HKSI Paper 6 English Free Preview Set Two Set Two

According to the Securities and Futures Commission (SFC) regulations in Hong Kong, acting as a distributor typically involves dealing in securities, necessitating a Type 1 license. However, exemptions exist. An asset manager with a Type 9 license (asset management) may be exempt from needing a Type 1 license if their distribution activities are solely for managing their own funds. The SFC should be consulted regarding the scope of these activities. If a distributor only introduces business, doesn’t handle client assets, and has no legal liabilities, they can apply to the SFC to become an ‘approved introducing agent,’ which still requires a Type 1 license but with reduced capital requirements. Dealers buying and selling CIS interests for clients need a Type 1 license unless an exemption applies. A Type 9 licensed fund manager marketing funds not under their management requires a Type 1 license and cannot claim the exemption mentioned earlier. An OFC must appoint an investment manager licensed or registered for Type 9 regulated activity. An authorized CIS needs to appoint a depositary, which can be a person licensed or registered for Type 13 regulated activity (providing depositary services for relevant CISs). Therefore, the scenario described in option (a) correctly reflects the licensing requirements and exemptions related to fund distribution in Hong Kong.

The CIS Advertising Guidelines, as stipulated by the SFC, apply broadly to all forms of advertising related to SFC-authorized CISs, regardless of whether the SFC has specifically approved the advertisement under s. 105 of the SFO or if it falls under an exemption. This encompasses distribution materials, display-only materials, and broadcasts. Therefore, statement I is correct. The guidelines aim to ensure that all advertising materials provide accurate and balanced information to investors, mitigating potential misrepresentation under ss. 103 to 108 of the SFO.

Distribution materials, as covered by the CIS Advertising Guidelines, include print media advertisements, brochures, fact sheets, newsletters, and any other regular updates, direct marketing, and “fax on demand” services. These materials are designed to inform potential investors about the CIS and must adhere to the content requirements specified in the guidelines. Hence, statement II is also correct.

Display-only materials such as posters, exhibition panels, and outdoor displays are also subject to the CIS Advertising Guidelines. These materials, while often concise, must still comply with the principles of accuracy and balance to avoid misleading investors. Thus, statement III is correct.

Broadcasts, including radio, television, and cinema advertisements, are also covered by the CIS Advertising Guidelines. These forms of advertising must adhere to the same standards of accuracy and balance as other advertising materials to ensure investors receive reliable information. Therefore, statement IV is correct.

In summary, all the statements (I, II, III, and IV) are correct, as the CIS Advertising Guidelines apply to all forms of advertising related to SFC-authorized CISs.

Section 302 of the Securities and Futures Ordinance (SFO) addresses the offense of making false representations regarding dealings in futures contracts. Specifically, it targets individuals who falsely claim to have engaged in futures transactions on behalf of another person. This provision aims to protect individuals from being misled into believing that their assets or financial interests are being managed or traded in a certain way when, in reality, no such activity has occurred. The core element of this offense is the intentional deception involved in misrepresenting the existence of futures contracts or transactions.

Statement I is correct because it accurately reflects the essence of Section 302, which prohibits falsely representing to someone that you’ve dealt in futures contracts on their behalf. Statement II is also correct; the SFO indeed aims to maintain market integrity and protect investors from fraudulent activities, including false representations about futures dealings. Statement III is incorrect because while the SFC does regulate futures trading, Section 302 is directly concerned with the act of making false representations, not the general regulation of trading activities. Statement IV is also incorrect because the offense under Section 302 is primarily about the false representation itself, not necessarily about causing direct financial loss, although financial loss could be a consequence. Therefore, the correct combination is I & II only.

