The requirement for reconciliations to be reviewed by independent senior staff is a fundamental principle of internal control, as emphasized in the SFC’s Internal Control Guidelines. Statement I is correct because the independence of the reviewer from the preparer creates a system of checks and balances. This segregation of duties is crucial for preventing and detecting fraud, collusion, or the concealment of errors. Statement II is also correct because the reviewer must be senior enough to possess the experience to recognize the significance of any discrepancies and the authority to challenge the preparer and escalate unresolved issues to higher management. Statement III is incorrect; while the review process might incidentally reveal performance issues, its primary objective is risk mitigation and control, not staff performance evaluation. Statement IV is incorrect as the reconciliation of client assets is an operational control function to safeguard client assets, which is distinct from the risk management function of validating market risk from proprietary trading strategies. Therefore, statements I and II are correct.

The Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules, often referred to as the OTCD Clearing Rules, establish when an OTC derivative transaction is subject to mandatory clearing. The obligation arises when several conditions are met simultaneously. Statement I is correct because the rules apply to specific, standardized OTC derivative products, such as certain interest rate swaps denominated in major currencies like HKD, USD, EUR, etc. Statement II is correct as the clearing obligation applies to transactions where both counterparties are ‘prescribed persons’, which includes licensed corporations under the SFO. Statement IV is also correct; a crucial jurisdictional link is that at least one of the prescribed persons must book the transaction in its Hong Kong office. Statement III is incorrect because the OTCD Clearing Rules specifically target Over-The-Counter (OTC) derivatives, which are traded bilaterally and not on a recognized exchange. Exchange-traded derivatives have their own clearing arrangements through the exchange’s clearing house. Therefore, statements I, II and IV are correct.

Statement I is correct. Eurex Exchange, one of Europe’s largest futures and options markets, is indeed owned and operated by Deutsche Börse AG, the German stock exchange operator. Statement II is correct. The China Financial Futures Exchange (CFFEX) was established in Shanghai in 2006 and its product offerings include key Chinese index futures like the CSI 300 Index futures. Statement III is incorrect. While the London Metal Exchange (LME) is a world-leading market for base metals, it was acquired by and is owned by Hong Kong Exchanges and Clearing Limited (HKEX) in 2012, not the CME Group. Statement IV is correct. ASX Limited was formed in 2006 through the merger of the Australian Stock Exchange (ASX) and the Sydney Futures Exchange (SFE), creating a single, integrated entity for Australia’s primary equity and derivatives markets. Therefore, statements I, II and IV are correct.

The explanation should detail the factors the Securities and Futures Commission (SFC) considers when determining penalties for regulatory breaches. The correct answer is that the SFC views proactive and cooperative actions by a licensed corporation as significant mitigating factors. This includes self-reporting the breach, cooperating fully with the SFC’s investigation, and taking immediate and effective remedial steps to correct the failure and prevent its recurrence. Such actions demonstrate the firm’s commitment to compliance and its responsibility in upholding market integrity. Conversely, the SFC would not consider a firm’s profitability or market reputation as a mitigating factor, as regulatory compliance is a fundamental requirement for all licensees regardless of their financial success. The argument that no clients suffered a direct financial loss does not excuse the systemic failure; the purpose of the regulations is to prevent potential harm and maintain standards, and a breach of these standards is a serious matter in itself. Finally, a claim that senior management was unaware of their obligations would be considered an aggravating factor, as it points to a failure in governance and a breach of the General Principle concerning the responsibility of senior management.

