The SFC’s Code on Real Estate Investment Trusts (REIT Code) sets out specific investment limitations for authorised REITs. Statement I is incorrect because the primary objective of a REIT is to invest in and manage income-generating real estate. Investing in vacant land purely for long-term capital appreciation, without a clear development plan, does not align with this core principle of generating recurrent rental income for unitholders. Statement II is incorrect as a REIT’s principal investment should be in real estate, not in a portfolio of financial instruments like mortgage-backed securities. While some financial instruments are permitted for hedging or liquidity management, a 15% allocation to such securities as a core investment is generally not permissible. Statement III is correct. The REIT Code allows for property development and related activities, provided that the total investment in such activities does not exceed 10% of the REIT’s Gross Asset Value (GAV). An investment constituting 8% of GAV falls within this permitted limit. Statement IV is also correct. A REIT is permitted to invest in securities issued by other property-related companies, including other listed REITs, subject to certain concentration limits. A small holding of 3% of GAV would typically be considered a permissible investment. Therefore, statements III and IV are correct.

The correct answer is that the arrangement is permissible because while the trustee and management company must be independent of each other, they are permitted to be owned by the same parent company. The SFC’s Code on Unit Trusts and Mutual Funds mandates that the trustee (for a unit trust) or custodian (for a mutual fund corporation) must be independent of the management company. This rule is crucial for investor protection, as it ensures that the entity safeguarding the scheme’s assets is separate from the entity making the investment decisions, preventing potential conflicts of interest. However, the Code provides a specific exception: this independence requirement does not prevent the trustee and the management company from being part of the same group or having a common holding company. Therefore, the scenario described, where both entities are wholly-owned subsidiaries of the same parent, is compliant with the regulations. The assertion that the arrangement is impermissible because of the common control structure is incorrect as it ignores this specific exception. Requiring additional measures like information barriers or a third-party sub-custodian, while potentially good governance, are not explicit conditions stipulated by the Code for this particular structural allowance.

The correct answer is that the fund manager should use the fair value, determined by referencing recent third-party transactions in similar investments or using appraisals from qualified professionals. According to the Fund Manager Code of Conduct (FMCC), unlisted or unquoted securities that are not actively traded should be valued based on their fair value. This principle requires using objective, verifiable inputs. The code specifically suggests methods such as referencing comparable recent third-party transactions, obtaining appraisals from suitably qualified experts (which may need to be cross-checked), or using other general information from independent sources. Relying on the initial acquisition cost adjusted by internal assessments is incorrect because it is not a fair value measurement and lacks the required objectivity and independence. Using the last known transaction price is insufficient if the transaction is not recent or comparable, as it may not reflect the current market value. Finally, while the valuation frequency must be appropriate for the fund’s dealing frequency, this does not dictate the valuation methodology; a standardized industry benchmark is often inappropriate for unique, illiquid startup investments, which require a more specific fair value assessment.

This question assesses the understanding of the distinct roles and regulatory responsibilities of key service providers in a Hong Kong collective investment scheme (CIS), specifically a unit trust. According to the SFC’s Code on Unit Trusts and Mutual Funds, there must be a clear separation of functions to protect investors’ assets.

Statement I is incorrect. A fundamental principle of investor protection is the segregation of assets. The fund management company manages the investment portfolio but does not hold the scheme’s assets. The assets must be entrusted to an independent trustee or custodian to safeguard them from the fund manager’s insolvency or misuse.

Statement II is correct. The trustee has a fiduciary duty to act in the best interests of the unitholders. This includes ensuring the fund is managed in accordance with the trust deed and overseeing the activities of the fund management company to protect the rights of the investors.

Statement III is correct. The primary role of a custodian is the safekeeping of the fund’s assets. This function ensures that the assets are properly accounted for and held separately from the assets of the fund manager and the trustee/custodian itself, which is a critical control.

Statement IV is incorrect. While the fund manager (as the promoter) proposes the trustee, the trustee must be independent of the fund manager and acceptable to the SFC. The appointment is a critical part of the fund’s authorization process and is governed by the requirements within the Code on Unit Trusts and Mutual Funds, not solely at the discretion of the fund manager. Therefore, statements II and III are correct.

