HKSI Paper 6 English Free Preview Set One

A licensed corporation holding client money in a segregated account has specific obligations regarding when and how that money can be disbursed. The primary principle is that client money should be used for the client’s benefit and in accordance with their instructions or regulatory requirements. Payments to the client, as per their written direction, or under a standing authority are permissible, provided they adhere to ethical and regulatory standards. Specifically, a standing authority cannot be used to make payments to the licensed corporation’s own account (except for meeting normal obligations related to regulated activities) or if the payment would be unconscionable. This is to prevent misuse of client funds and ensure fair dealing. The Securities and Futures Commission (SFC) emphasizes the importance of maintaining the integrity of client assets and preventing conflicts of interest. The term ‘unconscionable’ refers to actions that are so unfair or unjust that they shock the conscience. This provision aims to protect clients from potentially exploitative or abusive practices. Therefore, the licensed corporation must exercise due diligence and ensure that any payment made under a standing authority is both authorized and ethically sound, aligning with the best interests of the client and regulatory expectations. Failing to adhere to these requirements could result in disciplinary action by the SFC, including fines, suspension, or revocation of licenses.

The requirements for client account statements are designed to ensure transparency and provide clients with a clear understanding of their portfolio’s performance and holdings. According to regulatory guidelines in Hong Kong, client statements must include specific information to meet these objectives.

Statement I is correct because the name under which the asset manager operates is crucial for identifying the responsible party managing the assets. Statement II is also correct; the address of the asset manager’s principal place of business allows clients to contact them and verify their location. Statement III is correct as it is essential to identify the client by name, address, and account number to ensure the statement is accurately attributed. Statement IV is correct as the date of preparation provides a reference point for the information contained within the statement. The valuation details, including the quantity, market price, purchase cost, and market value of each security, open positions, money balances, and accounts payable and receivable, are all vital components of a comprehensive client statement. These requirements align with the principles of investor protection and market integrity, as emphasized by the Securities and Futures Commission (SFC) in Hong Kong. Therefore, all the statements are necessary components of a client account statement.

The MPFA guidelines stipulate that constituent funds have restrictions on borrowing. The overall limit is 10% of the market value of the fund. Borrowing is permitted for settlement purposes only in unexpected, temporary situations, and the fund should generally have the funds to settle at the time of entering into a buy investment transaction. Special requirements apply to feeder funds, portfolio management funds, capital preservation funds, and guaranteed funds. Approved pooled investment funds (PIFs) like unit trusts, mutual funds, and insurance policies generally adhere to the same investment requirements as constituent funds. Offering documents for MPF products must be up-to-date, consistent with constitutive documents (as confirmed by the MPFA), and only contain substantiated performance data. Forecasts are prohibited unless a specific investment return rate is guaranteed. These regulations ensure the financial stability and integrity of MPF schemes, protecting the interests of scheme members. The SFC Code on MPF Products provides further details on these requirements, emphasizing transparency and responsible investment practices. These measures aim to mitigate risks associated with borrowing and investment activities within MPF schemes, promoting long-term financial security for participants. The 10% limit is a crucial safeguard against excessive leverage and potential losses.

The scenario describes activities that fall under the definition of stock market manipulation, specifically price rigging, as outlined in Sections 278 and 299 of the Securities and Futures Ordinance (SFO). Let’s analyze each statement:

Statement I is correct because entering into a wash trade to influence the price of securities directly violates the prohibition against activities intended to manipulate market prices. This is a clear example of price rigging.

Statement II is also correct. Engaging in fictitious transactions with the intent to cause fluctuations in the price of securities or futures contracts is explicitly prohibited under the SFO as it artificially distorts the market.

Statement III is incorrect because price rigging, according to the SFO, applies to transactions carried out on a recognized stock market or through an authorized ATS, regardless of whether they occur in Hong Kong or elsewhere. The location of the transaction is relevant if it involves instruments traded on an overseas market, in which case the transaction must occur in Hong Kong to be considered price rigging.