The correct answer is that the transaction is not subject to the clearing obligation as it qualifies for the intra-group exemption between a prescribed person and an exempt affiliate. Under the Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping) Rules, while transactions between two ‘prescribed persons’ are generally subject to mandatory clearing, there are specific exemptions. One key exemption applies to transactions between a prescribed person and its ‘exempt affiliate’. An affiliate is defined as a company that is a member of the same group. Since the counterparty is a wholly-owned subsidiary, it qualifies as an exempt affiliate, thus relieving the transaction from the clearing obligation. The other statements are incorrect. Stating that the transaction must be cleared because both parties are prescribed persons correctly identifies the general rule but overlooks the specific intra-group exemption that applies in this case. The exemption related to booking a transaction in a designated jurisdiction is a separate and distinct exemption; it is not relevant to the facts presented, which center on the relationship between the counterparties. Lastly, the clearing threshold is used to determine whether an entity is classified as a ‘prescribed person’ in the first place. Once an entity exceeds the threshold and becomes a prescribed person, the threshold does not provide a transaction-level exemption; the specific exemptions like the intra-group one would then apply.

According to the Code of Conduct for Persons Licensed by or Registered with the SFC, when a licensed person receives a client’s order instruction via mobile phone while outside the firm’s usual place of business, the required procedure is to immediately record the order by calling the office’s telephone recording system. This ensures that a time-stamped, verifiable record of the instruction is created promptly. The correct answer is that the representative should immediately call his firm’s telephone recording system to record the time of receipt and the details of the client’s order. The option suggesting he should write down the order details is only a fallback measure to be used if the telephone recording system is inaccessible. Informing the client that he is prohibited from taking the order is incorrect; while there are restrictions on using mobile phones on the trading floor or in the office, there is a specific procedure for handling orders received outside these areas. Asking the client to send an email or text message, while a good practice for confirmation, does not fulfill the immediate voice recording requirement stipulated by the regulations.

The correct answer is that the firm must retain the comprehensive documentation of the risk management controls for the old system for a minimum of two years from the date it was decommissioned. According to paragraph 18 and Schedule 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a licensed person must keep comprehensive documentation of the risk management controls of an electronic trading system for a period of not less than two years after the system has ceased to be used. Similarly, audit logs and incident reports must also be kept for at least two years. Therefore, suggesting that records can be destroyed once the new system is stable or that only records for the new system are relevant is incorrect. Confusing the specific two-year retention period for electronic trading system records with the general seven-year requirement for other types of client and transaction records is also a common mistake; the rules for electronic trading systems are distinct.

Under the Securities and Futures (Professional Investor) Rules, certain entities are automatically classified as ‘Institutional Professional Investors’ and do not need to meet any monetary thresholds. Statement I is correct because an insurer authorised under the Insurance Ordinance (Cap. 41) is explicitly listed as an Institutional Professional Investor. Statement II is also correct as a registered scheme as defined in the Mandatory Provident Fund Schemes Ordinance (Cap. 485) is also an Institutional Professional Investor. Statement III describes a corporation that would be assessed under the ‘Corporate Professional Investor’ category. To qualify, it must have either a portfolio of at least HK$8 million or total assets of at least HK$40 million. With total assets of HK$35 million and no information about its portfolio, it does not automatically qualify. Statement IV describes a trustee company. To qualify as a Corporate Professional Investor, a trustee company must be entrusted with total assets of not less than HK$40 million. With total assets of HK$30 million, this entity does not meet the required threshold. Therefore, statements I and II are correct.

The correct answer is that the representative should promptly report the matter internally to the firm’s Money Laundering Reporting Officer (MLRO). According to the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (GAML), when an employee of a licensed corporation identifies a transaction that is unusual and inconsistent with a client’s known financial circumstances or business activities, they have a duty to report their suspicion. The internal reporting mechanism, through the MLRO, is the designated channel for this. The MLRO is responsible for assessing the suspicion and, if deemed necessary, filing a Suspicious Transaction Report (STR) with the Joint Financial Intelligence Unit (JFIU). Executing the transaction without question would neglect the firm’s AML obligations. Directly confronting the client for detailed documentation after suspicion has been formed could constitute ‘tipping-off’, which is a serious offense. While the firm may ultimately decide to terminate the relationship, the immediate and mandatory first step for the representative is internal escalation to the MLRO, not unilateral account closure.

