HKSI Paper 6: 70 Key Concepts and Study Guide
HKSI Paper 6 (Regulation of Asset Management) tests how well you know the regulatory world around fund managers in Hong Kong: the SFO licensing regime, the codes and guidelines that govern conduct, back-office compliance rules, product authorisation, and market misconduct. The paper is 40 multiple-choice questions in 60 minutes, with a fixed pass mark of 70%. Note that this pass mark is the score you need, not the pass rate. As at 14 September 2026, Paper 6 examinations follow the syllabus effective 12 January 2026 and the current study guide, version 2.7 published in November 2025.
This guide walks you through 70 key revision concepts in the official topic order, from the general regulatory framework through back-office compliance, asset management regulations and misconduct. Each concept gives you a short explanation, an original hypothetical example, a common trap, and a self-check question with an answer that tests whether you can apply the idea, not just recite it. Always confirm you are using the current study guide version for your sitting via the HKSI Institute.
Exam format: HKSI examination overview . Latest published pass rate: 61.75% (Jul 2026) . A pass rate is a past result for a group of candidates, not your required score.
How to use these 70 concepts
- Read the concepts topic by topic in the official syllabus order, and after each one close the page and try to restate the distinction in your own words before reading the example.
- Use every hypothetical example as a mini-drill: change one fact (for example, make the client a professional investor) and ask yourself whether your answer would change, and why.
- Attempt each self-check question before reading the answer; the questions are written to test application in new scenarios, so a wrong answer shows you which concept to revisit in your study guide.
The practice examples are original and hypothetical unless explicitly identified as a published case. The concept count is a revision structure; it does not represent official question frequency or topic weighting.
No matching concepts. Try a shorter search term.
Topic 1: General regulatory framework
Who regulates what in Hong Kong asset management, the SFO definitions and licensing regime, the Code of Conduct, internal control and senior management expectations, personal data, AML/CFT, discipline, corporate governance, and the MPFA and IA regimes.
1. 1. The Asset Management Ecosystem
The industry connects investors, ranging from retail individuals to pension and insurance institutions, with products such as funds and segregated mandates, through service providers: managers, trustees and custodians, distributors and administrators. The syllabus expects you to describe these products, services, providers and investors and how the roles fit together.
Example. Hypothetically, Ms Chan buys units in a fund: the manager makes investment decisions, a bank custodian safeguards the assets, and a distributor handles her subscription.
Watch out. Assuming Paper 6 is only about fund managers. Trustee, custodian and distributor duties are squarely examinable.
Self-check: In a hypothetical fund structure, who owes the duty to safeguard scheme property and who owes the duty to make investment decisions?
Answer: The trustee or custodian safeguards scheme property, while the manager is responsible for investment decisions; both roles must exist separately in a properly structured scheme.
2. 2. The Definition of Asset Management under the SFO
Under the SFO, asset management is a regulated activity: managing a portfolio of securities, futures contracts and/or collective investment schemes for another person, in the course of business. Managing only your own property does not amount to the regulated activity of asset management.
Example. Hypothetically, Mr Lee trades only his family company's own share portfolio, so no Type 9 activity arises; once he manages a neighbour's money for a fee, licensing is triggered.
Watch out. Assuming every fund-related job is Type 9. Advising on securities is Type 4 and dealing is Type 1; the activity performed determines the regulated activity.
Self-check: What changes, licensing-wise, when a hypothetical in-house treasury that manages only company money starts managing external clients' portfolios for fees?
Answer: It crosses into managing portfolios for another persons as a business, so it would need to be licensed to carry out the asset management regulated activity.
3. 3. The Broad Meaning of Securities
The SFO defines securities broadly to include shares, debentures, loan stocks, warrants, rights and options over shares, interests in collective investment schemes and many structured products. The breadth matters because it determines which activities are regulated.
Example. Hypothetically, a distributor selling units of an unlisted fund is dealing in securities, because interests in a CIS fall within the definition.
Watch out. Assuming securities means only shares and bonds. Fund interests and structured products are securities too, which pulls their distribution into the licensing regime.
Self-check: In a hypothetical case, are interests in an unlisted CIS securities under the SFO, and what follows for the salesperson?
Answer: Yes, CIS interests are securities, so inducing or dealing in them as a business is a regulated activity requiring appropriate licensing.