Statement IV is incorrect because price rigging applies to transactions entered on-exchange or via an authorized ATS. Therefore, the correct combination is I & II only.

The Securities and Futures Ordinance (SFO) addresses market misconduct, including false trading and price rigging. Section 274 of the SFO specifically targets wash trades and matched orders, aiming to prevent the creation of a false or misleading appearance of active trading. A wash trade involves the sale and purchase of securities without a change in beneficial ownership, while a matched order involves coordinated buy and sell orders for the same securities at substantially the same price and quantity.

Statement I is correct because the SFO presumes that engaging in wash trades or matched orders constitutes false trading. However, this presumption can be rebutted if the person can demonstrate that the trades were not intended to create a false or misleading appearance of active trading. Statement II is also correct because the SFO explicitly states that this presumption does not apply to off-market transactions, which are transactions conducted through a recognized stock market, authorized ATS, or overseas market but are not required to be recorded or notified to the stock market or trading system. Statement III is incorrect because the definition of a wash trade requires no change in beneficial ownership. Statement IV is incorrect because matched orders involve substantially the same price and quantity, not necessarily identical.

According to the Securities and Futures Ordinance (SFO) and the associated codes and guidelines issued by the Securities and Futures Commission (SFC), intermediaries are required to provide clients with comprehensive information regarding their transactions. This includes details of income credited and charges levied during the month, ensuring transparency in all financial dealings. Furthermore, a list of all relevant contracts entered into by the intermediary with or on behalf of the client during the month is essential for maintaining a clear audit trail and enabling clients to monitor their investment activities effectively. Contract notes, whether individual or consolidated, must contain specific details such as the intermediary’s business name, the client’s name and account number, and other pertinent transaction information. The consolidation of contract notes into a daily statement account is permissible, provided it meets regulatory requirements and does not impede the client’s ability to track their transactions. These requirements aim to protect investors by ensuring they receive timely and accurate information about their investments, fostering trust and confidence in the financial markets. The SFC actively enforces these regulations to maintain market integrity and safeguard investor interests in Hong Kong.

Section 274 of the Securities and Futures Ordinance (SFO) addresses false trading, specifically focusing on wash trades and matched orders. A wash trade involves the sale and purchase of securities where there is no change in beneficial ownership. A matched order occurs when an offer to sell (or buy) securities is met by a corresponding offer to buy (or sell) the same securities, in substantially the same quantity and at substantially the same price, by the offeror or an associate. The SFO presumes that engaging in wash trades or matched orders constitutes false trading, particularly when these activities occur on a recognized stock market or through an authorized automated trading service (ATS), whether in Hong Kong or elsewhere, or in Hong Kong concerning instruments traded on an overseas market. This presumption aims to prevent market manipulation by creating a false or misleading appearance of active trading or influencing the market price. However, this presumption does not apply to off-market transactions, defined as those not required to be recorded or notified to the stock market or trading system, even if conducted through their facilities. To rebut the presumption of false trading, the person involved must demonstrate that the wash trades or matched orders were not intended to create a false or misleading appearance of active trading or to manipulate the market or the price of the securities. The key factor is the intent behind the transactions; if a legitimate purpose can be proven, the presumption of false trading can be overcome.

The SFC’s Fit and Proper Guidelines emphasize several key aspects for individuals seeking to become licensed representatives or responsible officers in Hong Kong’s securities industry. These guidelines, along with the Guidelines on Competence and the Guidelines on Continuous Professional Training (CPT), form a comprehensive framework for assessing and maintaining the suitability of market participants.

Statement I is correct because the Fit and Proper Guidelines explicitly address an applicant’s financial status, including bankruptcy history and outstanding debts. An undischarged bankrupt or someone with a recent history of bankruptcy is unlikely to be deemed fit and proper.

Statement II is also correct. The Fit and Proper Guidelines, in conjunction with the Guidelines on Competence, specify age and competence qualifications. An applicant must be at least 18 years old and meet the prescribed competence standards.