Statement I is correct. The Weapons of Mass Destruction (Control of Provision of Services) Ordinance (WMD(CPS)O) prohibits any person, including a licensed corporation, from providing services where they have reasonable grounds to believe or suspect that the services may be connected to the proliferation of WMD. This requires them to cease the activity.

Statement II is correct. The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) mandates that a person must report their knowledge or suspicion that any property is terrorist property to an authorised officer, such as the Joint Financial Intelligence Unit (JFIU). Failure to do so is an offence.

Statement III is correct. The United Nations Sanctions Ordinance (UNSO) is the primary legislation for implementing United Nations Security Council Resolutions (UNSCRs) in Hong Kong. A fundamental AML/CFT control for a licensed corporation is to screen clients, beneficial owners, and relevant parties against the sanctions lists published by the Hong Kong government under this ordinance.

Statement IV is incorrect. The legal threshold for reporting under UNATMO is ‘knowledge or suspicion’. Waiting for ‘conclusive proof’ would defeat the purpose of the legislation and would likely constitute a failure to report in a timely manner. The ordinance provides legal protection (safe harbour) for disclosures made in good faith, which overrides duties of client confidentiality in this specific context. Therefore, statements I, II and III are correct.

The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission requires intermediaries to provide clients with a contract note for each transaction. However, to enhance efficiency, the Code provides specific alternatives for transactions executed on the same day. The correct answer is that the intermediary may either issue a single consolidated contract note covering all transactions from that day or incorporate the details of all those transactions into the daily statement of account. This is permitted provided the client has not instructed otherwise. The option stating that five separate contract notes are mandatory is incorrect because the rules explicitly allow for consolidation to reduce paperwork. The suggestion to consolidate transactions into a weekly contract note is incorrect because the provision for consolidation is strictly limited to contracts entered into on the same business day. Finally, the idea that a monthly statement alone is sufficient is wrong because it confuses the requirement for a periodic summary statement with the separate, more immediate requirement to confirm individual transactions via a contract note or its daily consolidated equivalent.

The correct answer is that the holding company must provide an undertaking that it will not allow the subsidiary to default and will not dispose of its shares in the subsidiary without prior SFC approval. According to the SFC’s Code on Unit Trusts and Mutual Funds, a trustee/custodian that is not licensed for Type 13 regulated activity must maintain minimum paid-up share capital and non-distributable capital reserves of HK$10 million. However, a waiver may be granted if the trustee is a wholly-owned subsidiary of a substantial financial institution. To obtain this waiver, the holding company must provide one of two specific commitments to the SFC. One is the undertaking described in the correct answer. The other is a standing commitment to subscribe for sufficient additional capital if required by the SFC. A declaration regarding common directors relates to the separate requirement for independence between the trustee and the management company, not the financial resources waiver. Compliance with the Securities and Futures (Financial Resources) Rules would be required if the entity were licensed for a regulated activity, but the scenario states it is not. A general letter of comfort is not specific enough to meet the SFC’s requirements for a formal undertaking.

According to paragraph 8.7 of the SFC’s Code on Unit Trusts and Mutual Funds (UT Code), the SFC imposes specific requirements on the management company of a hedge fund seeking authorization. Statement I is correct as the management company must have at least two key personnel, each with a minimum of five years of general experience in the hedge fund industry. Statement II is also correct, as it specifies a crucial detail of this requirement: of those five years, at least two must have been spent managing the same hedge fund strategy as the proposed fund. Statement III is incorrect; the requirement for a specific duration of experience applies to the key personnel, not to the management company as a whole having a track record of a certain length. Statement IV is also incorrect. While the management company must have adequate and appropriate risk management and internal control systems, the UT Code does not prescribe a mandatory appointment of an external, SFC-approved risk management firm. The systems are assessed on their own merit. Therefore, statements I and II are correct.

