The Securities and Futures Commission (SFC) places significant emphasis on the ‘fit and proper’ criteria for individuals seeking to become licensed representatives or responsible officers in Hong Kong’s financial industry. This assessment extends beyond mere qualifications and experience, delving into an individual’s character, integrity, and financial soundness. The Fit and Proper Guidelines, along with the Guidelines on Competence and Continuous Professional Training, provide a framework for evaluating these aspects. The SFC’s scrutiny isn’t limited to the applicant alone; it can also encompass related individuals within the organization, such as officers and substantial shareholders, to ensure a holistic view of the entity’s integrity. A crucial aspect of the ‘fit and proper’ test is financial solvency. An applicant’s history of bankruptcy, involvement in similar proceedings, or failure to meet judgment debts, whether in Hong Kong or elsewhere, raises serious concerns about their ability to manage financial responsibilities and uphold the integrity of the financial markets. Demonstrating a commitment to ethical conduct, compliance with regulatory requirements, and responsible financial management are essential for satisfying the SFC’s ‘fit and proper’ requirements. The onus is on the applicant to provide sufficient evidence and documentation to convince the SFC of their suitability for the role.

The CRA Code mandates that Credit Rating Agencies (CRAs) establish and maintain written procedures for generating credit ratings. These procedures are crucial for ensuring the integrity, transparency, and consistency of the rating process. Statement I is correct because the procedures must detail the rating methodologies employed, ensuring they are rigorous, systematic, and, where feasible, capable of objective validation through historical experience and back-testing. This aligns with the CRA Code’s emphasis on methodological soundness and transparency. Statement II is correct because the procedures should incorporate ongoing monitoring of issued ratings and updates as necessary, unless a rating explicitly indicates no ongoing surveillance. This reflects the CRA’s responsibility to maintain the accuracy and relevance of its ratings over time, as per the CRA Code. Statement III is correct because the procedures need to address the handling of confidential information received from rating targets, ensuring its protection and appropriate use. This is vital for maintaining trust and preventing misuse of sensitive data, as emphasized in the CRA Code. Statement IV is correct because the procedures must outline the steps for communicating new or revised ratings to rating targets before issuance, allowing for feedback and clarification. This promotes fairness and accuracy in the rating process, consistent with the CRA Code’s requirements. Therefore, all statements are correct, and the correct combination is ‘All of the above’.

The core objective of operational controls within a financial intermediary, as mandated by regulatory bodies like the Hong Kong Securities and Futures Commission (SFC), is to establish and maintain robust policies, procedures, and controls over day-to-day business operations. This framework is designed to ensure the intermediary can consistently maintain proper, reliable, and accurate records, which are essential for transparency and accountability. Furthermore, it aims to facilitate adequate and accurate exchanges of information with clients, ensuring they are treated fairly, honestly, and professionally, fostering trust and confidence in the intermediary’s services. Compliance with relevant legal and regulatory requirements is also a paramount objective, safeguarding the intermediary’s operations and reputation. Senior management plays a crucial role in establishing policies and procedures to identify and address potential conflicts of interest, preventing the intermediary or its staff from exploiting confidential price-sensitive information. Additionally, these controls are designed to prevent or detect errors, omissions, fraud, and other unauthorized or improper activities, ensuring the integrity of the intermediary’s operations. Risk management objectives focus on establishing and maintaining effective policies and procedures to ensure the proper management of risks to which the intermediary and its clients are exposed. This includes identifying such risks and providing timely and adequate information to senior management to enable them to take action to contain and manage these risks effectively. These measures collectively contribute to the stability and reliability of the financial system, protecting investors and maintaining market integrity, aligning with the SFC’s regulatory objectives.