4. 4. Futures Contracts and How They Differ from Securities
The SFO separately defines futures contracts, covering standardised contracts to buy or sell assets in the future at set terms, including instruments of that kind dealt with on derivative markets. Keeping securities and futures distinct matters because licensing and conduct rules track the type of instrument.
Example. Hypothetically, a manager running a portfolio of stock index futures is managing futures contracts, so the firm must be licensed to cover that element of its asset management business.
Watch out. Mixing up the two families: some derivatives relate to securities, but the futures contract definition is its own category with its own regulated activities.
Self-check: A hypothetical manager switches from equity portfolios to index futures portfolios. Why is this not a mere product tweak from a regulatory view?
Answer: It changes the regulated activity being carried on, from managing securities to managing futures contracts, so the firm's licence coverage must accommodate futures management.
5. 5. The Four Elements of a Collective Investment Scheme
A CIS exists where arrangements are made about property and all of the following apply: participants have no day-to-day control over the management of the property, the property is managed as a whole by or on behalf of the person running the arrangement, and participants' profits or income are pooled or the property is managed with a view to profit. All elements must be satisfied.
Example. Hypothetically, a promoter pools money from 30 individuals to invest in wine, telling them he manages it: day-to-day control, whole-of-scheme management and pooled profits are all present, so it is a CIS.
Watch out. Testing only one element. A missing element means the arrangement is not a CIS at all, whatever the marketing says.
Self-check: In a hypothetical club where each member personally directs the trading of the pooled account, is it a CIS?
Answer: Likely not, because participants who have day-to-day control over the management of the property defeat one essential CIS element.
6. 6. Arrangements Excluded from the CIS Definition
Even arrangements that look pooled can be expressly excluded by the SFO, for example pure mandate arrangements where property is managed for a single person rather than a collective group, employee share arrangements, and other cases excluded by law. The exclusions exist because some arrangements already carry other protections or are not genuinely collective.
Example. Hypothetically, a manager runs a bespoke portfolio for one wealthy client under a bilateral mandate: however much it resembles fund management, it is excluded from the CIS definition.
Watch out. Concluding that exclusions mean no regulation applies. The manager of a mandate still performs regulated activities; only the CIS label does not apply.
Self-check: A hypothetical promoter argues his single-client mandate is a CIS. What is the flaw?
Answer: A mandate managed solely for one person is an excluded arrangement, so it fails the CIS definition even though the manager may still need licensing for the management activity itself.
7. 7. Part IV: Offers of Investments to the Public
Part IV of the SFO requires that an offer of investments, including interests in CISs, to the Hong Kong public must be authorised by the SFC unless an exemption applies. The regime exists so retail investors receive approved offering documents and ongoing protections.
Example. Hypothetically, a company emails the general public inviting subscriptions to an unauthorised fund; unless an exemption, such as an offer only to professional investors, applies, this breaches Part IV.
Watch out. Treating authorisation as optional marketing hygiene. Unauthorised public offers are a legal breach, not just a code issue.
Self-check: A hypothetical fund is offered only to institutional professional investors. Does Part IV bite in the same way?
Answer: Exemptions, including offers to professional investors, can take the offer outside the public offer authorisation requirement, though the analysis depends on the actual offerees and conduct.
8. 8. Authorised Advertisements and Misrepresentation Controls
The SFC controls advertising: advertisements inviting the public to invest in authorised schemes generally need SFC authorisation before issue, and the SFO prohibits fraudulent, reckless or negligent misrepresentations that induce others to invest. These controls protect the decision-making of retail investors.
Example. Hypothetically, a poster for an authorised fund promises guaranteed returns with no risk; even if the fund itself is authorised, the misleading advertisement and representation raise separate problems.
Watch out. Assuming fund authorisation automatically covers all marketing. Each advertisement usually needs its own approval, and misrepresentation rules apply regardless.
Self-check: A hypothetical manager uses an unapproved advertisement for an authorised fund. Is that acceptable because the fund is authorised?
Answer: No. Authorisation of the scheme does not substitute for advertisement authorisation, and misleading representations can breach the SFO separately.
9. 9. Public Open-Ended Fund Companies and Part IVA
An OFC is a corporate form of fund with variable capital, governed by Part IVA of the SFO and related rules, which set special provisions on incorporation, structure, directors and custodians. A public OFC, offered to the retail public, still needs SFC authorisation of the scheme like any public offer.