Under Section 129 of the Securities and Futures Ordinance (SFO), the SFC must be satisfied that a person is fit and proper to be licensed. This assessment covers several key areas. Statement I is relevant because a past bankruptcy, even if discharged, pertains to the applicant’s financial status, integrity, and reliability. The SFC would review the circumstances leading to the bankruptcy and the applicant’s conduct since the discharge. Statement III is directly relevant to the applicant’s ability to carry on the regulated activity competently; passing the prescribed local regulatory examinations is a fundamental requirement to demonstrate competence in the Hong Kong regulatory environment. Statement IV is also relevant as it relates to the applicant’s reputation and character. While a professional disagreement is not an allegation of misconduct, the SFC would still consider the nature of the reference as part of its holistic assessment. In contrast, Statement II, a minor traffic violation not involving dishonesty or a criminal conviction, is generally not considered material to an individual’s fitness and properness for licensing purposes. Therefore, statements I, III and IV are correct.

Statement I is correct. The SFC’s Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products requires that a Product Key Facts Statement (KFS) must contain a warning statement on its first page. This warning explicitly states that investors should not make an investment decision based solely on the KFS and should read the full offering document.

Statement II is correct. This reflects the fundamental principle of disclosure under the Code on Unit Trusts and Mutual Funds (UT Code). The offering document must be comprehensive and provide all necessary information for an investor to be able to make a well-informed judgement about the investment, its features, and its risks.

Statement III is incorrect. While senior management is ultimately responsible, the regulations allow them to delegate the authority for issuing advertisements to a competent person. This designated person is then responsible for ensuring that all advertisements comply with the applicable product codes and advertising guidelines. The rule does not mandate personal approval of every single advertisement by senior management.

Statement IV is incorrect. The Securities and Futures Ordinance (SFO) provides two main, distinct pathways for a CIS to be offered to the public in Hong Kong: it must be either (i) authorised by the SFC, or (ii) structured as a company and listed on the Stock Exchange of Hong Kong (SEHK). The statement incorrectly suggests a combined requirement (‘and’) rather than alternative options (‘or’). While some products like ETFs may be both authorised and listed, it is not a universal requirement. Therefore, statements I and II are correct.

According to Paragraph 15 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, certain requirements may be waived when dealing with Professional Investors (PIs), provided proper assessment and client consent procedures are followed. Statement I is correct because the requirement to provide information about the licensed person and its employees can be exempted for PIs. Statement II is also correct as the need to establish a client’s financial situation, investment experience, and investment objectives (part of the ‘know your client’ process) can be waived, except in the context of corporate finance advisory. Statement III is incorrect because the exemption from the suitability requirement is not absolute or automatic, especially for solicited transactions in complex products. The intermediary must still act in the client’s best interests and meet specific conditions to rely on this exemption. Statement IV is incorrect because while the requirement for ‘prompt’ confirmation can be waived, the fundamental obligation to provide clients with transaction records, such as contract notes or statements of account, remains. The exemption pertains to the timing, not the complete removal of the obligation to provide such documentation. Therefore, statements I and II are correct.

This question assesses the understanding of senior management’s responsibilities in establishing core operational control policies under the SFC Code of Conduct. Statement I is correct as establishing robust Know-Your-Client (KYC) procedures, including identifying the ultimate beneficial owner, is a fundamental requirement before providing services (Code of Conduct, Paragraph 5.1). Statement II is also correct because the Code of Conduct (Paragraph 7.1) specifically requires intermediaries to have a written authority from the client before operating a discretionary account and to define the terms and conditions clearly. Statement III is incorrect; while senior management must ensure operating systems are adequate, their responsibility is to ensure systems support compliance and proper record-keeping, not to mandate a specific software to achieve a performance outcome like ‘maximum returns,’ which can be misleading. Statement IV is incorrect because setting profit targets is a commercial objective. From a regulatory standpoint, such targets can create conflicts of interest and pressure staff to act against clients’ best interests, undermining the principle of fair treatment. Therefore, statements I and II are correct.