A direct investment fund, as defined within the context of Pooled Retirement Funds (PRFs) in Hong Kong, operates under specific guidelines to ensure investor protection and fund integrity. According to the UT Code and the Code on Pooled Retirement Funds, a direct investment fund is characterized by the management company’s discretion in making direct investments into various financial products. However, this discretion is not unfettered. The fund must adhere strictly to the provisions outlined in its constitutive documents and comply with the core investment requirements specified in Chapter 7 of the UT Code. These requirements extend to specific rules applicable to money market funds or unlisted index funds and index tracking exchange traded funds, where relevant. A critical aspect of a direct investment fund is its designation as a non-derivative fund, meaning it cannot engage in investments involving derivatives. Furthermore, the regulations impose restrictions on investments in the securities of or lending to parties closely associated with the PRF, such as the Product Provider, management company, guarantor, trustee, or their connected persons. Exceptions are made only when these entities are substantial financial institutions or insurance companies, and the securities are interests in Collective Investment Schemes (CISs) authorized under SFO s. 104(1) or RJSs. These measures aim to prevent conflicts of interest and ensure that investments are made in the best interests of the fund’s participants. The ongoing requirements for PRFs also mandate compliance with documentation standards, including provisions for contents, fee structures, advertising, and termination procedures, mirroring those for CISs under the UT Code. Breaching the PRF Code can lead to serious consequences, including withdrawal of authorization, imposition of restrictive conditions, or denial of new applications.

The question addresses the conditions under which a discretionary account manager may receive and retain cash or money rebates in relation to client transactions under Hong Kong securities regulations. According to these regulations, such rebates are permissible only if specific conditions are met to ensure transparency and protect the client’s interests.

Statement I is correct because the client must provide written consent for the discretionary account manager to receive and retain cash rebates. This ensures that the client is fully aware of and agrees to this arrangement.

Statement II is also correct. The brokerage rates charged must not exceed customary full-service brokerage rates. This prevents the manager from inflating brokerage rates to generate larger rebates, which would be detrimental to the client.

Statement III is correct as well. The rebates and their approximate values must be disclosed to the client. This disclosure ensures transparency and allows the client to understand the financial benefits the manager is receiving from the transactions.

Statement IV is incorrect. While disclosure and consent can be provided in the client agreement, the contract note or statements issued at least twice a year must quantify the rebates received concerning that client. The statement implies that the client agreement alone is sufficient, which is not the case. The rebates must be quantified regularly.

Therefore, the correct combination is I, II & III only.

The principal brochure of an authorized Pooled Retirement Fund (PRF) in Hong Kong must contain comprehensive information to enable prospective participants to make informed decisions. According to the PRF Code and information disclosure templates published on the SFC’s website, the brochure must include specific disclosures. Statement I is correct because the principal brochure must include details about the PRF’s investment objectives and policies, providing participants with a clear understanding of the fund’s investment strategy. Statement II is also correct; the brochure must disclose the risk factors associated with investing in the PRF, enabling participants to assess their risk tolerance. Statement III is correct as the brochure should outline the fees and charges involved, ensuring transparency regarding costs. Statement IV is also correct because information about the PRF Product Provider, including their background and experience, is crucial for participants to evaluate the credibility and expertise of the entity managing the fund. Therefore, all the statements are required to be included in the principal brochure.

The Securities and Futures Ordinance (SFO) defines Professional Investors (PIs) to delineate those investors deemed sophisticated enough to understand and manage investment risks without the full protections afforded to retail investors. Institutional PIs, a subset of PIs, include entities with inherent expertise or regulatory oversight in financial matters. Exchange companies specified in Part III of the SFO are included due to their central role in market operations and regulatory compliance. Licensed corporations and registered institutions, along with their overseas counterparts, are considered Institutional PIs because they are already subject to regulatory scrutiny and possess specialized knowledge. Authorised financial institutions (AFIs) and similar overseas institutions also qualify due to their regulatory oversight and financial expertise. Insurers authorised under the Insurance Ordinance and their overseas counterparts are included because of their risk management expertise and regulatory compliance. Collective Investment Schemes (CISs) authorised in Hong Kong and their operators, along with their overseas counterparts, are considered Institutional PIs due to their professional management and regulatory oversight. Registered schemes under the Mandatory Provident Fund Schemes Ordinance (MPFSO) and Occupational Retirement Schemes Ordinance (ORSO), along with their trustees, service providers, and investment managers, are included due to their fiduciary responsibilities and regulatory oversight. Finally, governments, central banks, and multilateral agencies are considered Institutional PIs due to their inherent financial expertise and stability. Understanding these categories is crucial for determining which investors can access certain investment products and services with reduced regulatory protections, as outlined in the SFO and related guidelines issued by the Securities and Futures Commission (SFC).