The correct answer is that the licensed corporation is ultimately responsible for all orders transmitted through its electronic trading system and for the implementation of adequate controls. According to Paragraph 18 and Schedule 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a licensed person is responsible for the settlement and financial obligations of orders sent to the market via its electronic trading system. This responsibility cannot be delegated. While the client who placed the order has a duty to trade responsibly, the licensed corporation providing the market access is accountable to the regulator for the integrity of the orders it transmits. Similarly, although an external software vendor may have provided a faulty component, the licensed corporation is responsible for selecting, implementing, and testing its systems. The Manager-In-Charge (MIC) for Information Technology has specific duties related to the firm’s technology infrastructure and is subject to the SFC’s disciplinary powers, but the ultimate corporate and regulatory responsibility for the firm’s trading activities rests with the licensed corporation as a whole entity.

The Securities and Futures (Keeping of Records) Rules require intermediaries to maintain records that are sufficiently detailed to serve several key regulatory purposes. One of these is to enable a complete audit trail of reconciliations. It is not enough for a firm to simply perform a monthly reconciliation and record the final, correct balance. The rules explicitly mandate that the records must also show any differences that were identified during the reconciliation process and, crucially, demonstrate how those differences were subsequently resolved. This ensures transparency and accountability, allowing regulators or auditors to verify that the firm has robust controls for investigating and correcting discrepancies related to client assets. Therefore, the correct answer is that the firm’s record-keeping is non-compliant because it fails to show how differences identified during reconciliation were resolved. The other options are incorrect. The idea that simply performing the reconciliation is sufficient ignores the requirement to document the resolution process. Introducing a monetary threshold for compliance is not supported by the rules; all discrepancies must be accounted for. Finally, while having the process described in an operations manual is a good practice, it does not replace the actual requirement to keep records of the resolution actions taken for each specific reconciliation.

The correct answer is that the licensed corporation must notify the SFC in writing of the situation within one business day. The Securities and Futures (Financial Resources) Rules (FRR) mandate that a licensed corporation must immediately notify the SFC in writing if it becomes aware of certain events. In this scenario, two separate notification triggers have been met. First, the firm’s liquid capital (HK$4.5 million) has fallen below 120% of its Required Liquid Capital (120% of HK$4 million = HK$4.8 million). Second, its current liquid capital has also fallen below 50% of the amount stated in its last return submitted to the SFC (50% of HK$10 million = HK$5 million). The obligation to notify is immediate and is not contingent on whether the firm can fix the issue. Failure to do so is a breach of the FRR and can have serious consequences, including impacting the fitness and properness of the corporation and its management. Waiting to report the drop in the next regular financial return is incorrect because these specific events require immediate, ad-hoc notification outside the normal reporting cycle. Taking steps to restore the capital without first notifying the SFC is also incorrect, as the duty to inform the regulator arises as soon as the firm is aware of the breach. Requesting a waiver is not the correct initial procedure; the primary and mandatory first step is notification.

This question tests the principle of officer liability for corporate offences under Part XVI, section 390 of the Securities and Futures Ordinance (SFO). The SFO stipulates that where a corporation commits an offence, any officer of that corporation may also be prosecuted and held liable. The correct answer is that an officer can be held liable if the offence was committed with their consent or connivance, or was attributable to any recklessness on their part. This extends liability beyond direct participation to include situations where a senior manager’s negligence or willful blindness allows an offence to occur. Liability is not restricted solely to instances where the officer directly aided or abetted the specific act; their failure to maintain proper oversight (recklessness) is sufficient. Furthermore, for a criminal offence, the standard of proof required is ‘beyond reasonable doubt’, not the lower civil standard of ‘balance of probabilities’. The assertion that officers are shielded from personal liability by the corporate entity is incorrect, as section 390 is specifically designed to pierce the corporate veil in such regulatory contexts to ensure individual accountability.