Licensed corporations and registered institutions in Hong Kong are subject to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). This ordinance mandates that these entities implement reasonable measures to prevent contraventions of AMLO requirements and mitigate money laundering risks. The Guidance on Anti-Money Laundering and Counter-Terrorist Financing (GAML) provides assistance in complying with these requirements. A breach of the AMLO is a criminal offense, potentially leading to a fine of HK$1 million and imprisonment for up to two years. If fraud is involved, the imprisonment term can extend to seven years. Furthermore, breaches can result in regulatory discipline. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTRPO) criminalizes dealing with property known or suspected to be derived from drug trafficking. It requires individuals who suspect such property to report it to an authorized officer or the JFIU. Failure to disclose is an offense, although a reasonable excuse for the failure can be a defense. Disclosing that a report has been made is also an offense in certain circumstances. The Organized and Serious Crimes Ordinance (OSCO) addresses organized crime, granting the police powers to obtain information and conduct searches. These powers override duties of secrecy and confidentiality. The OSCO also contains provisions similar to those in the DTRPO regarding dealing, disclosure, immunity, and restraint orders.

Senior management requires comprehensive control information to effectively oversee a licensed corporation’s operations and ensure compliance with regulatory standards. According to the SFC’s guidelines on information management, several key areas must be covered in the reports received by senior management. These reports should detail the licensed corporation’s risks, including any identified weaknesses in its systems or processes. This ensures that management is aware of potential vulnerabilities and can take proactive measures to mitigate them. Furthermore, the reports must include identified cases of non-compliance with laws and regulations, providing transparency and accountability regarding adherence to legal requirements. Any deviations from established business objectives should also be highlighted, allowing management to assess performance against strategic goals and make necessary adjustments. The information management system’s design specifications and implementation programme are sufficiently documented and regularly reviewed for adequacy and effectiveness.

Therefore, all the statements (I, II, III, and IV) are crucial for senior management to effectively run the licensed corporation, making ‘All of the above’ the correct combination.

The Securities and Futures Ordinance (SFO) establishes the legal framework for regulating the securities and futures industry in Hong Kong. Credit Rating Agencies (CRAs) fall under this regulatory umbrella due to their significant influence on investment decisions and market stability.

Statement I is correct because the SFO empowers the Securities and Futures Commission (SFC) to oversee and regulate CRAs, ensuring they adhere to specific standards and guidelines. Statement II is also correct; a ‘credit rating’ is defined under the SFO as an opinion regarding the creditworthiness of an entity, security, or financial obligation. This definition is crucial for distinguishing regulated credit ratings from other forms of investment analysis. Statement III is incorrect because while CRAs are regulated, the primary objective is to ensure the quality and transparency of credit ratings, not to guarantee investment returns. Statement IV is correct as providing credit rating services involves issuing credit ratings to the public or a specific group, and this activity is subject to licensing and regulatory oversight by the SFC. Therefore, the correct combination is I, II & IV only.

The question addresses the role of the Securities and Futures Commission (SFC) in Hong Kong in supervising and monitoring licensed corporations, particularly Credit Rating Agencies (CRAs), to ensure compliance with applicable laws and regulations. The SFC’s regulatory supervision includes licensing, ongoing supervision and monitoring, and disciplinary actions.

Statement I is correct because the SFC conducts regular inspections, both on-site and via information requests, to ensure compliance. Statement II is also correct as the SFC emphasizes the importance of maintaining proper documentation for compliance checks. Statement III is correct because the SFC promotes international cooperation by sharing information with regulators in other jurisdictions. Statement IV is correct because CRAs are expected to adhere to compliance manuals and operational procedures tailored to their specific circumstances.

Therefore, all the statements are correct, reflecting the comprehensive approach the SFC takes to regulate and supervise licensed corporations in Hong Kong, particularly those with international operations, ensuring they adhere to both local and relevant international standards.

Paragraph 9.4 of the Code of Conduct mandates that licensed or registered persons must promptly notify clients upon ceasing to carry out a regulated activity. This requirement ensures clients are informed in a timely manner, allowing them to make necessary arrangements regarding their investments and financial affairs. The notification should include details about the cessation of services, alternative options available to the client, and procedures for transferring assets or terminating agreements. This is crucial for maintaining transparency and trust between the licensed person and the client.

Option (b) is incorrect because while providing a final performance report is good practice, it is not the primary requirement upon ceasing business operations. Option (c) is incorrect as offering discounted services to retain clients is irrelevant when the firm is ceasing regulated activities. Option (d) is incorrect because while informing the SFC is a regulatory requirement for the firm, the primary obligation to the client is direct notification of the cessation of services. The SFC’s role is to oversee compliance, but the client’s need for immediate information is paramount.