The internal product approval process for unlisted structured investment products, as outlined by the Hong Kong Securities and Futures Commission (SFC), emphasizes a multi-faceted approach to ensure investor protection and market integrity. Product providers are required to establish and maintain robust internal controls and procedures for the design, development, and distribution of these complex products. This process includes a thorough assessment of the product’s features, risks, and potential impact on investors. Crucially, the product approval process must involve individuals with the necessary expertise and authority to make informed decisions. Disclosure requirements are paramount, ensuring that investors receive clear, concise, and comprehensive information about the product’s terms, conditions, and associated risks. The SFC’s guidelines also stress the importance of ongoing monitoring and review of approved products to identify and address any emerging risks or issues. This includes regular stress testing and scenario analysis to assess the product’s resilience under different market conditions. Furthermore, product providers must have adequate systems and controls in place to handle investor complaints and resolve disputes effectively. The SFC’s regulatory framework aims to strike a balance between fostering innovation in the structured product market and safeguarding the interests of investors, promoting a fair and transparent investment environment in Hong Kong. The internal product approval process is a critical component of this framework, ensuring that only suitable and well-understood products are offered to the public.

A well-defined investment mandate is crucial for any fund, especially constituent funds within a Mandatory Provident Fund (MPF) scheme in Hong Kong. This mandate acts as a guiding document for the fund manager, ensuring that investment decisions align with the fund’s objectives and regulatory requirements. Several key elements are essential in constructing a comprehensive investment mandate. Firstly, the investment objectives of the fund must be clearly articulated. This includes specifying the desired level of risk and return, as well as the time horizon for achieving these objectives. Secondly, the types of securities and other assets in which the fund will invest must be defined. This could include equities, bonds, cash, or alternative investments, and should be consistent with the fund’s risk profile and investment objectives. Thirdly, the balance between the various kinds of securities and markets should be specified. This involves determining the asset allocation strategy, which outlines the proportion of the fund’s assets that will be allocated to each asset class and market. Fourthly, the risks of the investment strategy and the expected returns of the portfolio must be disclosed. This includes identifying the key risks associated with the fund’s investments, such as market risk, credit risk, and liquidity risk, as well as providing an estimate of the expected returns that the fund is likely to generate. Fifthly, the policy regarding any holdings of financial futures and options contracts should be outlined. This includes specifying the types of derivatives that the fund is permitted to use, as well as the purposes for which they may be used, such as hedging or speculation. Finally, whether the fund will conduct securities lending should be disclosed. This involves lending securities to other investors in exchange for a fee, and can generate additional income for the fund. The investment mandate should be reviewed regularly to ensure that it remains aligned with the fund’s objectives and regulatory requirements. According to the Mandatory Provident Fund Schemes (General) Regulation, constituent funds may only invest in permissible investments as specified in Parts 2 and 3 of Schedule 1.

The scenario describes a cross trade, which occurs when a fund manager executes a trade between two client accounts or between a house account and a client account. According to regulatory guidelines, cross trades between a house account and a client account are permissible only with the prior written consent of the client, ensuring they are fully informed about potential conflicts of interest. The activities must be disclosed to both clients, and the reasons for the cross trade must be documented before the trades are executed. This ensures transparency and fair treatment. Cross trades between staff accounts and client accounts are strictly prohibited. Therefore, the correct combination is I & II only, as cross trades between house and client accounts require prior written consent and disclosure of potential conflicts of interest to the client. The Securities and Futures Commission (SFC) emphasizes the importance of managing conflicts of interest fairly and transparently, as outlined in the Fund Manager Code of Conduct. This includes ensuring that clients are not disadvantaged by cross trades and that the fund manager acts in the best interests of the client. Failing to adhere to these guidelines can result in regulatory action and reputational damage.

Section 125 of the Securities and Futures Ordinance (SFO) mandates that a licensed corporation must appoint a minimum of two responsible officers, with at least one being an executive director. This requirement ensures a sufficient level of oversight and accountability within the organization. Furthermore, every executive director must be approved as a responsible officer, reinforcing the importance of executive involvement in regulated activities. The SFO, under section 118(1)(a)(ii), also stipulates that for each regulated activity, at least one responsible officer must be based in Hong Kong to supervise the business. This local presence ensures accessibility and effective supervision of the regulated activity. While another responsible officer can be based outside Hong Kong, they must be readily contactable and proper internal controls must be in place to ensure the proper discharge of duties. Failing to comply with these requirements without a reasonable excuse constitutes an offence, leading to a fine at level 6 and a further fine of HK$2,000 for each day the offence continues, as per section 4.36(a) and (b). This underscores the SFC’s commitment to maintaining high standards of supervision and compliance within licensed corporations.