The correct answer is that the licensed corporation must obtain approval from its senior management before establishing the business relationship. According to Hong Kong’s Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (GAML), when a customer is connected to a jurisdiction identified by the Financial Action Task Force (FATF) as having strategic AML/CFT deficiencies, the licensed corporation must apply Enhanced Due Diligence (EDD). Key EDD measures for such high-risk situations include obtaining senior management approval to establish or continue the relationship, taking adequate measures to establish the source of wealth and funds, and conducting enhanced ongoing monitoring of the business relationship. Filing a Suspicious Transaction Report (STR) is incorrect because the client’s country of incorporation, while a high-risk factor, does not in itself constitute a suspicious transaction that requires reporting. An STR should be filed only when there is knowledge or suspicion of criminal activity. Automatically declining the business relationship is also incorrect; while a firm may choose to de-risk, the regulatory requirement is to apply EDD to manage the risk, not to automatically refuse service. Applying standard due diligence and simply increasing the frequency of reviews is insufficient, as the situation explicitly calls for the more rigorous and comprehensive measures associated with EDD from the outset.

Statement I is correct. The London Metal Exchange (LME), a key global market for base metals, was acquired by and is now a subsidiary of the Hong Kong Exchanges and Clearing Limited (HKEX) since 2012. Statement II is also correct. The China Financial Futures Exchange (CFFEX) is the primary venue in mainland China for trading financial futures, including key stock index futures like the CSI 300 and SSE 50. Statement III is incorrect. Eurex Exchange is owned by the German stock exchange operator Deutsche Börse AG, not the US-based CME Group. Statement IV is incorrect. The CME Group offers one of the most diverse ranges of derivatives products globally, including interest rates, equity indexes, foreign exchange, and weather derivatives, far beyond just agricultural and energy commodities. Therefore, statements I and II are correct.

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission requires licensed corporations to have a robust risk management framework that addresses all material risks, including operational risk. Statement I is correct because arranging adequate insurance, such as fidelity insurance, is a key measure to mitigate financial losses from events like employee fraud, which is a component of operational risk. Statement II is correct as establishing clear reporting lines, responsibilities, and authorisation limits is a fundamental feature of good management and supervision, ensuring proper controls and accountability. Statement III is also correct; a good personnel function, crucial for managing operational risk, involves ensuring staff are well-trained on policies, procedures, and regulatory obligations to minimise errors and misconduct. Statement IV is incorrect because while market and credit risks are critical, a comprehensive risk management system must address all four major types of risk: market, credit, liquidity, and operational. Neglecting operational risk is a significant regulatory failing. Therefore, statements I, II and III are correct.

Under the Securities and Futures (Financial Resources) Rules (FRR), a licensed corporation must calculate its liquid capital by subtracting its ranking liabilities from its liquid assets. Ranking liabilities encompass all liabilities of the corporation with certain specific exceptions.

Statement I is correct. A provision for a contingent liability, such as a potential legal claim that is probable and can be reasonably estimated, must be included as a ranking liability. This reflects a potential future outflow of resources.

Statement II is correct. A bank overdraft is a form of short-term borrowing and represents a clear liability of the firm. It must be included in the calculation of ranking liabilities.

Statement III is incorrect. The FRR specifically excludes from ranking liabilities any amount payable to a client provided that it is held in a segregated account established and maintained in accordance with the Securities and Futures (Client Money) Rules. Since the funds are in a segregated trust account, they are not counted as a ranking liability.

Statement IV is correct. Accrued expenses, such as audit fees that have been incurred but not yet paid or invoiced, are considered liabilities of the corporation and must be included in the ranking liabilities calculation. Therefore, statements I, II and IV are correct.

This question assesses the ability to correctly classify different types of entities as Professional Investors (PIs) under the Securities and Futures (Professional Investor) Rules.

Statement I is correct. An insurer authorised under the Insurance Ordinance is explicitly listed as an ‘Institutional Professional Investor’. These entities automatically qualify as PIs without needing to meet any asset or portfolio thresholds.

Statement II is incorrect. For a partnership to qualify as a ‘Corporate Professional Investor’, it must have either a portfolio of not less than HK$8 million or total assets of not less than HK$40 million. A portfolio of HK$7.5 million is below the required HK$8 million threshold.

Statement III is correct. A trust corporation qualifies as a ‘Corporate Professional Investor’ if it is responsible for total assets of not less than HK$40 million. With HK$45 million in assets under its responsibility, this entity meets the criteria.

