diligence and verify the legitimacy of client orders.

Option (a) is incorrect because executing the trades promptly without verifying the legitimacy of the order may expose the firm to regulatory scrutiny and potential legal risks.

Option (c) is incorrect because ignoring the unusual order neglects the duty to conduct proper due diligence and may lead to regulatory non-compliance.

Option (d) is incorrect because discussing the order with other representatives, while potentially beneficial, does not address the immediate need to verify the legitimacy of the order and ensure compliance with regulatory requirements.

Securities firms are required to report suspicious transactions to the Financial Services and Treasury Bureau (FSTB) as part of their obligations to combat money laundering and terrorist financing. In this scenario, a client’s request to transfer funds to a charitable organization without providing any supporting documentation raises red flags for potential misuse of funds or involvement in illicit activities. Therefore, the securities firm should report such transactions to the relevant authorities. Option (a) is the correct answer as it identifies a situation that triggers the requirement for reporting suspicious transactions.

Option (b) is incorrect because small transactions below the reporting threshold, while potentially indicative of structuring, may not necessarily be suspicious on their own.

Option (c) is incorrect because substantial profits from legitimate trading activities do not necessarily imply suspicious behavior warranting reporting.

Option (d) is incorrect because withdrawing funds to purchase personal assets does not inherently raise suspicions of money laundering or terrorist financing.

Trading based on insider information is illegal and constitutes market misconduct under the Securities and Futures Ordinance (SFO). Licensed representatives have a duty to uphold market integrity and report any instances of suspected market misconduct, including the possession or use of insider information, to the appropriate regulatory authorities. Therefore, Mr. B should refuse to execute the trades and promptly report the client’s admission of possessing insider information to the Securities and Futures Commission (SFC) as mandated by regulatory requirements. Option (b) is the correct answer as it aligns with the duty to report market misconduct and uphold regulatory standards.

Option (a) is incorrect because executing trades based on insider information is illegal and unethical, regardless of potential business relationships.

Option (c) is incorrect because advising the client to consult legal counsel does not absolve Mr. B from his duty to report suspected market misconduct to the regulatory authorities.

Option (d) is incorrect because proceeding with executing the trades without reporting the client’s admission of possessing insider information violates regulatory requirements and facilitates market misconduct.

Front-running, the practice of trading securities for a firm’s proprietary account based on advance knowledge of impending orders from its clients, violates the principles of market integrity and fairness outlined in the Securities and Futures Ordinance (SFO). It unfairly advantages the firm’s own trading activities over those of its clients and undermines market confidence. Option (a) is the correct answer as it identifies an action that directly contravenes regulatory principles.

Option (b) is incorrect because providing investment advice based on thorough research and analysis is a legitimate practice that promotes market integrity.

Option (c) is incorrect because offering discounted brokerage fees to attract clients is a marketing strategy and does not necessarily compromise market integrity or fairness.

Option (d) is incorrect because disclosing material non-public information to select clients for personal gain constitutes insider trading, which is illegal and undermines market integrity.

Licensed representatives have a duty to conduct proper client suitability assessments and ensure that clients provide accurate information about their financial background and investment experience to assess their risk tolerance accurately. Providing false information to qualify for higher-risk investment products is a violation of regulatory requirements and compromises investor protection. Therefore, Mr. D should refuse to proceed with the investment transactions and report the client’s false information to the firm’s compliance department as mandated by regulatory obligations. Option (d) is the correct answer as it reflects the appropriate response to discovering false information provided by a client.

Option (a) is incorrect because ignoring false information provided by the client undermines regulatory requirements and investor protection.

Option (b) is incorrect because advising the client to provide accurate information alone may not be sufficient to address the regulatory breach and protect investor interests.

Option (c) is incorrect because proceeding with investment transactions despite knowing the client provided false information violates regulatory obligations and may expose the firm to legal and reputational risks.

Upon discovering that the client is under investigation for market manipulation by the Securities and Futures Commission (SFC), Mr. E should inform the client about the ongoing investigation and refuse to execute the trades. Executing trades for a client under investigation for market manipulation may potentially involve the licensed representative in unlawful activities and could result in regulatory sanctions. Therefore, option (b) is the correct answer as it aligns with ethical and regulatory obligations to maintain market integrity and avoid involvement in market manipulation.

Option (a) is incorrect because proceeding with executing the trades despite knowing about the client’s investigation status may expose Mr. E to legal and regulatory risks.

Option (c) is incorrect because disclosing the client’s investigation status to other clients violates confidentiality and may not be necessary for ensuring compliance with regulatory requirements.

Option (d) is incorrect because Mr. E should take immediate action upon discovering the client’s investigation status rather than waiting for guidance from the compliance department.

pon observing unusual trading patterns suggestive of market manipulation in a client’s account, Ms. F should conduct further analysis to confirm suspicions and gather evidence to support her observations. Subsequently, she should report her findings to the firm’s compliance department as mandated by regulatory obligations. Reporting suspicions of market manipulation is essential for maintaining market integrity and preventing harm to investors. Therefore, option (d) is the correct answer as it aligns with regulatory requirements and ethical standards.

Option (a) is incorrect because ignoring unusual trading patterns, especially those suggestive of market manipulation, neglects Ms. F’s duty to maintain market integrity and protect investors.

Option (c) is incorrect because closing the client’s account without proper investigation and evidence may not be warranted and could expose the firm to legal and regulatory risks.

Option (b) is incorrect because advising the client to increase trading activities based on suspected market manipulation is unethical and could involve Ms. F in unlawful activities.