The HKSI study manual serves as the primary and often sole source of information for examination questions. Candidates are expected to thoroughly understand the material presented in the manual and any subsequent updates released by the HKSI Institute. This ensures that candidates are tested on the most current and relevant regulatory and market information. The HKSI Institute provides updates to reflect changes in applicable laws, rules, regulations, codes, and market practices in Hong Kong. These updates are crucial for candidates to stay informed about the latest developments in the securities and futures industry. Candidates should regularly visit the HKSI Institute website and log on to the HKSI Online Registration and Enrolment System to access the latest version of the E-Study Manual. This proactive approach ensures that they are well-prepared for the examination and have the most up-to-date information. While the securities and futures industry changes rapidly, the HKSI Institute strives to provide timely updates to the study manual. However, if updates on relevant information are not provided, examination questions will only be based on the manual where the information is still current. This approach ensures fairness and accuracy in the examination process. Therefore, statements I, II, and III are correct.

The question addresses conflicts of interest within Credit Rating Agencies (CRAs) and their representatives, a crucial aspect of maintaining market integrity as highlighted by the IOSCO principles and the Code of Conduct for Persons Providing Credit Rating Services (“CRA Code”).

Statement I is correct because representatives owning securities or derivatives of the rated entity creates a direct conflict of interest. Their personal financial gain could influence their rating decisions, compromising objectivity.

Statement II is also correct. Representatives dealing in the securities of an entity they rate presents a similar conflict. Any trading activity could be influenced by, or perceived to be influenced by, inside information or the desire to manipulate the rating for personal profit.

Statement III is correct as well. Representatives participating in fee negotiations with an entity they rate can lead to biased ratings. The desire to secure higher fees might incentivize them to assign more favorable ratings than warranted.

Statement IV is also correct. A CRA assigning a higher rating to an issuer from whom the CRA receives substantial fees is a clear violation of the CRA Code. This practice directly links financial incentives to rating outcomes, undermining the independence and credibility of the rating process. Therefore, all the statements are correct, highlighting various scenarios where conflicts of interest can arise within CRAs and their representatives, potentially leading to improper ratings and market misconduct. These scenarios are addressed in section 3 of Topic 3.

According to the regulatory requirements for Credit Rating Agencies (CRAs) operating in Hong Kong, maintaining readily accessible and convertible records is crucial for transparency and regulatory oversight. The stipulation that records be kept for at least seven years, unless otherwise specified by law or regulations, ensures that the SFC and other relevant authorities can effectively monitor the CRA’s activities over a substantial period. This requirement aligns with international standards aimed at enhancing the integrity and reliability of credit ratings. The appointment of an auditor is another key aspect of regulatory compliance, providing an independent assessment of the CRA’s financial health and adherence to regulatory standards. The obligation to submit financial statements and auditor’s reports to the SFC within four months of the financial year-end is a critical reporting requirement that enables the SFC to promptly identify and address any potential issues. Furthermore, the SFC’s power to appoint an auditor if it has reasonable cause to believe that a CRA has not complied with the FRR or has failed to submit annual accounts and reports underscores the SFC’s commitment to ensuring that CRAs meet their regulatory obligations. These measures collectively contribute to maintaining the stability and integrity of the financial markets in Hong Kong by ensuring that CRAs are subject to appropriate oversight and accountability. The Code of Conduct for Persons Providing Credit Rating Services emphasizes the importance of ethical conduct, transparency, and adherence to regulatory requirements in the credit rating process.