Statement III is incorrect. While the SFC considers the fitness and properness of related persons, such as officers and substantial shareholders, this consideration does not extend to an applicant’s family members. The focus remains on individuals directly involved in the licensed corporation.

Statement IV is incorrect. The guidelines do not specify a maximum age limit for applicants. The emphasis is on competence, capability, and ongoing adherence to regulatory requirements, regardless of age.

Therefore, the correct combination is I & II only.

When establishing cross-border correspondent relationships with related foreign financial institutions, a streamlined approach to due diligence is permissible under specific conditions. The licensed corporation or licensed VAS provider can leverage its group’s AML/CFT program, provided it meets certain criteria. Firstly, the group policy must include continuous monitoring of business relationships and record-keeping practices that are substantially similar to those mandated by the SFC. This ensures ongoing oversight and accountability. Secondly, the group policy must be capable of adequately mitigating higher risk factors associated with cross-border transactions, addressing potential vulnerabilities effectively. Thirdly, the effective implementation of the group policy must be supervised at a group level by a competent authority, ensuring consistent application and oversight. Furthermore, if relying on a group company, the licensed corporation or VAS provider must ensure the group has considered their specific circumstances, business arrangements, and the particular correspondent relationship. Crucially, cross-border relationships are prohibited with financial institutions lacking a physical presence in their authorized location or that are not part of a regulated financial group subject to effective group-wide supervision. This safeguards against dealing with shell corporations or entities lacking proper oversight, mitigating risks associated with illicit financial activities. The obligation to report suspicious transactions rests with the individual who becomes suspicious, and reports should be made to the JFIU without delay.

Section 114 of the Securities and Futures Ordinance (SFO) strictly regulates who can perform ‘regulated functions’ related to regulated activities like asset management. This provision aims to ensure that individuals performing these functions are qualified and accountable, thereby protecting investors and maintaining market integrity. The law requires individuals performing regulated functions to be either licensed representatives or registered with the Hong Kong Monetary Authority (HKMA) and acting for their principal. The definition of a ‘regulated function’ is broad, encompassing any function performed on behalf of a person carrying on a regulated activity as a business, directly related to that activity. However, it specifically excludes routine tasks typically performed by accountants, clerks, or cashiers.

The SFO also addresses the role and responsibilities of substantial shareholders in licensed corporations. Becoming or remaining a substantial shareholder requires prior approval from the Securities and Futures Commission (SFC), highlighting the importance of their influence and potential impact on the corporation’s operations. A substantial shareholder is defined as someone who, alone or with associates, holds more than 10% of the issued shares or voting power of the corporation. This requirement ensures that individuals with significant control over licensed corporations are vetted and deemed fit and proper to hold such positions, further safeguarding the interests of investors and the stability of the financial market. The penalties for contravening Section 114 are substantial, reflecting the seriousness with which unauthorized performance of regulated functions is viewed. These penalties include significant fines and imprisonment, with escalating fines for continuing offenses. This underscores the importance of adhering to the licensing and registration requirements outlined in the SFO.

Passive ETFs listed on the SEHK are subject to specific disclosure requirements to ensure transparency and investor protection. One key requirement is the prompt disclosure of any information that could impact the ETF’s position, prevent false markets, or materially affect market activity or the price of its securities. This disclosure must be made to both the SFC and the ETF holders via a public announcement. Additionally, passive ETFs are required to provide certain trading information on their websites, including the offering document (with the Product Key Facts Statement), recent interim and annual reports, and all public announcements made in Hong Kong, such as notices of trading suspensions or resumptions. The investment limitations applicable to index funds also generally apply to passive ETFs. However, when a passive ETF’s net derivative exposure or securities financing transactions exceed 50% of its total NAV, additional information, as specified in the UT Code, must be made available on the ETF’s website. These measures are designed to provide investors with comprehensive and timely information to make informed investment decisions and maintain market integrity, aligning with the SFC’s guidelines for fund management companies and the requirements for listed securities on the SEHK.