Part 5 of the OFC Rules outlines the procedures for shareholder meetings and resolutions. According to these rules, shareholders holding at least 10% of the total voting rights have the right to require the directors to call a general meeting and to require the inclusion of a proposed resolution at the general meeting. The notice period for an ordinary general meeting must be at least 14 days, or longer if specified in the instrument of incorporation. Special notice, requiring a minimum of 28 days’ notice, is necessary for resolutions concerning the removal or appointment of a director or the removal of an auditor, as detailed in Part 6 of the OFC Rules. The instrument of incorporation specifies whether matters require an ordinary resolution (simple majority) or a special resolution (at least 75% majority). These provisions ensure shareholder participation and protect their rights in the governance of the OFC, aligning with the regulatory framework established by the Securities and Futures Commission (SFC) to maintain transparency and accountability in the operation of OFCs in Hong Kong. The framework ensures that shareholders have sufficient opportunity to influence the direction of the OFC through their voting rights and participation in general meetings.

Part 5 of the OFC Rules specifically addresses shareholder meetings and resolutions, outlining the powers and responsibilities of both the directors and the shareholders in calling and conducting these meetings. A key provision within this part is the right granted to shareholders holding at least 10% of the total voting rights to influence the agenda and timing of general meetings. This ensures that a significant minority of shareholders can proactively address concerns or propose resolutions that the directors might not otherwise prioritize. The requirement for directors to call a meeting upon the request of such shareholders safeguards minority interests and promotes corporate governance. The inclusion of proposed resolutions at the general meeting, initiated by shareholders with at least 10% of voting rights, further strengthens shareholder influence. This mechanism allows shareholders to directly raise and vote on matters of importance, fostering transparency and accountability within the OFC. The notice periods for general meetings, as stipulated in the OFC Rules and the instrument of incorporation, are designed to provide shareholders with adequate time to review proposed resolutions and make informed decisions. The distinction between ordinary and special resolutions, requiring different levels of majority support, ensures that significant decisions are subject to greater scrutiny and consensus among shareholders. Special notice requirements for resolutions concerning the removal or appointment of directors or the removal of an auditor further emphasize the importance of these decisions and provide shareholders with additional time to consider the implications. These provisions collectively contribute to a robust framework for shareholder participation and corporate governance within OFCs, aligning with the broader objectives of the Securities and Futures Ordinance (SFO) to protect investor interests and maintain market integrity.

When providing information to prospective participants regarding special funds like capital preservation, money market, cash management, and guaranteed funds, it’s crucial to emphasize the unique characteristics, investment strategies, and the operator’s discretionary powers. This ensures investors understand the fund’s objectives, risk profile, and potential returns. For capital preservation funds, the focus should be on how the fund aims to protect the principal investment while generating modest returns. Money market and cash management funds should highlight their low-risk nature and suitability for short-term investment goals. Guaranteed funds require clear explanations of the guarantee mechanism, the guarantor’s financial strength, and any limitations or conditions attached to the guarantee.

The SFC’s role in reviewing MPF product documentation is limited to instances where the constitutive documents form part of the offering document. Otherwise, the MPFA is primarily responsible for reviewing the constitutive documents of MPF products. Advertising materials for CIS products, including MPF products, must comply with the CIS Advertising Guidelines, ensuring that they are fair, accurate, and not misleading. MPF products, including MPF schemes and PIFs, require registration and approval from both the MPFA and the SFC. While the MPFA focuses on compliance with MPF legislation, the SFC assesses the product from a broader investment perspective. Employer-sponsored schemes, being specific to the employer and its employees, do not require authorization from the SFC as they are not public schemes.