The Chief Executive in Council holds the authority to adjust the amounts specified in Schedule 8 of the relevant ordinance. This adjustment is permissible to reflect the Chief Executive’s assessment of the impact of inflation on the value of the amounts outlined in the Schedule. The adjustment can be made either since the Schedule’s original implementation date or since the date of the Schedule’s most recent amendment. This provision ensures that the fines remain relevant and proportionate to the severity of the offenses, even as the value of money changes over time due to inflation. The Secretary for Justice is authorized to update the text of the Ordinance in the loose-leaf edition to align with the changes made under this section, ensuring consistency and clarity in the published laws. The ordinance also specifies that certain fines, such as those exceeding a maximum amount, daily fines, and fixed penalties under specific ordinances, are excluded from the general provisions regarding fines for offenses. This exclusion ensures that these types of fines are governed by their specific regulations and are not subject to the deemed fine levels outlined in the table. Therefore, statement I is correct, as the Chief Executive in Council can amend Schedule 8 to reflect inflation. Statement II is also correct, as the Secretary for Justice can update the loose-leaf edition to reflect changes. Statement III is incorrect, as the power to amend Schedule 8 lies with the Chief Executive in Council, not the Secretary for Justice. Statement IV is incorrect, as the ordinance specifies which fines are excluded, and this exclusion is not at the discretion of the Secretary for Justice.

The Securities and Futures (Keeping of Records) Rules mandate specific record-keeping requirements for licensed corporations in Hong Kong. Senior management’s role in establishing and maintaining an effective compliance function is paramount, as outlined in the ‘Compliance’ section of the HKSI Paper 4 study guide. This includes ensuring compliance staff have the necessary skills and access to records.

Statement I is correct because senior management is indeed responsible for establishing and maintaining a compliance function independent of operational functions. This independence ensures objectivity in monitoring and enforcing compliance.

Statement II is incorrect because while senior management must ensure compliance staff have access to necessary records, this access is ‘as far as practicable,’ acknowledging potential limitations due to confidentiality or legal restrictions. Absolute, unfettered access isn’t always feasible.

Statement III is correct because establishing comprehensive compliance procedures covering legal, regulatory, and internal control requirements is a key responsibility of senior management. This includes record keeping as per the Securities and Futures (Keeping of Records) Rules.

Statement IV is incorrect because while proper complaints handling procedures are essential, they don’t necessarily need to be handled exclusively by senior management. They can delegate this responsibility, provided the procedures are well-defined and effective.

The correct answer is I & II only.

Statement I is correct because the CRA Code explicitly prohibits compensating or evaluating a representative based on the revenue derived from rated entities they rate or regularly interact with. This is to maintain objectivity in the rating process, as highlighted in section 3.22 of the CRA Code. The CRA’s House Code should reflect this prohibition, and formal reviews of compensation policies should be periodically undertaken.

Statement II is correct because representatives directly involved in the rating process should not initiate or participate in discussions about fees or payments with any entity they rate. This is to prevent any potential bias or conflict of interest that could arise from the representative’s involvement in financial negotiations with the rated entity.

Statement III is incorrect because while representatives should disclose personal relationships that create potential conflicts of interest, the disclosure is made to the CRA’s compliance officer or a designated responsible officer, not directly to the rated entity. This ensures that the CRA can manage the conflict internally and maintain the integrity of the rating process.

Statement IV is incorrect because representatives are prohibited from dealing in securities issued by entities within their primary analytical responsibility, not just those they are currently rating. This prohibition also extends to the representative’s spouse, partner, minor children, and any account controlled by the representative in which the representative has a beneficial interest. Collective investment schemes are excluded from this prohibition.

The Fit and Proper Guidelines issued by the SFC outline the criteria for assessing the suitability of individuals and corporations to be licensed or registered to conduct regulated activities in Hong Kong. These guidelines emphasize the importance of integrity, financial soundness, and competence.

Statement I is correct because the guidelines explicitly state that an applicant should be of good character. This is a fundamental requirement to ensure the integrity of the financial markets.

Statement II is correct because the guidelines require that an applicant has not breached any codes or guidelines promulgated by the SFC or other regulators. Compliance with regulatory standards is crucial for maintaining market confidence.

Statement III is incorrect because while the guidelines consider disciplinary actions by professional associations, they do not automatically disqualify an applicant. The SFC assesses the nature and severity of the disciplinary action.

Statement IV is incorrect because while the guidelines consider past involvement in insolvent corporations, they do not automatically disqualify an applicant. The SFC assesses the nature and extent of the person’s involvement and behavior in the relevant corporation.

Therefore, the correct combination is I & II only.