Example. Hypothetically, a manager converts an umbrella unit trust into an OFC: the corporate wrapper changes, but offering the OFC to the public still requires SFC authorisation.
Watch out. Assuming the OFC structure itself removes the need for product authorisation. Incorporation as an OFC and authorisation as a scheme are separate steps.
Self-check: Is a hypothetically registered OFC automatically an authorised fund for public offering?
Answer: No. Registration as an OFC creates the corporate fund vehicle, but a public offer of its shares still requires SFC authorisation under the public offer regime.
10. 10. The SFC's Statutory Objectives
The SFC works to statutory objectives: maintaining and promoting the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures markets, promoting public understanding of those markets, protecting the investing public, and reducing systemic risk. These objectives explain why seemingly technical rules exist.
Example. Hypothetically, a misleading fund advertisement is pursued not merely as paperwork failure but as a threat to investor protection and market transparency.
Watch out. Memorising the list without linking objectives to outcomes. Exam scenarios often ask you to identify which objective a measure serves.
Self-check: A hypothetical new rule requires clearer risk disclosure in fund offering documents. Which SFC objectives best explain it?
Answer: Protection of the investing public and promotion of public understanding, supported by transparency and orderly markets.
11. 11. The SFC's Divisions and Committees
The SFC delivers its work through divisions responsible for areas such as licensing intermediaries, authorising investment products, supervising market operations and enforcing breaches, supported by committees and advisory bodies. Knowing roughly which arm does what helps you read regulatory news and exam scenarios correctly.
Example. Hypothetically, a complaint about a fund manager's conduct would move from supervisory staff who investigate to enforcement staff if formal action is warranted.
Watch out. Assuming one office does everything. Licensing, product authorisation, supervision and enforcement are distinct functions with different powers.
Self-check: In a hypothetical enforcement case against a manager, which functions of the SFC are most directly involved?
Answer: The investigative and enforcement functions, informed by supervisory findings, while licensing staff handle any fitness and propriety consequences.
12. 12. The Four Key Regulators and Their Mandates
Four regulators matter for asset management: the SFC for securities and futures markets and licensed intermediaries, the HKMA for the banking sector, the MPFA for mandatory provident fund schemes, and the IA for the insurance industry. Each guards a distinct slice of the savings and investment chain.
Example. Hypothetically, an investment-linked assurance policy sits with the IA for the insurance wrapper and engages the SFC for the underlying authorised funds.
Watch out. Attributing MPF product conduct solely to the SFC or solely to the MPFA; both touch different layers of the same product.
Self-check: Which regulator would a hypothetically insolvent MPF trustee answer to, and why?
Answer: The MPFA, because approval and supervision of MPF trustees and schemes sit with the MPFA under the MPF framework.
13. 13. Regulatory Co-operation Where Mandates Overlap
Because products straddle sectors, the regulators co-operate through arrangements such as memoranda of understanding and information sharing. The design principle is that overlapping oversight should not create gaps or inconsistent demands on firms.
Example. Hypothetically, an MPF fund needs SFC authorisation of the product while the MPFA supervises the scheme and trustee, so the two authorities coordinate their oversight.
Watch out. Thinking of the regulators as silos. Many exam scenarios turn on which authority is responsible for which layer of a multi-regulated product.
Self-check: For a hypothetical investment-linked assurance scheme, why might both the IA and the SFC be involved?
Answer: The IA regulates the licensed insurer and the policy wrapper, while the SFC authorises and supervises the underlying investment-linked funds under the product codes.
14. 14. Mapping Regulated Activities to Asset Management Roles
Different roles map to different regulated activities: dealing in securities for distribution work, advising on securities for recommendations, dealing in and managing futures contracts for derivative mandates, asset management for discretionary portfolios, and providing depositary services for CIS trustees and custodians. Identifying the activity first tells you what licensing is needed.
Example. Hypothetically, a firm that manages discretionary bond portfolios and also runs a fund distribution desk needs coverage for asset management and for dealing in securities.
Watch out. Focusing only on Type 9. A typical asset manager touches several regulated activities, and each requires the right licence coverage.
Self-check: A hypothetical adviser only recommends securities and never trades or manages portfolios. Which regulated activity is it performing?
Answer: Advising on securities, a distinct regulated activity from dealing or asset management, requiring its own licensing coverage.