According to the Securities and Futures Ordinance (SFO) and related guidelines, licensed intermediaries in Hong Kong must maintain meticulous records to ensure transparency and facilitate audits. Statement I is correct because intermediaries are required to keep detailed records of all money received, how it was applied, all income received, and expenses paid. This ensures a clear financial trail. Statement II is also correct; intermediaries must maintain a full audit trail for all transactions, including particulars of initiators, orders, instructions, trading, settlement, and accounting entries. This requirement is crucial for regulatory oversight and investor protection. Statement III is correct as well; client agreements and discretionary account agreements must be meticulously recorded to protect client interests and ensure compliance with regulatory requirements. Statement IV is also correct. Intermediaries must keep records in a manner that allows for convenient and proper audits, adhering to generally accepted accounting principles. This ensures that records are easily accessible and understandable for auditors, facilitating efficient regulatory oversight and maintaining market integrity. These requirements are outlined in the Keeping of Records Rules and are essential for maintaining the integrity of Hong Kong’s financial markets.

The scenario describes a licensed person engaging in intragroup NCC OTCD transactions and utilizing substituted compliance by adhering to margin requirements of another jurisdiction deemed comparable by the SFC or HKMA. The key aspect here is understanding the exceptions to margin exchange requirements. Specifically, IM does not need to be exchanged if the licensed person has no counterparty risk. This exception is crucial in intragroup transactions, where the risk might be perceived as lower due to the consolidated nature of the group. However, the absence of counterparty risk must be genuine and demonstrable. The Code of Conduct emphasizes that margin calculations should always reflect the potential future exposure and ensure full coverage of counterparty risk exposures with a high degree of confidence. The notification to the SFC regarding substituted compliance does not automatically exempt the licensed person from all margin requirements; it merely allows adherence to another jurisdiction’s rules if deemed comparable. The licensed person remains responsible for ensuring that the chosen margin requirements adequately address the risks associated with the transactions. The fact that the transactions are intragroup does not automatically eliminate the need for margin, unless there is demonstrably no counterparty risk. The exemption for significant non-financial counterparties using NCC OTCDs predominantly for hedging purposes is not applicable in this scenario, as the counterparty is within the same group.

Statement I is correct because the Keeping of Records Rules mandate that records be kept in either Chinese or English and in a format that is readily accessible and convertible into writing. This ensures that records are easily understandable and can be presented in a tangible form when required. Statement II is also correct. The rules require intermediaries to adopt reasonable procedures to protect against and detect any falsification of records, ensuring the integrity and reliability of the information. Statement III is correct as the general rule stipulates that all records should be kept for a minimum of seven years, unless other legislation specifies different periods for particular records. This ensures that records are available for regulatory review and audit purposes for a sufficient duration. Statement IV is correct because if an intermediary becomes aware of non-compliance with record-keeping requirements, they must notify the SFC in writing within one business day. This prompt notification is crucial for maintaining regulatory oversight and addressing any potential issues swiftly. Therefore, all the statements are correct.

The question explores the role of a depositary in safeguarding investor assets within the Hong Kong regulatory framework. Depositaries play a crucial role in mitigating risks associated with asset management, particularly when assets and management are geographically dispersed. They act as custodians, ensuring the safe-keeping of assets and providing oversight to prevent mismanagement or fraud.

Statement I is correct because a core function of a depositary is indeed to hold assets on behalf of investors, providing a layer of security and segregation of assets from the investment manager. This is in line with the SFC’s objective of protecting investors and minimizing management risks.

Statement II is also correct. Depositaries are responsible for verifying and reconciling asset positions, ensuring that the investment manager’s records align with the actual holdings. This reconciliation process helps to detect discrepancies or irregularities that could indicate mismanagement or fraudulent activity.

Statement III is incorrect. While depositaries provide essential oversight, they do not typically make investment decisions. Their role is primarily custodial and supervisory, focused on safeguarding assets and ensuring compliance with regulations. Investment decisions remain the responsibility of the investment manager.

Statement IV is incorrect. Depositaries are not directly involved in marketing investment products to potential investors. Their focus is on the post-investment phase, ensuring the security and proper administration of assets. Marketing and distribution are typically handled by the investment manager or other authorized parties.

Therefore, the correct combination is I & II only.