This question assesses understanding of a licensed corporation’s duties regarding information management and compliance under the SFC’s Internal Control Guidelines (ICG). Statement I is correct because maintaining a complete audit trail is a fundamental requirement under the Securities and Futures (Keeping of Records) Rules, allowing regulators and auditors to reconstruct all trading activities. Statement II is correct as the ICG emphasizes the need for controls to ensure the integrity, security, and reliability of all information, including electronic records, to prevent tampering or loss. Statement IV is correct because compliance is an ongoing obligation; management must periodically review and update its systems and procedures to adapt to new technologies and changes in laws and regulations. Statement III is incorrect because while a licensed corporation can outsource functions to a vendor, it cannot delegate its ultimate responsibility for compliance with regulatory requirements. The SFC holds the licensed corporation, not its service providers, accountable for any breaches. Therefore, statements I, II and IV are correct.

This question tests the understanding of the suitability obligation under the SFC Code of Conduct for Persons Licensed by or Registered with the SFC (the ‘Code of Conduct’). According to General Principle 2 (Diligence) and specifically Paragraph 5.2, a licensed person should ensure that any recommendation or solicitation made to a client is reasonably suitable, having regard to the client’s financial situation, investment experience, and investment objectives. Statement I is correct because a significant mismatch between the product’s risk level and the client’s documented risk tolerance is a primary indicator of unsuitability. Statement II is correct as failing to explain the risks and worst-case scenarios means the client cannot make an informed decision, which is a crucial part of the suitability assessment. Statement III is also correct; recommendations must be made in the client’s best interest, not to serve the representative’s own interests, such as meeting sales targets. This would be a breach of General Principle 1 (Honesty, Fairness and Integrity). Statement IV is incorrect because a long-standing client relationship does not negate the firm’s obligation to conduct a suitability assessment for each specific recommendation. In fact, exploiting a long-term relationship of trust could be seen as an aggravating factor in a misconduct case. Therefore, statements I, II and III are correct.

The correct answer is that the fund must immediately notify the SFC, cease all marketing activities in Hong Kong, and stop accepting new subscriptions from Hong Kong investors. Under the regulations governing the Mutual Recognition of Funds (MRF) scheme, if a fund ceases to meet the eligibility requirements of the Host Jurisdiction (in this case, Hong Kong), the management company is obligated to take these specific actions without delay. This is to protect potential new investors and ensure regulatory compliance. While rectifying the breach is important, it is not the first step; the immediate priority is to halt sales and inform the regulator. Notifying only the Home Jurisdiction regulator (CSRC) to handle communication with the SFC is incorrect, as the rules require simultaneous notification to both regulators. Similarly, while informing existing investors and managing redemptions are crucial aspects of fund management, the primary and immediate regulatory obligation is to notify the SFC and cease the offering to the public in the Host Jurisdiction.

Under the Securities and Futures Ordinance (SFO) and the Financial Resources Rules (FRR), an auditor of a licensed corporation has specific reporting obligations. Statement I is correct because any contravention of the FRR, such as a liquid capital deficit, is a reportable matter. Section 157 of the SFO requires an auditor to report such matters to the SFC as soon as reasonably practicable after becoming aware of them. The fact that the deficit was rectified does not negate the reporting obligation. Statement II is correct because holding client money in a non-segregated account, even for a short period, is a direct breach of the Securities and Futures (Client Money) Rules. The auditor is required to provide an opinion on the licensed corporation’s compliance with these rules and must qualify the report to reflect this contravention. Statement III is incorrect. The requirement for an auditor’s opinion on compliance with the Client Securities Rules is qualified by the phrase ‘in so far as applicable’. If a licensed corporation does not hold client securities, it is not required to have systems for their control, and the auditor would note that this part of the opinion is not applicable, rather than reporting it as a deficiency. Statement IV is incorrect. SFO s.157 explicitly states that an auditor must make a written report to the SFC ‘as soon as reasonably practicable’ upon becoming aware of a reportable matter. Delaying this report until the final audit is issued would be a breach of this statutory duty. Therefore, statements I and II are correct.

The correct answer is that the management company must immediately inform the trustee/custodian and the SFC of the error. According to the SFC’s Code on Unit Trusts and Mutual Funds, if a pricing error is 0.5% or more of the Net Asset Value (NAV) per unit, it is considered significant. The primary and immediate obligation for the management company is to report this error to both the trustee/custodian and the Securities and Futures Commission (SFC) without delay. This ensures regulatory oversight and that the subsequent correction and compensation process is handled properly. While recalculating the NAV and compensating investors are necessary subsequent steps, they follow the immediate reporting requirement. Consulting the trustee to determine materiality is incorrect because the 0.6% error has already surpassed the 0.5% threshold, making it automatically material and reportable. Simply issuing a public announcement to correct the price for the future does not fulfill the immediate regulatory duty to report the past error to the authorities.