The Securities and Futures Ordinance (SFO) and the Financial Resources Rules (FRR) mandate specific liquid capital requirements for licensed corporations in Hong Kong. For a corporation holding a Type 10 license (dealing in securities) that does not hold client assets, the minimum required liquid capital (RLC) is the higher of HK$100,000 or 5% of its adjusted liabilities, as stipulated in Section 6 and Schedule 1, Table 2 of the FRR. Section 146 of the SFO and Section 55 of the FRR require a licensed corporation, including a credit rating agency (CRA), to notify the Securities and Futures Commission (SFC) as soon as reasonably practicable if it fails to meet the RLC and paid-up share capital requirements. Furthermore, the corporation must cease conducting regulated business unless the SFC permits it to continue operations. This regulatory framework ensures that licensed corporations maintain sufficient liquid assets to meet their financial obligations and protect investors. The notification requirement ensures transparency and allows the SFC to take timely action to mitigate potential risks to the financial system. Failure to comply with these requirements can result in regulatory sanctions, including suspension or revocation of the license.

The CRA Code mandates that a CRA’s code of conduct, or ‘House Code,’ must be publicly disclosed on the firm’s website, ensuring transparency. This aligns with Part 4 of the CRA Code, which emphasizes the importance of publicly available policies and procedures. Therefore, statement I is correct. The CRA Code also requires CRAs to maintain the confidentiality of information obtained from rated entities and to ensure that such information is not misused, including implementing policies governing staff trading activities, as stated in Part 3 of the CRA Code. Therefore, statement II is correct. The CRA Code emphasizes the consistent use of objective and appropriate methodologies which are properly recorded, and the involvement of representatives with appropriate knowledge and experience. Therefore, statement III is correct. The CRA Code requires the CRA to ensure adequate public disclosure is made of its methodologies, ratings issued and rating updates so that outside parties can understand the ratings, their meaning and how they are arrived at. Therefore, statement IV is correct. The correct combination is ‘All of the above’.

Article 1 of Regulation (EU) No 462/2013 focuses on amending Regulation (EC) No 1060/2009 concerning credit rating agencies (CRAs). A key aspect of this regulation is to ensure the independence of CRAs and avoid conflicts of interest. The EU regulation stipulates that only credit ratings issued under specific conditions can be used for compliance within European Community (EC) member states. These conditions include ratings issued directly under the EU regulation, ratings from countries with equivalent regulatory regimes and operational cooperation agreements, or ratings endorsed by EU-regulated CRAs that meet stringent requirements. The regulation aims to prevent CRAs from rating entities where significant shareholders have overlapping interests, specifically prohibiting ratings when a shareholder holding 10% or more of the CRA’s share capital also holds 10% or more of the rated entity. This measure is designed to mitigate potential bias and ensure the integrity of credit ratings. Furthermore, the EU regulation enhances transparency by requiring CRAs to disclose if any shareholder holding 5% or more of the CRA’s share capital also holds 5% or more of the rated entity. These provisions collectively aim to bolster investor confidence and the reliability of credit ratings within the EU financial system. Hong Kong’s regulatory framework for CRAs is designed to align with EU standards, enabling CRAs operating in Hong Kong to issue ratings serviceable in the EU.

The SFC’s fining powers under the SFO are guided by several key principles. Statement I is correct because the SFC considers the severity and impact of the misconduct when determining the fine amount. This ensures that penalties are proportionate to the harm caused. Statement II is also correct; the SFC assesses the degree of culpability of the person involved, taking into account their intent, knowledge, and level of involvement in the misconduct. Statement III is correct as the SFC considers the need for deterrence, both specific (to prevent the individual from repeating the misconduct) and general (to deter others from similar misconduct). Statement IV is correct because the SFC evaluates the person’s disciplinary record and past compliance history to determine if there is a pattern of misconduct or a lack of commitment to regulatory compliance. All these factors are essential to ensure fairness, proportionality, and effectiveness in the SFC’s enforcement actions, aligning with the objectives of maintaining market integrity and protecting investors as outlined in the SFO.