The SFC’s power to appoint an auditor under Section 162 of the Securities and Futures Ordinance (SFO) is triggered by specific circumstances indicating potential non-compliance or misconduct by a licensed corporation. Statement I is correct because failure to comply with the Financial Resources Rules (FRR) is a direct trigger for SFC intervention. Statement II is also correct; failure to comply with prescribed requirements or to submit annual accounts and reports are explicit grounds for the SFC to appoint an auditor. Statement III is correct as well; an auditor’s report indicating non-compliance is a critical signal prompting SFC action. Finally, Statement IV is correct because a written application alleging failure to account for assets or act according to client instructions, if deemed reasonable, also justifies the appointment of an auditor. Therefore, all the listed scenarios can lead the SFC to exercise its power under Section 162 of the SFO to appoint an auditor to investigate the licensed corporation. The appointed auditor has extensive powers, including examining officers and requiring the production of relevant records, to ensure a thorough investigation.

The UT Code sets a standard threshold for deferring redemption requests to manage liquidity. This threshold is generally set at 10% of the total NAV or the total number of units/shares in issue. This provision aims to protect the fund from significant liquidity strains that could arise from a large volume of redemption requests on a single dealing day. However, the UT Code recognizes that a one-size-fits-all approach may not be suitable for all funds, given their diverse investment strategies, asset types, and investor bases. Therefore, the SFC retains the authority to adjust this 10% threshold on a case-by-case basis. This flexibility allows the SFC to consider the specific circumstances of each fund and tailor the threshold to its unique risk profile and liquidity needs. Any variation from the standard 10% threshold must be clearly disclosed in the fund’s offering document. This disclosure ensures that investors are fully informed about the potential for redemption deferrals and the specific circumstances under which they may occur. The disclosure requirement promotes transparency and enables investors to make informed decisions about their investments. The UT Code’s approach balances the need for a consistent regulatory framework with the flexibility to address the specific needs of individual funds, while maintaining transparency for investors.

A trustee/custodian, especially one licensed or registered for Type 13 regulated activity, is subject to stringent financial resource requirements under the Securities and Futures (Financial Resources) Rules. These rules mandate independent audits to ensure compliance with statutory and regulatory standards, safeguarding the financial stability and operational integrity of the trustee/custodian. For entities not licensed for Type 13 activity, a minimum paid-up share capital and non-distributable capital reserves of HK$10 million (or equivalent) are typically required. This requirement may be waived for wholly-owned subsidiaries of substantial financial institutions if the holding company provides a standing commitment to subscribe for additional capital or undertakes not to allow the subsidiary to default, ensuring continuous financial support. The independence requirement between the trustee/custodian and the management company is crucial to prevent conflicts of interest and maintain objectivity in their respective roles. This independence is considered satisfied if both entities share the same holding company, provided they are not subsidiaries of each other and do not have common directors. The independent audit serves as a critical oversight mechanism, verifying that the trustee/custodian adheres to these financial and operational safeguards, thereby protecting the interests of investors and maintaining market confidence. The audit scope includes reviewing capital adequacy, operational procedures, and adherence to regulatory guidelines, providing assurance that the trustee/custodian can fulfill its obligations effectively and responsibly.

The correct answer is ‘All of the above’. All the statements are correct regarding stress testing and liquidity risk management for fund management companies in Hong Kong, aligning with the SFC’s guidelines and circulars. Statement I is correct because management companies are indeed required to perform regular stress testing to evaluate the impact of adverse market conditions and the effectiveness of their action plans and liquidity risk management tools. This is a crucial part of ensuring the fund’s resilience. Statement II is correct as the stress test results should be reviewed by the liquidity risk management committee or senior management to determine if further action is needed. This review ensures that appropriate measures are taken to mitigate potential risks identified by the stress tests. Statement III is correct because proper documentation and record-keeping of these assessments and tests are essential for transparency, accountability, and regulatory compliance. Statement IV is correct because fund managers must consider climate-related risks, including physical and transition risks, in their investment and risk management processes, as well as the potential for liability risks. This is in line with the SFC’s emphasis on integrating climate-related considerations into fund management practices, as outlined in the CRR Circular. These measures collectively ensure robust liquidity risk management and alignment with regulatory expectations.