Statement IV is correct. An individual qualifies as an ‘Individual Professional Investor’ if they have a portfolio of not less than HK$8 million. The definition of ‘portfolio’ includes securities and money (cash deposits), and the rules permit the portfolio to be held jointly with a spouse. A combined portfolio of HK$10 million exceeds the required threshold. Therefore, statements I, III and IV are correct.

The correct answer is that the licensed corporation could face a substantial fine and its officers could face imprisonment. Under the Securities and Futures Ordinance (SFO), a contravention of the Securities and Futures (Client Money) Rules is a criminal offence. The penalties are severe to reflect the importance of protecting client assets. Upon conviction, a licensed corporation or an associated entity is liable to a significant fine, and its responsible officers may face imprisonment. While the SFC has a range of disciplinary powers, the SFO explicitly provides for criminal sanctions for such breaches. A public reprimand and a requirement to enhance internal controls are disciplinary actions the SFC might take, but they do not represent the most severe potential consequence, which is criminal prosecution. Similarly, a temporary license suspension is a disciplinary sanction, not a criminal penalty, and is less severe than potential imprisonment. Levying a fine only on the junior staff member is incorrect because the licensed corporation itself holds the primary responsibility for compliance with the Client Money Rules, and the most significant penalties are directed at the corporation and its senior management.

The correct answer is that the firm must insist on receiving the full initial margin as required by HKFE rules before executing the order. Under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a licensed corporation must exercise diligence, which includes the proper collection of margins. Specifically, when dealing in futures contracts on behalf of a client, the firm, as an HKFE Exchange Participant, must enforce the margin and variation adjustment requirements as if the client were an exchange participant themselves. This means the full initial margin stipulated by the exchange is mandatory and must be collected upfront to mitigate counterparty risk. There is no provision for delaying payment or accepting partial amounts based on a client’s promise. This ensures the financial integrity of the clearing system. Executing the order and allowing a T+2 settlement period for the remaining margin is incorrect. Futures margining is fundamentally different from equity settlement; it is a good-faith deposit required before a position is opened to cover potential losses, not a post-trade settlement obligation. Accepting a corporate guarantee in lieu of the required margin is also incorrect. While a guarantee may offer some secondary recourse, it does not satisfy the HKFE’s requirement for the deposit of actual, liquid collateral to cover the initial margin. Referring the matter to an internal credit committee is inappropriate because the HKFE’s minimum margin requirements are not subject to a firm’s internal credit discretion. A credit committee may assess risks for granting credit above and beyond regulatory minimums, but it cannot waive a mandatory exchange rule.

This question assesses the understanding of regulatory requirements for electronic communications, specifically those sent on a non-interactive, broadcast basis. Statement I is correct because any communication promoting a specific financial product to multiple recipients is considered an advertisement under the SFC’s purview. As such, it must comply with the Advertising Guidelines, which mandate that all advertisements be clear, fair, and not misleading. Statement II is correct because a core principle of the Code of Conduct is the suitability requirement. When a licensed person makes a recommendation, they must have a reasonable basis to believe it is suitable for the client. Broadcasting an identical recommendation to a diverse group fails to account for individual client circumstances, financial situations, and risk tolerance, thus raising significant suitability concerns. Statement III is correct as licensed corporations have a stringent obligation under the Code of Conduct and the Securities and Futures (Keeping of Records) Rules to maintain records of communications related to client orders and advice. If the firm cannot centrally capture, monitor, and retrieve messages sent via a third-party application, it would be in breach of its record-keeping duties. Statement IV is incorrect because sending unsolicited investment recommendations to potential customers falls squarely within the definition of ‘cold calling’. The method of communication (non-interactive broadcast) does not provide an exemption from the general prohibition against cold calling members of the public who are not professional investors or other exempted parties. Therefore, statements I, II and III are correct.