This question assesses the ability to identify actions that constitute corporate wrongdoing or market misconduct arising from poor corporate governance. Statement I describes a classic case of insider dealing, where a director uses non-public, price-sensitive information for personal gain, which is a criminal offence under the Securities and Futures Ordinance (SFO). Statement II illustrates an abusive connected transaction, where a company acquires an asset from a connected person at an inflated price, harming the interests of the company and its minority shareholders. This is a breach of directors’ fiduciary duties and a major concern under the Listing Rules. Statement III points to potential accounting fraud or misfeasance, where management intentionally misrepresents the company’s financial health, causing losses to investors. This highlights the importance of strong auditing and adherence to high-quality accounting standards. Statement IV, however, describes a pro-rata rights issue, which is a standard and legitimate corporate finance method for raising capital that treats all shareholders equally and is not inherently an example of misconduct. Therefore, statements I, II and III are correct.

Under the Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme, the SFC has set clear requirements for Mainland funds distributed in Hong Kong to ensure investor protection. Statement I is correct because a core principle of the MRF is simultaneous disclosure. Any information, including updated offering documents, must be made available to investors in Hong Kong at the same time as it is released to investors in the Home Jurisdiction (Mainland China). Statement II is also correct as it reflects the principle of fair and equal treatment. Hong Kong investors are entitled to the same level of investor protection, rights, and compensation as their Mainland counterparts. Statement III is incorrect. While the fund’s internal management and operation are governed by its Home Jurisdiction’s regulator (the CSRC), its sale and distribution activities within Hong Kong must comply with Hong Kong’s laws and regulations, which are enforced by the SFC. Statement IV is incorrect because the primary regulatory oversight rests with the Home Jurisdiction’s regulator. Major changes typically require approval from the CSRC first, after which the SFC must be notified. The SFC would not grant pre-approval before the home regulator. Therefore, statements I and II are correct.

Statement I is correct. According to the Securities and Futures (Licensing and Registration) (Information) Rules, a licensed corporation must submit its annual return to the SFC within one month of the anniversary of its licence. As the licence anniversary is 15 May, the deadline is 14 June. The annual fee is payable at the same time as the submission of the annual return. Statement II is incorrect. While the annual return is due within one month of the licence anniversary, the audited financial statements are required to be submitted within four months of the corporation’s financial year-end, as stipulated by the Securities and Futures (Financial Resources) Rules (FRR). Since the financial year-end is 31 December, the audited accounts are due by 30 April. These are two separate submissions with different deadlines. Statement III is correct. The Securities and Futures Ordinance (SFO) specifies that if a licensed person fails to pay the annual fee by the due date, penalty payments are imposed. This starts at 10% of the unpaid fee for the first month of default. Statement IV is incorrect. Paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC imposes an ongoing obligation on licensed corporations to report any material breach or non-compliance to the SFC immediately upon becoming aware of it. Waiting to include such a report in the annual return would constitute a separate breach of this reporting requirement. Therefore, statements I and III are correct.

The Fund Manager Code of Conduct (FMCC) establishes strict principles to manage conflicts of interest arising from personal account dealings by staff. A core principle is that the interests of the funds managed by the firm must always have priority over the personal interests of its employees. The correct action is that the analyst must refrain from executing his personal trade. This is because the FMCC explicitly prohibits a ‘relevant person’ from buying or selling an investment for their personal account on any day when the fund manager has a pending order for a fund in the same investment. The fund’s unexecuted buy order from Tuesday means a pending order exists, directly barring the analyst’s personal trade on Wednesday. While pre-clearance is generally valid for up to five trading days, this validity is conditional and does not override the more specific and critical prohibition against trading concurrently with a pending fund order. Seeking fresh pre-clearance is incorrect because the compliance officer would be bound by the same rule and could not grant permission. Executing the trade at a price no better than the fund’s is also incorrect, as the rule is an outright prohibition on the trade itself, not a condition on the execution price.