The offering document for a CIS must contain all information necessary for investors to make an informed judgment about the investment, as per the UT Code. This aligns with statement I. A Product KFS should highlight key information about the product in a clear and concise manner, enabling investors to understand its key features and risks, which supports statement II. The Product KFS should include a warning statement on the first page advising investors not to base their investment decision solely on the KFS, as stated in statement III. Senior management of an advertisement issuer must delegate authority to a competent person to issue advertisements, ensuring compliance with applicable product codes, which aligns with statement IV. Therefore, all four statements are correct, reflecting the comprehensive disclosure and authorization requirements for CISs in Hong Kong under the UT Code and SFC guidelines. These measures are in place to protect investors and ensure transparency in the marketing and operation of CISs.

The question addresses personal investment activities of relevant persons within a Fund Manager’s organization, focusing on ethical conduct and conflict of interest avoidance. Statement I is correct because it reflects the restriction on personal trading around fund transactions or recommendations, aiming to prevent front-running. This aligns with the principle of fair dealing and maintaining investor confidence, as highlighted in the SFC’s Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission. Statement II is correct as cross trades between relevant persons and funds they manage are generally prohibited to avoid potential conflicts of interest and ensure fair treatment of fund investors. This is consistent with regulatory expectations for fund managers to act in the best interests of their clients. Statement III is correct because short selling securities recommended for purchase by the Fund Manager is prohibited. This prevents relevant persons from profiting from a decline in the value of securities they have recommended for purchase, which would create a clear conflict of interest. Statement IV is correct because relevant persons are prohibited from participating in initial public offerings (IPOs) available to funds managed by the Fund Manager or its connected persons. This is to ensure that the fund’s interests are prioritized and that relevant persons do not unfairly benefit from investment opportunities intended for the fund. All these measures are designed to uphold the integrity of the fund management process and protect the interests of investors, as emphasized in the relevant guidelines and regulations.

Licensed corporations in Hong Kong that manage assets, deal in securities or futures, or advise on them, and are permitted to hold client assets, are subject to specific reporting requirements under the Securities and Futures Ordinance and the Financial Resources Rules (FRR). These corporations must submit a monthly declaration statement along with supplementary financial returns to the Securities and Futures Commission (SFC) within three weeks after the end of each reporting period. These financial returns must include a liquid capital calculation, an RLC (Required Liquid Capital) calculation, a summary of bank loans and other credit facilities, and an analysis of client assets. However, corporations licensed for Type 13 regulated activity (providing depositary services for relevant CISs) are exempt from the client asset analysis requirement for their Type 13 activities, but must provide an analysis of CIS property received or held for any authorized CIS. In addition to the monthly reporting, these licensed corporations must also submit a quarterly declaration statement with additional returns within three weeks after the end of March, June, September, and December. These quarterly returns include an analysis of their clientele and an analysis of their proprietary derivative positions. Therefore, statements I, II, and III are correct, while statement IV is incorrect because it conflates monthly and quarterly reporting requirements.

According to the Securities and Futures Ordinance (SFO) and the Keeping of Records Rules, licensed intermediaries in Hong Kong have stringent record-keeping obligations to ensure transparency and accountability. These requirements are designed to facilitate audits and protect client interests.

Statement I is correct because intermediaries must maintain detailed records of all money received and how it was applied, as well as all income received and expenses paid. This ensures a clear financial trail and proper accounting.

Statement II is also correct. Intermediaries are required to keep records of transactions, including particulars of initiators, orders, instructions, trading, settlement, and accounting entries. This creates a full audit trail, allowing regulators and auditors to trace every transaction from its origin to its completion.

Statement III is correct as client agreements and discretionary account agreements must be meticulously documented and retained. This ensures that the terms of the relationship between the intermediary and the client are clearly defined and can be referred to in case of disputes or audits.