Statement I is correct. According to Schedule 2 of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), a licensed corporation must keep records relating to customer due diligence (CDD) and transactions for a period of at least six years after the end of the business relationship or the date of the transaction, whichever is later. Statement II is correct. The Guideline on Anti-Money Laundering and Counter-Terrorist Financing (GAML) outlines that for customers not physically present for identification, a financial institution must take additional measures to mitigate the higher risk. The measures described, such as obtaining a certified copy of an identity document and independently verifying the address, are appropriate examples of such measures. Statement III is correct. The AMLO explicitly prohibits financial institutions from entering into or continuing a correspondent banking relationship with a shell bank, which is defined as a bank that has no physical presence in the country in which it is incorporated and licensed, and which is unaffiliated with a regulated financial group. Statement IV is incorrect. Section 7 of the AMLO states that where a financial institution commits an offence, any person who was an officer of the institution at the time and who knowingly caused or permitted the contravention also commits an offence. This establishes personal criminal liability for senior management, including Responsible Officers. Therefore, statements I, II and III are correct.

According to paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC, a licensed corporation is required to notify the SFC immediately of any material failure, error or defect in the operation or functioning of its trading, accounting, or other operational systems. The critical 24-hour outage described in statement I clearly constitutes such a material problem. Furthermore, the bankruptcy of a director, as mentioned in statement II, is a significant event that must be reported to the SFC as it pertains to the fitness and properness of the firm’s management. Statement IV describes a suspected material breach of market misconduct provisions under the Securities and Futures Ordinance (SFO) by a client, which is also a specific event requiring immediate notification to the SFC. In contrast, statement III describes a minor client complaint that was resolved internally. While firms must have procedures for handling complaints, this specific incident does not trigger a mandatory notification to the SFC as it was not determined or settled through the Financial Dispute Resolution Scheme (FDRS). Therefore, statements I, II and IV are correct.

The correct answer is that the Omnibus Client Account requires a specific instruction for position closing. According to the rules of the HKCC, positions in an Omnibus Client Account are maintained on a gross long and short basis and are considered ‘open’ by default. To close out offsetting positions within this account, the HKCC Participant must actively submit a position adjustment request through the Derivatives Clearing and Settlement System (DCASS). In contrast, positions held in a Market Maker Account are margined on a net basis, and any offsetting positions are netted automatically by the clearing house without requiring a specific instruction from the participant. Similarly, positions in a House Account are also netted automatically. Therefore, the assertion that all accounts require a manual instruction is incorrect, as this specific procedural step is characteristic of the gross-positioning nature of the Omnibus Client Account.

The Securities and Futures (Client Securities) Rules establish specific requirements for how intermediaries must handle client assets to ensure their protection. The rules’ applicability is determined by three key criteria: the location of the assets, the type of securities, and who holds them. Statement I is correct because the shares are listed on a recognised stock market (The Stock Exchange of Hong Kong Limited) and are held in Hong Kong by the intermediary. Statement III is also correct because the assets are interests in a collective investment scheme authorised by the SFC under s.104 of the SFO, and they are held in Hong Kong. Statement II is incorrect because the Client Securities Rules specifically apply only to securities received or held in Hong Kong; assets held overseas, such as in the United States, are excluded from the Rules’ direct protection, although the Code of Conduct requires specific risk disclosures for them. Statement IV is incorrect because the shares belong to a private, unlisted company. The Rules only apply to securities listed on a recognised stock market or interests in an SFC-authorised collective investment scheme. Therefore, statements I and III are correct.

According to paragraph 11.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, an intermediary conducting margined transactions (such as futures contracts) for a client must provide a statement of account no later than the end of the second business day after the event takes place. Statement I is correct because if the position is opened on a Monday, the second business day is Wednesday. Statement II is correct as the Code of Conduct specifies that the statement must include the intermediary’s company name and the client’s name, address, and account number. Statement III is incorrect because the requirement applies to both the opening and closing of each position, not just the closing. Statement IV is incorrect because the Code of Conduct explicitly permits contract notes due for a certain day to be consolidated with the daily statement of that day. Therefore, statements I and II are correct.