15. 15. Licensing Requirements and Restrictions on Business
Carrying on a regulated activity as a business generally requires an appropriately licensed corporation with licensed representatives and responsible officers, subject to licence conditions and SFO restrictions. Certain categories of persons are exempt or excluded, but the default is that no licence means no business.
Example. Hypothetically, an unlicensed person regularly manages third-party portfolios for fees; the lack of a licence makes the activity unlawful unless a specific exemption applies.
Watch out. Believing a one-off or informal arrangement escapes the regime. Regularity as a business, not the size of the fee, drives the analysis.
Self-check: A hypothetical firm holds a licence only for dealing in securities and starts managing client portfolios. Is this lawful?
Answer: Not without expanding its licensed coverage; conducting asset management as a business requires the corresponding regulated activity on the licence.
16. 16. The Fit and Proper Test
The SFC licenses only persons who are fit and proper, assessing financial status and solvency, qualifications and experience, the ability to act competently, honestly and fairly, and reputation and character. Fit and proper is an ongoing standard, not a one-off entry exam.
Example. Hypothetically, a licensing applicant falsifies his trading record; even with strong exam results, the misrepresentation goes directly to reputation and honesty.
Watch out. Treating fitness as purely financial. Competence, honesty and character are independent limbs, and conduct after licensing can still undermine fitness.
Self-check: A hypothetical representative is solvent and qualified but was recently disciplined for dishonesty at another firm. Is the fit and proper limb engaged?
Answer: Yes, because reputation and character, and the ability to act honestly and fairly, are core components of fitness, independent of financial soundness.
17. 17. Guidelines for Intermediaries Conducting Asset Management
The SFC issues guidelines on how intermediaries should conduct asset management activities, addressing matters such as the competence and sufficiency of key personnel, internal systems, risk controls and premises. The theme is that the firm's resources and people must match the strategies and risks it actually runs.
Example. Hypothetically, a two-person firm launches complex derivative mandates with no experienced derivatives manager; the mismatch between business and capability would concern the regulator.
Watch out. Assuming guidelines are soft decoration. They shape licensing expectations and are relevant when the SFC assesses a firm's fitness.
Self-check: A hypothetical manager outsources all portfolio decisions to an external adviser. What do the guidelines push it to demonstrate?
Answer: That it retains adequate oversight, experienced key personnel and systems to supervise the delegated activity rather than abdicating responsibility.
18. 18. The Code of Conduct: Who It Covers and Its Fundamental Obligations
The Code of Conduct applies to licensed and registered persons — licensed corporations and their licensed representatives, and registered institutions together with their relevant individuals (individuals engaged to carry on regulated activity on a registered institution's behalf, who are entered in the HKMA register rather than individually licensed by the SFC) — in their dealings with clients, setting fundamental obligations to act honestly, fairly, diligently and in clients' best interests, and to manage conflicts. It sits alongside specialist codes for asset management, such as the Fund Manager Code of Conduct, studied later.
Example. Hypothetically, a relationship manager recommends a high-fee fund because her employer earns more from it; the conflict duty requires disclosure or avoidance of the conflict.
Watch out. Assuming codes carry criminal sanctions like statutes. Codes are regulatory standards whose breach can evidence unfitness and trigger disciplinary action, which is a different consequence from law-breaking.
Self-check: A hypothetical firm argues the Code of Conduct does not apply because its staff followed the law. What is wrong with that argument?
Answer: Compliance with law is the floor; as a licensed intermediary the firm is separately bound by the Code of Conduct's standards in dealings with clients.
19. 19. Suitability, Client Agreements and Disclosure in Practice
The Code of Conduct translates into practical requirements: understand your client through know-your-client information, ensure recommendations or solicitations are reasonably suitable for the client's circumstances, use proper client agreements, and disclose material information and conflicts. These duties turn client relationships from sales transactions into assessed matches.
Example. Hypothetically, a client with a conservative profile and short horizon is sold a volatile emerging-market fund; without documented suitability analysis, the recommendation is exposed.
Watch out. Assuming a signed risk disclaimer cures everything. Suitability is judged against the client's profile at the time of recommendation, not by paperwork alone.
Self-check: A hypothetical client insists on an unsuitable product. Does documenting his insistence end the matter?
Answer: Recording client instructions helps, but where the firm recommends or solicits, it must still be able to show reasonable suitability or handle execution-only properly under the rules.