The Securities and Futures Ordinance (SFO) outlines specific licensing requirements for entities involved in regulated activities within Hong Kong’s financial markets. Understanding the nuances of these requirements is crucial for compliance. Issuers and originators, while instrumental in initiating the credit rating process, are not themselves expressing a credit rating opinion. Their role is to provide information that CRAs use to formulate their ratings. Consequently, they are not subject to Type 10 licensing requirements under the SFO. Users of credit ratings, such as investors, also do not require licensing. Their activity involves utilizing the information provided by CRAs for investment decisions, not expressing a credit rating opinion. Financial intermediaries, such as investment advisors, may refer to credit ratings when advising clients. However, as long as they are not expressing their own credit rating opinion, they are not required to be licensed as Type 10 intermediaries. The focus of Type 10 licensing is on entities that directly express credit rating opinions, ensuring accountability and regulatory oversight of the rating process. The Hong Kong Monetary Authority (HKMA) also plays a role in regulating credit rating services because Authorized Financial Institutions (AFIs) regulated by the HKMA may undertake Type 10 regulated activity, i.e. providing credit rating services.

Section 135 of the Securities and Futures Ordinance (SFO) mandates specific notification requirements for licensed corporations to ensure the Securities and Futures Commission (SFC) remains informed of significant changes or events that could impact their operations or financial stability. This includes, but is not limited to, changes in directors, substantial shareholders, or key personnel, as well as any breaches of laws, regulations, or internal control procedures. The purpose of these notifications is to enable the SFC to proactively assess and mitigate potential risks to investors and the integrity of the market.

Option (a) correctly identifies the core purpose of these notifications: to keep the SFC informed about events that could materially affect the licensed corporation’s operations or financial soundness. This aligns with the SFC’s regulatory objectives of maintaining market stability and protecting investors. Options (b), (c), and (d), while potentially related to the overall compliance framework, do not accurately capture the primary intent behind the Section 135 notification requirements. These requirements are not solely for internal audit purposes, nor are they primarily aimed at facilitating routine inspections or solely for updating contact information, although these may be secondary benefits.

The Securities and Futures Commission (SFC) emphasizes the importance of robust anti-money laundering (AML) policies and procedures within licensed corporations in Hong Kong. According to the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (GAML), senior management bears the ultimate responsibility for ensuring the effectiveness of these measures. This includes regularly reviewing AML policies and procedures through the compliance and audit functions to adapt to evolving risks and regulatory requirements. The appointment of a Money Laundering Reporting Officer (MLRO) is crucial as a central point for reporting suspicious transactions and ensuring compliance with AML regulations. The MLRO acts as a key liaison between the licensed corporation and regulatory authorities, facilitating the reporting of suspicious activities and contributing to the overall integrity of the financial system.

Client Due Diligence (CDD) is a cornerstone of AML efforts, requiring licensed corporations to adopt a risk-based approach. This involves conducting enhanced CDD for higher-risk customers, business relationships, or transactions, while simplified CDD may be appropriate for lower-risk scenarios. Factors such as product/service risk, customer risk (including politically exposed persons and complex ownership structures), and country risk (considering the customer’s nationality, residence, and place of business) should be taken into account when determining the risk profile of customers. The GAML provides guidance on these aspects to ensure that licensed corporations implement effective AML measures tailored to their specific business operations and risk exposures. The requirements are in place to safeguard Hong Kong’s financial system from being used for money laundering or terrorist financing activities, thereby maintaining its reputation as a trusted international financial center.

The scenario describes a situation where a licensed corporation, under the purview of the Securities and Futures Ordinance (SFO) and the SFC’s Code of Conduct, is facing a potential breach of regulatory requirements. According to the Code of Conduct, specifically regarding reporting obligations, a licensed corporation is required to report material breaches or suspected material breaches of any law, rules, regulations, codes, and guidelines administered or issued by the SFC. This obligation extends to breaches by the corporation itself or its employees.