This question assesses the understanding of a licensed corporation’s obligations regarding client complaint handling under the SFC Code of Conduct. According to Paragraph 12.3 of the Code of Conduct, a licensed corporation must establish and maintain effective procedures for handling client complaints. Statement I is correct because any expression of dissatisfaction from a client concerning a regulated activity, regardless of the channel it is received through (such as a feedback form), should be identified and treated as a complaint. Statement II is correct as a fundamental part of effective complaint handling is to acknowledge receipt of the complaint promptly to the client. Statement IV is correct because the Code of Conduct requires that complaints are investigated by a person of sufficient authority who is not directly implicated in the complaint, ensuring an independent and impartial review. Statement III is incorrect; while the form may promise confidentiality regarding the client’s personal data and general feedback, this does not absolve the firm of its regulatory duty to investigate a complaint, especially one alleging misconduct. The obligation to investigate potential breaches of regulations supersedes the general context of a feedback survey. Therefore, statements I, II and IV are correct.

According to paragraph 8.4 of the Code of Conduct for Persons Licensed by or Registered with the SFC, when a client exercises their right under a cooling-off mechanism, the licensed person must act promptly. Statement I is correct as the firm must execute the client’s instruction without undue delay. Statement II is also correct; a reasonable handling charge is permissible, but it must have been disclosed to the client at or before the point of sale and must not contain any profit margin for the firm. Statement III is incorrect because the firm must provide the client with the full refund obtained from the product issuer, which includes any sales commission the firm received. The firm cannot retain the commission. Statement IV is incorrect as the firm’s primary duty is to execute the client’s instruction to cancel the transaction promptly. Persuading the client to hold the product, even with good intentions, interferes with the client’s right to exercise the cooling-off option and does not align with the principle of acting in the client’s best interests. Therefore, statements I and II are correct.

The correct answer is that the SFC’s action demonstrates its function to maintain and promote the fairness, efficiency, and orderliness of the securities and futures industry. Section 5 of the Securities and Futures Ordinance (SFO) outlines the SFC’s principal functions. A key function is to ensure the market operates in a fair and orderly manner and to protect the investing public. When a new, potentially complex product emerges, the SFC’s review of its risks, suitability, and disclosure standards is a direct application of this function. This proactive measure aims to prevent market misconduct, ensure transparency, and safeguard investor interests, thereby upholding the integrity of the market as a whole. The other choices describe different, though also important, functions or activities of the SFC. The function to supervise, monitor, and discipline licensed corporations is more focused on the ongoing conduct and compliance of specific intermediaries, rather than a market-wide assessment of a new product type. Overseeing the listing-related activities of the Stock Exchange of Hong Kong is a specific function handled by the Corporate Finance division and is not relevant to a derivative product that may not be listed. Finally, cooperating with and providing assistance to other financial regulators outside Hong Kong relates to cross-border enforcement and information sharing, which is not the primary purpose of the domestic market review described in the scenario.

According to the Securities and Futures (Licensing and Registration) (Information) Rules, when an entity ceases to be an associated entity of a licensed corporation, the licensed corporation must notify the SFC of this change. The notification must include the date on which the change occurred and the circumstances surrounding it. Furthermore, a critical component of this notification, except in cases where the associated entity is an Authorized Financial Institution (AFI), is a confirmation that all client assets that were received or held by that entity have been fully accounted for and properly disposed of. This requirement underscores the SFC’s focus on the protection of client assets, ensuring they are not compromised during corporate restructuring or changes in association. An answer suggesting that only the date and purchaser’s name are needed is incorrect because it is an incomplete submission, lacking the circumstances and the vital client asset confirmation. An answer stating that the new shareholders of the former associated entity must be reported is incorrect because the licensed corporation’s obligation is to report on the cessation of its own association, not the ongoing corporate affairs of a now-unrelated entity. Finally, an answer that misinterprets the AFI exception is incorrect; the client asset confirmation is specifically required for non-AFIs, as AFIs are already subject to prudential supervision by the Hong Kong Monetary Authority.