20. 20. Professional Investors and Relaxed Conduct Requirements
Certain institutional and individual investors can be treated as professional investors, for which some protective requirements, such as specific disclosures or agreement formalities, may be relaxed, provided proper classification and assessment procedures are followed. Relaxation is selective, and fundamental obligations still apply.
Example. Hypothetically, a licensed firm serves a large institutional investor without issuing certain client-facing documents because of PI status; it must still assess and document that status properly.
Watch out. Believing professional investor status waives the entire Code of Conduct. It relaxes specified protections only, never the core duties of honesty and fairness.
Self-check: A hypothetical firm treats every corporate client as a PI and skips all conduct protections. What is the error?
Answer: PI treatment requires classification under the defined categories with proper procedures, and even for genuine PIs, many Code obligations continue to apply.
21. 21. Type 13: Trustees and Custodians Providing Depositary Services
Providing depositary services for CISs is a regulated activity, bringing the trustees and custodians who safeguard scheme property into the conduct framework. Their key requirements include safekeeping of scheme assets, keeping them separate from their own property, and oversight functions such as monitoring the manager's instructions and valuations.
Example. Hypothetically, a custodian executes a manager's withdrawal instruction that contradicts the trust deed; its oversight role means it should question and escalate, not merely process.
Watch out. Assuming custodians are passive warehouses. Depositary services include active oversight duties alongside safekeeping.
Self-check: In a hypothetical scheme, the manager instructs the custodian to value assets at a price the custodian doubts. What is expected of the custodian?
Answer: It should apply its independent oversight duty, query the valuation against proper procedures, and refuse or escalate instructions inconsistent with the scheme documents.
22. 22. Conduct Requirements for OTC Derivative Transactions
Firms dealing in OTC derivatives face conduct requirements such as proper client documentation, disclosure of risks, adequate systems and competent staff, within a broader regime aimed at clearing, margin and reporting of non-centrally cleared derivative transactions. The purpose is transparency and reduced counterparty risk in a previously opaque market.
Example. Hypothetically, a firm sells a bespoke interest rate swap to a corporate client; proper documentation, risk disclosure and the applicable clearing or margin obligations all need checking before trading.
Watch out. Assuming OTC derivative rules only concern reporting. Conduct duties to the client apply alongside the reporting and risk-mitigation regime.
Self-check: A hypothetical dealer relies on a handshake before entering an OTC swap with a new client. Which conduct requirement does this offend?
Answer: The requirement for proper written client documentation covering the transaction and its risks before dealing.
23. 23. Internal Controls: Key Areas under the ICG
The Management, Supervision and Internal Control Guidelines expect firms to maintain effective internal controls across key areas: sound organisational structure with segregation of duties, specific control procedures for operations, clear reporting lines, and management oversight. Controls should be proportionate to the firm's size and business risk.
Example. Hypothetically, the same trader initiates trades and also confirms them to clients; the absence of segregation lets errors or misconduct hide, breaching control expectations.
Watch out. Equating controls with paperwork. The test is whether the control actually prevents or detects the risk, not whether a policy exists.
Self-check: A hypothetical small firm says segregation is impossible with three staff. How should it respond under the internal control expectations?
Answer: It should implement proportionate compensating controls, such as independent review by management, so no single person controls a transaction end to end.
24. 24. Senior Management Supervision under the ICG
The guidelines make senior management responsible for the firm's overall direction and control: setting strategy, establishing compliance policies, ensuring adequate resources, and supervising delegations. Delegation of tasks is permitted, but accountability stays with senior management.
Example. Hypothetically, a chief executive delegates compliance wholly to a junior officer and stops reviewing reports; when breaches occur, the failure to supervise is itself the governance failure.
Watch out. Thinking delegation transfers accountability. Under the management responsibility framework, senior managers remain answerable for supervised functions.
Self-check: A hypothetical head of compliance misses a client money breach. Can senior management argue the fault was compliance's alone?
Answer: No. Senior management must direct and supervise the business and its systems, so weak oversight of the compliance function is their own responsibility failure.
25. 25. Personal Data under the PDPO
The Personal Data (Privacy) Ordinance applies data protection principles: data must be collected for lawful purposes by fair means, kept accurate and no longer than necessary, used only for the purposes for which it was collected unless consent allows more, protected by security, and handled with openness and access rights for individuals.
Example. Hypothetically, a fund distributor uses investors' account data for third-party marketing without the required consent; the use goes beyond the original collection purpose.