The correct answer is that access to a specialized financial data and analytics terminal is a permissible soft dollar arrangement. Under the SFC’s Code on Unit Trusts and Mutual Funds, a management company may retain goods and services (soft dollars) from a broker provided they are of demonstrable benefit to the holders of the Collective Investment Scheme (CIS). A financial data terminal directly aids in research and investment decision-making, thereby benefiting the unitholders by potentially improving fund performance. The other conditions, such as best execution and proper disclosure, must also be met. An arrangement to cover the fund manager’s office leasing costs is unacceptable, as this is a general business overhead of the management company and does not provide a direct benefit to the CIS unitholders. Similarly, using soft dollars for the fund manager’s compliance software subscription is an operational expense that the manager should bear. A direct cash rebate based on commission volume is explicitly prohibited; any cash rebates received must be paid into the assets of the CIS for the benefit of its holders.

This question assesses the understanding of the specific circumstances under which the Securities and Futures Commission (SFC) may exercise its powers to appoint an auditor to investigate a licensed corporation, as stipulated in the Securities and Futures Ordinance (SFO). Statement I is a valid trigger because the SFO allows the SFC to appoint an auditor if it receives a report from the firm’s own auditor stating a failure to comply with any prescribed requirement, such as the Client Money Rules. Statement II is also a valid trigger, as the SFO explicitly provides for this power when the SFC receives a written application from a client, with good reason, alleging that the firm failed to act in accordance with instructions and did not account for resulting losses. Statement III describes a proactive notification of a potential future breach of the Financial Resources Rules (FRR). While the SFC would take this seriously and likely increase supervision, the trigger is typically an actual failure to comply, not an anticipated one. The SFC has discretion, but this is not one of the explicit grounds. Statement IV is incorrect because the SFC’s formal powers, such as appointing an auditor, are based on substantive evidence or formal reports, not on market rumours. A rumour might initiate a preliminary inquiry, but it is not a sufficient legal basis on its own to appoint an auditor under this section. Therefore, statements I and II are correct.

Under the Securities and Futures (Keeping of Records) Rules, licensed corporations, including asset managers, must maintain comprehensive records. Statement I is correct because the rules require records that can trace all movements of client assets (like securities) through the firm’s systems. Statement II is correct as a fundamental requirement is that the records must be sufficient to allow for the preparation of financial statements that give a true and fair view of the firm’s financial affairs. Statement III is incorrect because the rules specify that reconciliations of balances and positions with external parties, such as custodians, must be performed on a monthly basis, not quarterly. Statement IV is correct because the records must be adequate to enable the licensed corporation to readily establish its compliance with the Financial Resources Rules (FRR) at any given time. Therefore, statements I, II and IV are correct.

This question assesses the knowledge of disclosure requirements for SFC-authorized collective investment schemes as stipulated in the Code on Unit Trusts and Mutual Funds. Statement I is correct because the Product Key Facts Statement (KFS) is a mandatory document for public funds. It must be provided to investors at or before the point of sale to help them understand the key features and risks. The SFC requires the KFS to be in both English and Chinese. Statement II is also correct. For investor protection, the offering document must clearly disclose the details of the custody arrangements, including the name, registered office, and place of incorporation of the trustee or custodian responsible for safeguarding the fund’s assets. Statement IV is correct as it is a standard regulatory requirement for offering documents to include a clear warning that encourages potential investors to seek independent professional advice if they are uncertain about the contents of the document. Statement III is incorrect. While the offering document must state where the most recent audited annual and interim reports can be obtained and inspected free of charge, there is no requirement for these reports to be physically bound with or attached to every copy of the offering document distributed. This would be impractical as reports are updated periodically. Therefore, statements I, II and IV are correct.