Statement I is correct because the suspected unauthorized trading activities by the employee constitute a potential material breach of the SFO and the SFC’s regulations, necessitating a report to the SFC. Statement II is also correct. The potential misallocation of client funds represents a serious breach of conduct and regulatory requirements, directly impacting clients and the integrity of the market. This must be reported. Statement III is incorrect. While internal investigations are important, they do not negate the immediate requirement to report suspected material breaches to the SFC. Delaying the report until the investigation is concluded would be a violation of the reporting obligations. Statement IV is correct. The senior management’s awareness of the potential breaches triggers their responsibility to ensure the firm adheres to proper procedures and maintains appropriate standards of conduct, as outlined in General Principle 9 of the Code of Conduct. This includes reporting the matter to the SFC. Therefore, the correct combination is I, II & IV only.

The Securities and Futures Ordinance (SFO) mandates specific notification requirements to ensure transparency and regulatory oversight of licensed corporations. Section 135 of the SFO outlines the circumstances under which a licensed corporation must notify the Securities and Futures Commission (SFC) of certain events.

Statement I is correct because any material change in the information provided during the licensing application, such as changes in directors, shareholders, or business activities, must be promptly reported to the SFC. This ensures that the SFC has up-to-date information about the licensed corporation’s operations and management.

Statement II is also correct. Breaches of laws, rules, and regulations, including those related to anti-money laundering, market misconduct, or client asset protection, must be reported to the SFC. This allows the SFC to take appropriate enforcement action and protect investors.

Statement III is incorrect. While changes in capital requirements are important, the SFO and its subsidiary legislation, such as the Securities and Futures (Financial Resources) Rules, specify the exact reporting thresholds and timelines. Not every minor fluctuation needs immediate notification; only those that breach regulatory thresholds.

Statement IV is incorrect. While internal control weaknesses are a concern, the obligation to report them to the SFC typically arises only when these weaknesses are significant and could materially affect the licensed corporation’s ability to comply with regulatory requirements or protect client assets. Routine operational inefficiencies do not necessarily trigger a mandatory notification under Section 135 of the SFO.

Therefore, the correct combination is I & II only.

According to the SFC’s Code of Conduct, licensed or registered persons are obligated to report specific situations to the SFC. These reporting requirements are crucial for maintaining market integrity and protecting investors. The scenarios that necessitate reporting include material breaches or suspected material breaches of any law, rules, regulations, codes, and guidelines administered or issued by the SFC, or the rules of other regulatory authorities. This encompasses breaches by the firm itself or its employees. Additionally, any insolvency situations affecting the firm, its substantial shareholders, or its directors must be reported. Disciplinary actions taken against the firm by regulators or other professional or trade bodies also fall under the reporting requirements. Furthermore, material problems with the firm’s business systems or equipment, as well as any suspected material breach of market misconduct provisions under the SFO by a client, must be reported. These reporting obligations ensure transparency and accountability within the financial industry, enabling the SFC to take timely action to address potential risks and maintain market stability. Senior management plays a vital role in ensuring compliance with these reporting requirements. They are responsible for maintaining appropriate standards of conduct and adherence to proper procedures within the firm. This includes understanding the nature of the business, its internal control systems, risk management policies, and the extent of their own authority and responsibilities. Senior management must also have access to relevant information about the business on a timely basis and necessary advice on their responsibilities.

The Securities and Futures Ordinance (SFO) is the principal ordinance governing the credit rating industry in Hong Kong. It mandates that entities providing credit rating services must be licensed or registered with the Securities and Futures Commission (SFC). Schedule 5 of the SFO defines ‘credit ratings’ as opinions, expressed using a defined ranking system, primarily regarding the creditworthiness of a person other than an individual, debt securities, preferred securities, or an agreement to provide credit. The SFO empowers the SFC to set regulatory rules for licensed or registered persons, including Credit Rating Agencies (CRAs). Compliance with these rules is crucial for maintaining licensed or registered status. While there are no specific exemptions for Type 10 regulated activity (providing credit rating services), certain activities commonly undertaken by CRAs are excluded from the definition of Type 10 regulated activity. Authorised Financial Institutions (AFIs) such as banks, regulated by the Hong Kong Monetary Authority (HKMA), must register with the SFC if they engage in regulated activities. These registered institutions are jointly regulated by the HKMA and the SFC, with the HKMA acting as the front-line supervisor and the SFC as the primary regulator. Part V of the SFO grants the SFC its licensing powers, requiring corporations engaging in regulated activities, including providing credit rating services, to be licensed unless specifically exempt. Therefore, a CRA must obtain a license to provide credit rating services, and its staff and representatives performing a regulated function for the CRA will be required to obtain licenses as its representatives.