Statement IV is also correct. Intermediaries must keep records in a manner that allows for convenient and proper auditing. This includes organizing records logically, ensuring they are easily accessible, and maintaining them in a format that can be readily reviewed by auditors. Furthermore, entries in the records must adhere to generally accepted accounting principles to ensure consistency and accuracy.

Therefore, all the statements are correct, reflecting the comprehensive record-keeping requirements for licensed intermediaries in Hong Kong under the SFO and related regulations.

The Securities and Futures Commission (SFC) in Hong Kong mandates stringent guidelines for advertising Collective Investment Schemes (CISs) to ensure investors are not misled by inaccurate or irrelevant comparisons. Specifically, when using past records of unauthorized CISs in advertising an authorized CIS, several conditions must be met to maintain fairness and transparency. First, this practice is permissible only when the authorized CIS is relatively new, lacking a substantial performance track record of its own (less than six months). This allows investors to have some basis for comparison, given the newness of the authorized CIS. Second, the unauthorized and authorized CISs must have demonstrably similar investment objectives, policies, and strategies. This ensures that the comparison is relevant and that investors are not comparing fundamentally different investment products. Furthermore, the management team overseeing both CISs should be the same, providing consistency in investment approach and decision-making. Finally, the advertisement must clearly state that the performance figures quoted are not from the authorized CIS, disclose any significantly different terms applicable to the unauthorized CIS, and clarify that the unauthorized CIS is neither authorized in nor available to the public in Hong Kong. These disclosures are crucial for preventing investors from assuming that the past performance of the unauthorized CIS is directly indicative of the future performance of the authorized CIS. These regulations are in place to protect investors and maintain the integrity of the financial market in Hong Kong, as outlined in the SFC’s guidelines on advertising CISs.

The removal of a management company is governed by specific provisions to protect the interests of unit holders and maintain the integrity of the fund. Statement I is correct because the management company must retire if the SFC withdraws its approval, ensuring regulatory oversight. Statement II is also correct, as the management company can be removed if it goes into liquidation, becomes bankrupt, or has a receiver appointed, indicating financial instability. Statement III is correct because the trustees or directors can remove the management company for good and sufficient reasons, provided they state in writing that a change is desirable for the holders’ interests. Statement IV is correct because unit holders holding at least 50% of the outstanding units can request the management company’s dismissal. These provisions, outlined in regulatory guidelines and constitutive documents, aim to safeguard investor interests and ensure competent management of the fund. The trustee or directors must also notify the SFC of any decision to remove a management company and appoint a new one as soon as possible, subject to SFC approval, as per regulatory requirements. These measures ensure continuous oversight and accountability in the management of mutual funds, aligning with the principles of investor protection under Hong Kong securities regulations.

The MPFA safeguards MPF scheme assets and liabilities through several mechanisms. These include mandating appropriate trust arrangements to ensure proper management and segregation of assets. Additionally, trustees are required to obtain adequate insurance coverage against specific risks, such as losses resulting from fraud or other causes, providing a financial safety net. The MPFA also establishes compensation fund arrangements under the MPFSO, which offer protection against losses stemming from misconduct by individuals involved in administering MPF schemes. Therefore, statements I, II, and III are correct.

Regarding investment requirements, the SFC’s role is limited to authorizing MPF schemes and constituent funds. The SFC does not dictate specific investment requirements for these MPF products, except for approved pooled investment funds (PIFs), which are authorized unit trusts or mutual funds. Investment requirements for constituent funds are determined by the MPFA, as outlined in Schedule 1 of the Mandatory Provident Fund Schemes (General) Regulation. The SFC Code on MPF Products specifies that if a fund’s name suggests a particular investment focus, at least 70% of its net asset value (NAV) should align with that focus. It also mandates that funds investing in capital preservation, money market, or cash management instruments must not mislead investors into thinking they are equivalent to bank deposits. Therefore, statement IV is incorrect.