The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the ‘Code of Conduct’) establishes the primary ethical and conduct standards for all licensed intermediaries in Hong Kong. Statement II is correct because the General Principles, such as acting honestly, fairly, and with due skill, care, and diligence, form the foundation of the Code and apply universally to all regulated activities conducted by a licensed corporation. Statement III is also correct; Schedule 3 of the Code of Conduct sets out specific additional requirements for persons dealing in securities listed or traded on the Stock Exchange of Hong Kong (SEHK), which would apply when the firm executes such trades. Conversely, Statement I is incorrect because the Fund Manager Code of Conduct (FMCC) imposes additional, specific requirements on entities licensed for Type 9 (Asset Management) activities; it supplements the Code of Conduct but does not supersede or replace it. Statement IV is incorrect because while the Code of Conduct allows for certain exemptions or streamlined procedures when dealing with Professional Investors (PIs) (e.g., regarding the suitability assessment), it does not grant a complete exemption from all its provisions. The fundamental principles of the Code always apply. Therefore, statements II and III are correct.

The Securities and Futures Ordinance (SFO) defines ‘securities’ broadly. The classification of a virtual asset depends on its specific features and the rights it confers upon its holder. Statement I describes a digital token representing equity in a corporation, which directly aligns with the definition of a ‘share’ and is therefore a security under the SFO. Statement III describes a digital instrument that creates a debt or liability for the issuer, promising a return to the holder. This falls under the definition of a ‘debenture’ and is also considered a security. In contrast, Statement II describes a cryptocurrency primarily used for payment, which typically lacks the characteristics of a security and would more likely be regulated as a virtual asset under the AMLO. Statement IV describes a utility token, which provides access to a service or platform but does not represent an ownership stake, a debt claim, or an interest in a collective investment scheme. As such, it is not considered a security. Therefore, statements I and III are correct.

This question assesses understanding of the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules concerning asset managers.
Statement I is incorrect. A receipt for client assets must contain full details, which explicitly includes the account into which the assets were deposited, in addition to the names of the intermediary and client, relevant dates, and a description of the assets.
Statement II is correct. Section 11(4) of the Rules stipulates that a monthly statement of account must be provided to clients no later than the end of the tenth business day after the end of the monthly accounting period.
Statement III is incorrect. The requirement to issue a monthly statement is triggered by any of three conditions: (1) any activity during the month, (2) the presence of balances at any time during the month, or (3) an open position at the end of the month. The presence of a cash balance alone necessitates the issuance of a statement.
Statement IV is correct. An asset manager is required to issue a receipt for client assets by no later than the end of the second business day after receiving them. Therefore, statements II and IV are correct.

The correct answer is that the assessment must be approved by senior management and subsequently reviewed at least every two years or when major events trigger a review. According to the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations), a licensed corporation is required to undertake an institutional risk assessment to identify and understand the specific ML/TF risks it faces. This assessment is a critical internal governance document that must be formally approved by the firm’s senior management to ensure top-level oversight and accountability. It is not a static document; it must be kept current. The Guideline mandates a review at least every two years. Additionally, a review should be triggered by major events or developments, such as the introduction of new products, changes in the customer base, or significant operational changes. One incorrect option suggests the assessment must be submitted to the SFC for approval and reviewed annually. This is wrong because the SFC requires the assessment to be performed and documented, but does not approve it directly, and the minimum review period is two years, not one. Another incorrect choice states the assessment only needs to be documented for the JFIU with no mandatory review. This is insufficient as it omits the crucial requirements for senior management approval and the specified review cycle. Finally, the suggestion that an independent external auditor must conduct the assessment and review it every three years is also incorrect; while external assistance is permissible, the responsibility is internal, and the review frequency is at least every two years, not three.

According to the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping) Rules, a licensed corporation must ensure that all records relating to an OTC derivative transaction are kept for a period of at least 5 years after the transaction has been fully terminated or has matured. This requirement ensures that the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have access to historical transaction data for surveillance, investigation, and market stability analysis purposes. The retention period begins only after the transaction is no longer active. A retention period of 2 years after termination is insufficient and does not meet the specific requirements for OTC derivative records, although it might be applicable to other types of financial records. Similarly, while a 7-year retention period is often associated with anti-money laundering records, it is not the prescribed period for this specific rule. The suggestion to keep records for the life of the transaction plus an additional 2 years is incorrect; the rules mandate a fixed 5-year period post-termination, regardless of the transaction’s original duration.