The definition of securities under the Securities and Futures Ordinance (SFO) is broad, encompassing various instruments and rights. Statement I is correct because the definition explicitly includes derivatives like options and warrants related to underlying shares. Statement II is also correct, as the Financial Secretary has the power under s. 392 of the SFO to prescribe other interests, rights, or property as securities, expanding the scope beyond the initially defined instruments. Statement III is incorrect because while structured products are included, those subject to public offers authorized under s. 105(1) of the SFO are considered securities only if they don’t fall under the other defined categories (a to f). Statement IV is correct because the definition of securities specifically excludes interests in Collective Investment Schemes (CISs) that are registered MPF schemes under the Mandatory Provident Fund Schemes Ordinance (MPFSO), occupational retirement schemes under the Occupational Retirement Schemes Ordinance (ORSO), or contracts of insurance related to any class of insurance business under the Insurance Ordinance. Therefore, the correct combination is I, II & IV only.

The eligibility criteria for Recognised Mainland Funds under the Mutual Recognition of Funds (MRF) scheme are designed to ensure that only well-established and appropriately sized funds are offered to Hong Kong investors. The requirement that a fund must have been established for more than one year aims to ensure a track record of performance and operational stability. The minimum fund size of RMB200 million (or equivalent) is intended to ensure that the fund has sufficient assets to operate efficiently and effectively. The restriction on investing primarily in the Hong Kong market is to prevent the MRF from being used as a backdoor for Mainland funds to circumvent restrictions on investing in Hong Kong. The 50% cap on Hong Kong investors is designed to maintain the fund’s primary focus on the Mainland market and to prevent excessive concentration of Hong Kong investors. These requirements, as stipulated by the Securities and Futures Commission (SFC) in Hong Kong, must be met both at the time of initial application and on an ongoing basis to maintain authorization. Failure to meet these requirements could result in the fund’s authorization being revoked. The ongoing requirements ensure continuous compliance and investor protection, aligning with the SFC’s regulatory objectives under the Securities and Futures Ordinance.

The Fund Manager Code of Conduct (FMCC) mandates specific disclosures to fund investors when side pockets are utilized. This is to ensure transparency and protect investor interests. Statement I is correct because the FMCC requires disclosure of the arrangements, including any limits on the total assets that can be placed in side pockets. Statement II is also correct, as the FMCC requires disclosure of how the Fund Manager will identify assets suitable for side pockets. Statement III is correct because the FMCC requires disclosure that the redemption lock-up period would be different from ordinary units/shares in the fund. Statement IV is also correct, as the FMCC requires disclosure of whether the side pockets can be transferred to another investment vehicle and if so the circumstances under which that is allowed, and the effect on the fee structure. The fees actually charged in relation to side-pocketed assets should be disclosed from time to time. Furthermore, when an asset is moved into a side pocket, the FMCC requires clear disclosure to fund investors regarding the asset being moved, its valuation at the time of the move, and its ongoing valuation. Therefore, all the statements accurately reflect the disclosure requirements under the FMCC.

The Securities and Futures (Keeping of Records) Rules mandate that licensed corporations maintain comprehensive records of their business activities. This includes, but is not limited to, client transactions, internal control procedures, and financial dealings. The purpose of these rules is to ensure transparency and accountability in the securities and futures market. The records must be kept in a manner that allows for easy retrieval and inspection by the Securities and Futures Commission (SFC). The specific retention period varies depending on the type of record, but generally, records must be kept for at least seven years. This requirement is crucial for regulatory oversight, dispute resolution, and the overall integrity of the market. Failure to comply with these rules can result in disciplinary action by the SFC, including fines, suspension, or revocation of licenses. The rules also specify the format and location in which records must be stored, emphasizing the importance of maintaining accurate and accessible information. Furthermore, the rules require that records be protected from unauthorized access or alteration, ensuring the reliability of the information. The Keeping of Records Rules are a cornerstone of Hong Kong’s regulatory framework for the securities and futures industry, promoting investor protection and market stability. They are directly related to the fit and proper status of intermediaries, as maintaining accurate records is a fundamental aspect of responsible business conduct.

The correct answer is **I, II & IV only**. Let’s break down why:

* **Statement I is correct:** The management company of the Recognised Mainland Fund (or its board of directors if self-managed) *must* have engaged in the internal product approval process as defined by the SFC’s Internal Guidance *before* submitting the application. A written confirmation of compliance is required.

* **Statement II is correct:** The management firm of the Recognised Mainland Fund *is* responsible for completing and submitting the checklist, along with all necessary documentation, to the SFC. This checklist must be signed by an authorized signatory of the management firm.