The CRA Code emphasizes the importance of maintaining the confidentiality of non-public information related to credit ratings. According to the CRA Code, proposed ratings should be communicated to the rated entity prior to their issue, allowing them an opportunity to provide additional information or address any concerns. This is to ensure fairness and accuracy in the rating process. The CRA Code also recognizes that non-public information about ratings, including the possible future issue or revision of ratings, should be regarded as confidential and therefore not be disclosed on a selective basis, except to the rated entity or its designated agents. However, the CRA’s ratings procedures, methodologies, and assumptions should not be subject to confidential treatment; sufficient information on these matters should be clearly published in an easily comprehensible manner that permits an understanding of how the rating was determined. Furthermore, where sufficient historical data exists, verifiable and quantifiable historical information about the performance of their rating opinions should be published. Therefore, statements I and II are correct, while statements III and IV are incorrect.

Price rigging, as defined under the Securities and Futures Ordinance (SFO) in Hong Kong, specifically targets actions that artificially influence the price of securities. Statement I accurately describes one form of price rigging: entering into a wash trade. A wash trade involves buying and selling the same security to create the illusion of market activity without any actual change in ownership. This can mislead other investors and distort the true market value, contravening sections 278 and 299 of the SFO. Statement II also correctly defines price rigging, focusing on fictitious or artificial transactions or devices. These are actions designed to manipulate the price of securities or futures contracts, again with the intention or recklessness of affecting market prices. This is explicitly prohibited under the SFO to maintain market integrity. Statement III describes stock market manipulation, which is a related but distinct offense. It involves entering into transactions to influence the investment decisions of others, which is also illegal under the SFO. Statement IV, however, describes the disclosure of information about prohibited transactions, which is a separate form of market misconduct under sections 276 and 297 of the SFO. It involves disseminating information about planned market manipulation activities for personal or associated gain. Therefore, only statements I and II directly describe price rigging as defined in the SFO, making ‘I & II only’ the correct combination.

Senior management plays a crucial role in ensuring adherence to the Code of Conduct and establishing proper procedures. According to the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC, senior management is responsible for ensuring that the standards described in the Code of Conduct are adhered to and that proper procedures to ensure this are established and consistently adhered to. This involves creating a culture of compliance, implementing effective internal controls, and providing adequate training to staff. They must actively promote ethical behavior and ensure that any breaches of the Code of Conduct are promptly addressed. The guidelines emphasize the importance of maintaining proper records, ensuring the reliability of financial information, and complying with all applicable laws and regulatory requirements. Senior management’s commitment to these principles is essential for maintaining the integrity of the financial industry and protecting investors. The SFC’s pragmatic approach to breaches considers factors like business size and compensatory measures, highlighting the importance of proactive management and supervision. The ICG identifies key areas of internal controls, including management and supervision, segregation of duties, personnel and training, information management, compliance, audit, operational controls, and risk management, all of which fall under the purview of senior management’s responsibilities.

The correct answer is I & II only.

Statement I is correct because Part XIII of the SFO indeed establishes the Market Misconduct Tribunal (MMT) and defines various forms of market misconduct that fall under its jurisdiction. These forms of misconduct are addressed under a civil standard of proof, meaning the burden of proof is lower than in criminal court.

Statement II is also correct. The SFO does provide a private right of civil action for investors who have suffered losses as a direct result of market misconduct. This allows investors to seek compensation for damages incurred due to the illegal actions of others in the market.

Statement III is incorrect because the SFC’s codes of conduct are relevant, but the primary focus of Part XIII and XIV of the SFO is on statutory offences defined within the ordinance itself, not merely breaches of the SFC’s codes. While breaches of the SFC codes can lead to disciplinary action, market misconduct proceedings under the SFO specifically address the offences defined within the ordinance.

Statement IV is incorrect because while the SFC can issue guidance and interpretations, it does not have the power to amend the SFO itself. Amending the SFO requires legislative action through the Hong Kong Legislative Council.