The requirements for a PRF (Pooled Retirement Fund) product provider’s investment portfolio and management structure are outlined to ensure investor protection and regulatory compliance. If the PRF’s investment portfolio is a direct investment fund, the product provider must appoint a management company licensed or registered with the SFC to conduct asset management business and currently managing SFC-authorized CIS under the UT Code. If the PRF’s investment portfolio is not a direct investment fund, appointing a management company is voluntary, but if one is appointed, it should be licensed or registered with the SFC or based in a jurisdiction with an inspection regime acceptable to the SFC. Any investment delegate must be duly licensed or registered in Hong Kong or in a jurisdiction with an inspection regime acceptable to the SFC. If the PRF Product Provider is not incorporated or does not have a place of business in Hong Kong, a representative in Hong Kong must be appointed. Therefore, statements I, II, and III are correct, while statement IV is incorrect as it describes a voluntary action, not a mandatory one. The Hong Kong representative’s written undertaking is required to support the application, as well as the principal brochure and constitutive documents of the PRF, sales and advertising materials, and a checklist of compliance with the PRF Code. These measures ensure that PRFs operating in Hong Kong adhere to established standards and regulatory oversight, promoting transparency and safeguarding the interests of investors.

The Securities and Futures Commission (SFC) places significant emphasis on the financial soundness and operational competence of licensed corporations and registered institutions to safeguard investor interests and maintain market integrity. Statement I is correct because adherence to the Securities and Futures (Financial Resources) Rules for licensed corporations and the HKMA’s capital adequacy requirements for registered institutions is a fundamental aspect of demonstrating financial stability. Statement II is also correct; an intermediary facing bankruptcy proceedings or failing to meet a judgment debt raises serious concerns about its financial viability and ability to meet its obligations. Statement III is correct as intermediaries must demonstrate competence in accordance with the SFC’s Guidelines on Competence, conducting regulated activities efficiently and effectively. Statement IV is correct as a proper organizational structure, risk management policies, and internal control systems are crucial elements the SFC considers when assessing a corporation’s competence. Therefore, all the statements accurately reflect the fit and proper guidelines concerning financial status, solvency, competence, and capability as outlined by the SFC. These guidelines are designed to ensure that intermediaries operate with integrity, manage risks effectively, and protect the interests of their clients, contributing to the overall stability and reliability of the financial market.

The SFC’s regulatory approach in Hong Kong encompasses virtual assets that fall under the Securities and Futures Ordinance (SFO) or the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). Statement I is correct because virtual assets representing equity interests, debt, or collective investment schemes (CIS) are considered securities under the SFO. Statement II is also correct as the AMLO covers virtual assets that function as a unit of account, store of economic value, medium of exchange, or provide certain rights, and can be transferred, stored, or traded electronically. Statement III is correct because fund management activities related to virtual assets, whether securities under the SFO or non-securities under the AMLO, are subject to SFC oversight. Statement IV is also correct because the Secretary for Financial Services and the Treasury has the authority to specify digital representations of value as virtual assets or not under the AMLO. Therefore, all statements are correct, reflecting the comprehensive regulatory framework for virtual assets in Hong Kong.

According to Chapter 5 of the SFC Code on MPF Products, offering documents presented to prospective scheme participants or fund holders must include specific information to ensure transparency and informed decision-making. Key among these are details pertaining to the scheme’s constitution, which outlines its legal and structural framework, and comprehensive information about the operators and principals involved in managing the scheme, ensuring accountability. The document must also detail the constituent funds within the scheme, providing insights into their specific objectives and strategies. A critical component is the investment policy and any restrictions placed upon it, giving potential investors a clear understanding of how their funds will be managed and the limitations that apply. It is explicitly stated that performance forecasts are not permitted in these documents, as they can be misleading. Furthermore, copies of material contracts, such as investment management contracts, are essential for transparency. Proposed sales and advertising materials must also be included to ensure investors are aware of how the scheme is being marketed. Finally, copies of the trustee’s written approval for any delegation of investment functions, along with their consent to the exchange of information between the SFC and the MPFA, are vital for demonstrating proper oversight and regulatory compliance. This comprehensive disclosure framework aims to protect investors and maintain the integrity of the MPF system in Hong Kong, aligning with the regulatory objectives outlined in the Securities and Futures Ordinance.