* **Statement III is incorrect:** While general information about the Recognised Mainland Fund is required, the specific detail of the fund’s historical performance is not explicitly mentioned as a requirement in the provided text. The checklist focuses on the fund’s type and any waivers from usual requirements, not its past performance.

* **Statement IV is correct:** The checklist requires information about the Hong Kong Representative. This is crucial for the SFC to have a local point of contact for the Recognised Mainland Fund. The Hong Kong Representative acts as a liaison between the fund and the SFC, facilitating communication and ensuring compliance with local regulations.

Therefore, statements I, II, and IV accurately reflect the requirements for the application process of Recognised Mainland Funds seeking authorization under the Mutual Recognition of Funds arrangement as reviewed by the SFC.

The OFC Code establishes a robust framework for the operation and regulation of Open-ended Fund Companies (OFCs) in Hong Kong. The seven general principles are designed to ensure the integrity, transparency, and investor protection within these investment vehicles. These principles mandate that key operators act honestly, fairly, and professionally, emphasizing ethical conduct and adherence to high standards. Skill, care, and diligence are paramount, extending to the selection and monitoring of delegates to maintain operational competence. The protection of scheme property through a custodian is crucial for safeguarding investor assets. Conflicts of interest must be avoided or, if unavoidable, managed, minimized, and disclosed to investors, ensuring transparency and fairness. Timely, clear, and effective disclosures are essential for informed decision-making by investors. Compliance with regulatory requirements, cooperation with regulators, and prompt reporting of material breaches are fundamental to maintaining regulatory oversight and accountability. Finally, adherence to the OFC’s instrument of incorporation and offering documents ensures that the OFC operates within its defined scope and objectives. These principles collectively promote investor confidence and the stability of the OFC market. The naming conventions are also important to ensure that the OFC name is not misleading and compliant with the SFO. The SFC’s oversight ensures adherence to these standards, fostering a well-regulated and trustworthy investment environment. The OFC Code, under the Securities and Futures Ordinance (SFO), aims to protect investors and maintain market integrity.

The correct answer is I & II only. Let’s break down why:

Statement I is correct because, according to the SFC’s guidelines on margin requirements for non-centrally cleared OTC derivatives, intragroup transactions, when accounted for and risk-managed on a consolidated basis, are indeed subject to specific considerations. The key here is the consolidated risk management, which allows for a more holistic view of the group’s overall risk exposure. This is in line with the SFC’s aim to ensure that risks are appropriately managed even within related entities.

Statement II is also correct. The concept of ‘substituted compliance’ allows a licensed person to adhere to the margin requirements of another jurisdiction, provided that the SFC or HKMA deems those requirements comparable. This is designed to avoid duplicative or conflicting regulatory burdens when dealing with counterparties in different jurisdictions, promoting efficiency without compromising risk management standards.

Statement III is incorrect because the absence of counterparty risk is a valid reason for *not* exchanging Initial Margin (IM), as per the SFC’s guidelines. The purpose of IM is to mitigate potential losses arising from counterparty default, so if there’s no such risk, the requirement is waived.

Statement IV is incorrect. While it’s true that there are exemptions for significant non-financial counterparties using NCC OTCDs predominantly for hedging, this exemption applies to *both* Initial Margin (IM) and Variation Margin (VM), not just VM. The SFC recognizes that hedging activities reduce overall risk and therefore warrants a lighter regulatory touch in these specific cases. This is outlined in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

The SFC Code on MPF Products mandates specific disclosures in offering documents to ensure prospective scheme participants are well-informed. Core disclosure requirements include information about the scheme’s constitution, the operators and principals involved, the constituent funds available, and the investment policy and restrictions in place. While proposed sales and advertising materials are relevant to marketing the fund, they are not included in the core disclosure requirements of the offering document itself. Similarly, copies of material contracts (like investment management contracts) and trustee approvals for delegation or information exchange are important for the scheme’s operation and regulatory compliance, but they are not part of the core information that must be directly presented to prospective participants in the offering document. Therefore, only statement III is correct. The offering document focuses on the fundamental aspects of the scheme and its investment approach, rather than the operational details or marketing materials. This ensures that participants can make informed decisions based on the essential characteristics of the MPF product, aligning with the objectives of the Securities and Futures Commission (SFC) in protecting investors and maintaining market integrity in Hong Kong.