Watch out. Assuming internal convenience justifies data use. Purpose limitation and consent requirements govern each new use of personal data.
Self-check: A hypothetical manager wants to share a client database with an affiliated retailer for promotions. What determines whether this is lawful?
Answer: Whether the use is consistent with the notified purposes and, where required for new purposes such as direct marketing, whether the necessary consent or opt-out regime has been properly observed.
26. 26. The AML/CFT Legislative Framework
Hong Kong's anti-money laundering framework includes the AMLO, which imposes customer due diligence and record keeping duties, plus offences and reporting requirements under ordinances targeting drug trafficking proceeds, organised crime and terrorist financing, alongside SFO provisions. Suspicious transactions must be reported to the Joint Financial Intelligence Unit, and tipping off a customer is itself problematic.
Example. Hypothetically, a client insists on wiring subscription money from an unrelated third party's account with no explanation; the firm should escalate and consider a suspicious transaction report.
Watch out. Assuming AML duties end at onboarding. Ongoing monitoring and reporting are continuing obligations throughout the relationship.
Self-check: A hypothetical employee warns a client that a report about his transactions may be filed. Why is this a serious step?
Answer: It may amount to tipping off, which is prohibited, and it undermines the suspicious transaction reporting system.
27. 27. The Risk-Based Approach and Third Parties
The risk-based approach requires firms to assess ML/TF risk by customer type, product, delivery channel and geography, then apply simplified or enhanced measures, such as deeper checks for higher-risk situations like politically exposed persons. Where firms rely on third parties for parts of due diligence, ultimate responsibility for the assessment remains with the firm.
Example. Hypothetically, a fund accepts subscriptions introduced by an intermediary; the manager cannot outsource its judgment and must consider the underlying risks and any reliance conditions.
Watch out. Applying identical checks to everyone. Identical treatment is not the standard; the measures must be proportionate to assessed risk.
Self-check: A hypothetical firm relies on a third-party bank's identification records. If something is wrong, who is answerable?
Answer: The firm remains responsible for ensuring the due diligence meets requirements; reliance does not transfer accountability away from it.
28. 28. How the SFC Exercises Its Fining Powers
The SFC has published the principles it applies when fixing disciplinary fines, considering factors such as the seriousness and duration of the breach, harm or risk to investors and the market, any benefit gained, cooperation with the investigation, previous disciplinary record and the firm's financial resources. This distinguishes principled disciplinary fines from arbitrary penalties.
Example. Hypothetically, two firms commit similar record keeping breaches; the one that concealed the problem and profited from the conduct faces a heavier fine than the one that self-reported and remediated.
Watch out. Assuming identical breaches always produce identical fines. The published factors make outcomes proportionate to conduct and circumstances.
Self-check: A hypothetical firm fully cooperates with an SFC investigation into an isolated breach. How should this affect the fine under the published principles?
Answer: Cooperation and the isolated nature of the breach point toward a lower fine than for protracted, concealed or repeated misconduct of similar seriousness.
29. 29. Corporate Governance: Strengths and Deficiencies
Good governance in a licensed firm means senior management that directs the business with clear allocation of responsibilities, independent risk management and internal audit, and transparent reporting up the chain. Deficiencies appear where authority is concentrated, oversight functions are weak or reporting lines are blurred.
Example. Hypothetically, one dominant executive both runs the dealing desk and signs off its risk limits; the absence of independent challenge is a classic governance deficiency.
Watch out. Confusing governance with the presence of committees. Structures only help if they genuinely challenge management decisions.
Self-check: A hypothetical board meets rarely and rubber-stamps management papers. Which governance strength is missing, and what risk follows?
Answer: Independent oversight and challenge; the risk is that senior management decisions, including risk-taking and compliance failures, go untested until losses or breaches surface.
30. 30. How the SFC Supervises Licensed Firms
The SFC supervises through off-site surveillance of regular returns and notifications, on-site inspections of firms' operations, thematic reviews across the industry, and escalation into investigation and enforcement. The design is continuous oversight rather than a single licensing checkpoint.
Example. Hypothetically, an SFC inspection identifies unreconciled client money; the matter may move from supervisory remediation to enforcement if the firm fails to fix it.
Watch out. Assuming supervision happens only when complaints arrive. Routine returns and inspections can surface problems without any complaint.