The Securities and Futures Commission (SFC) in Hong Kong mandates stringent disclosure requirements for unlisted structured investment products to ensure investors are adequately informed about the associated risks and complexities. These requirements are outlined in various guidelines and circulars, emphasizing transparency and investor protection. Product providers must furnish comprehensive information regarding the product’s structure, underlying assets, risk factors, potential returns, and associated fees. This includes clear and concise explanations of any embedded derivatives or complex features that could impact the product’s performance. Furthermore, the disclosure documents must highlight any conflicts of interest that may exist between the product provider and the investors. The SFC’s focus on disclosure aims to empower investors to make informed decisions and understand the potential downsides of investing in these products. The disclosure requirements also extend to ongoing reporting, ensuring investors receive regular updates on the product’s performance and any material changes that could affect its value. This continuous flow of information is crucial for maintaining investor confidence and promoting market integrity. Failure to comply with these disclosure requirements can result in regulatory action by the SFC, including fines and other penalties.

The FMCC (Fund Manager Code of Conduct) places significant emphasis on the responsibilities of senior management within asset management firms. Senior management must establish and maintain effective internal control systems to ensure compliance with regulatory requirements and ethical standards (Part I, FMCC). This includes implementing policies and procedures to prevent conflicts of interest, detect and prevent market misconduct, and safeguard client assets. Fund managers are required to act in the best interests of the funds they manage, exercising due care, skill, and diligence (Part II, FMCC). This involves conducting thorough research and analysis, making informed investment decisions, and monitoring portfolio performance. Interactions between asset managers and investors must be transparent and fair, with clear and accurate disclosure of information about investment products and services (Part III, FMCC). This includes providing investors with regular reports on fund performance, fees, and expenses. Asset managers are required to report certain information to the SFC to facilitate its oversight of the asset management industry (Part IV, FMCC). This includes reporting on fund performance, investment strategies, and compliance with regulatory requirements. Therefore, all the statements are correct.

Section 295 of the Securities and Futures Ordinance (SFO) addresses the offense of disclosing information about prohibited transactions, specifically insider dealing. This provision aims to prevent individuals from benefiting from or facilitating insider dealing activities by disclosing information that could lead others to engage in such prohibited conduct. The rationale behind this provision is to maintain market integrity and prevent unfair advantages derived from non-public, price-sensitive information. The SFO prohibits disclosing information if the person knows or has reasonable cause to believe that the disclosure would likely result in another person dealing in relevant listed securities or their derivatives, or procuring another person to deal, and that the dealing would constitute insider dealing. The provision covers a broad range of scenarios, including direct and indirect disclosures, and applies to individuals who possess inside information and are aware of the potential consequences of their disclosure. The severity of the penalties reflects the seriousness of the offense, aiming to deter individuals from engaging in activities that undermine market fairness and investor confidence. The provision is crucial for upholding the principles of equal access to information and preventing market manipulation through the dissemination of privileged information.

Cross trades, while potentially beneficial for efficiency, present inherent conflicts of interest. To mitigate these risks and ensure fair treatment of all clients, stringent conditions must be met. Firstly, the trades must demonstrably be in the best interests of both clients involved and align with their respective investment objectives and restrictions. This necessitates a thorough assessment of each client’s portfolio and investment goals to confirm that the cross trade serves their individual needs. Secondly, the trades must be executed at arm’s length, meaning that they are conducted as if between independent parties, without any undue influence or preferential treatment. This requires determining the current market value of the securities being traded and executing the transaction at that price. Finally, the commission rates charged for the cross trades must not exceed customary institutional rates, preventing the fund manager from profiting excessively from the transaction at the expense of the clients. These conditions are designed to ensure that cross trades are conducted fairly, transparently, and in the best interests of all clients involved, in accordance with regulatory guidelines and ethical standards. The Securities and Futures Commission (SFC) emphasizes the importance of fund managers acting with utmost care and diligence when engaging in cross trades to avoid any potential conflicts of interest and to protect the interests of their clients.