The UT Code, as outlined in Section II of the Handbook, governs the authorization of CISs, encompassing aspects such as required documentation, minimum operational procedures, and advertising standards. Public OFCs must adhere to both the OFC Code and the UT Code, ensuring comprehensive regulatory compliance. The OFC Code specifies requirements for key operators, including directors, investment managers, and custodians, all of whom must comply with the Handbook. Investment managers must be licensed or registered for Type 9 regulated activity (asset management) and are subject to the FMCC. The custodian requirements under the OFC Code mirror those under the UT Code. The SFC’s codes of conduct and guidelines primarily affect the licensing status of intermediaries and their representatives. Non-compliance may influence the SFC’s decisions regarding authorization, licensing, and registration. Therefore, statements I, II, and III are correct, while statement IV is incorrect as it misrepresents the scope of the UT Code by including REITs, which are governed by the Code on REITs.

The regulations surrounding fair value adjustments, NAV calculation, and error handling are crucial for maintaining investor confidence and ensuring the integrity of fund operations. When a fair value adjustment is necessary due to the absence of a market value, the management company must act in good faith, exercise due skill, care, and diligence, and consult with the trustee/custodian. This collaborative approach ensures that the valuation is reasonable and justifiable. Unquoted shares must be valued regularly by a professional person approved by the trustee/custodian to provide an objective assessment. The offer and redemption prices or NAV must be calculated and made public free of charge on every dealing day through appropriate channels like newspapers, telephone hotlines, and websites, ensuring transparency and accessibility for investors. Pricing errors must be corrected promptly. A threshold of 0.5% or more of the NAV per unit/share triggers specific reporting obligations, including immediate notification to the trustee/custodian and the SFC. Recurring or simultaneous errors that collectively reach the 0.5% threshold also require immediate reporting to the SFC. Compensation rules dictate that losses to the management company should not be compensated, while all losses to the scheme should be compensated. Individual investor losses exceeding HK$100 (or a lesser amount set by the management company) should be compensated in a manner approved by the trustee/custodian. The trustee/custodian must justify any deviation from these compensation rules to the SFC. These measures collectively ensure that funds are managed responsibly and that investors are protected from significant financial losses due to valuation errors.

The guidelines outlined by the HKSI regarding employee trading and related accounts are designed to prevent conflicts of interest and ensure fair treatment of clients. Statement I is correct because employees are indeed required to identify and report all related accounts, including those of minor children and accounts in which they have a beneficial interest, to senior management. This ensures transparency and allows for proper monitoring. Statement II is also correct as employees should generally be required to deal through their employer (the licensed or registered person) or its affiliates. This facilitates oversight and compliance. Statement III is incorrect because while duplicate trade confirmations and statements are important, they are specifically required when employees are allowed to deal through other licensed or registered persons, not universally. Statement IV is correct, as licensed or registered persons should not knowingly have another licensed or registered person’s employee as a client without the written consent of the employee’s principal. This prevents poaching of clients and potential conflicts of interest. Therefore, statements I, II, and IV are correct, while statement III is incorrect.

REITs in Hong Kong are subject to stringent regulations to protect investors and ensure the stability of the market. Investing in vacant land or property development is generally restricted to maintain the income-generating nature of REITs, with exceptions only under specific conditions outlined in paragraphs 7.2 and 7.2A of the Code on REITs. Similarly, engaging in lending activities or using the property of the scheme as security is heavily restricted to prevent undue risk-taking. The use of special purpose vehicles (SPVs) to hold real estate, joint ownership arrangements, minimum holding periods, and borrowing limitations are all designed to ensure prudent management and diversification of risk. Transactions must be at arm’s length and on normal commercial terms, although connected party transactions are permitted under certain conditions, including independent valuation, proper disclosure, and compliance with Chapter 14A of the Listing Rules, as modified by the Code on REITs. The Practice Note on Overseas Investments by SFC-authorised REITs provides guidance on applying the Code on REITs to schemes investing in overseas properties, ensuring consistent regulatory standards regardless of geographical location. These regulations collectively aim to maintain the integrity and stability of REITs, safeguarding investor interests while allowing for reasonable investment flexibility.