Self-check: A hypothetical firm passes licensing but then lets its systems decay. Through which mechanism is it most likely to be caught?
Answer: Ongoing supervision: off-site surveillance of returns and periodic on-site inspections, which can escalate to enforcement.
31. 31. The MPF Regulatory Framework
The mandatory provident fund system is built on the MPF Ordinance: the MPFA approves and supervises schemes and trustees, employers and employees make mandatory contributions into registered schemes, and investment products used in MPF schemes require SFC authorisation. Understanding which authority owns which layer is the core of this topic.
Example. Hypothetically, an employer enrols staff in a registered scheme holding an SFC-authorised fund; the MPFA oversees the scheme and trustee, the SFC oversees the product.
Watch out. Assuming the SFC regulates MPF schemes end to end. The SFC authorises products; scheme and trustee supervision belongs to the MPFA.
Self-check: For a hypothetical MPF fund's underlying product, which authority's approval is needed, and who polices the trustee?
Answer: The SFC authorises the investment product, while the MPFA supervises the trustee and scheme conduct.
32. 32. MPF Intermediaries and MPFA Supervision
MPF intermediaries are persons who carry on a main business of selling MPF scheme products or inviting others to join schemes; they must be registered with the MPFA and follow its conduct guidelines. Many are already licensed or registered in other sectors, adding an MPF-specific registration layer.
Example. Hypothetically, a bank employee whose main role is selling MPF schemes to employers must be registered as an MPF intermediary on top of her firm's licensing.
Watch out. Assuming an SFC licence alone authorises MPF selling. MPF intermediary registration under the MPFA regime is a separate requirement.
Self-check: A hypothetically licensed securities dealer wants staff to market MPF schemes. What extra step is required?
Answer: The relevant staff must be registered with the MPFA as MPF intermediaries and comply with the MPFA's conduct guidelines.
33. 33. IA Codes for Licensed Insurance Agents and Brokers
The IA issues codes of conduct for licensed insurance agents and licensed insurance brokers, imposing standards of honesty, competence, disclosure and proper needs analysis when advising on insurance products. Brokers, acting as agents of the client, carry duties distinct from agents who represent insurers.
Example. Hypothetically, a broker recommends an investment-linked policy; the IA code expects a documented needs analysis and explanation of fees and risks.
Watch out. Treating insurance intermediaries' duties as identical to agents' and brokers' roles; whose interest each type serves is the key distinction.
Self-check: In a hypothetical ILAS sale, why does the client's interest analysis differ between an insurer's agent and an insurance broker?
Answer: An agent represents the insurer, while a broker acts for the client, so the broker's code emphasises client-serving duties such as impartial needs analysis and disclosure of remuneration.
Topic 2: Back-office compliance
The ongoing statutory machinery for licensed firms: notifications, capital, client securities and money, records, contract notes, accounts and audit, the operation of open-ended fund companies, and OTC derivative reporting and record keeping.
34. 34. Ongoing Notification Requirements
Under the SFO's subsidiary legislation, licensed corporations must notify the SFC of changes in prescribed information, such as changes in responsible officers, business addresses and ownership or corporate structure, within the prescribed time limits. Some changes require prior approval rather than mere notification.
Example. Hypothetically, a firm appoints a new responsible officer; this is not just internal news but triggers a regulatory application or notification depending on the role involved.
Watch out. Treating all changes alike. The rules distinguish events needing prior approval, such as certain key personnel changes, from those needing notification after the event.
Self-check: A hypothetical firm moves its principal place of business. What obligation arises, and when?
Answer: It must notify the SFC within the prescribed period under the subsidiary legislation, keeping its registered information current.
35. 35. Capital Requirements and Liquid Capital
The Financial Resources Rules require licensed corporations to maintain paid-up capital and liquid capital at or above the required minima for their regulated activities at all times. Liquid capital is computed by taking available liquid assets and deducting prescribed deductions; falling below requirements is a reportable event.
Example. Hypothetically, assume a firm's required liquid capital is HK$3 million. If its available liquid assets of HK$4 million are subject to HK$1.2 million of deductions, the resulting liquid capital is HK$2.8 million. This is HK$200,000 below the requirement: compare the liquid capital after deductions with the required minimum, without deducting the same adjustment twice.
Watch out. Assuming capital matters only at licensing. The requirement is continuous, and even temporary shortfalls trigger obligations.
Self-check: Hypothetically, a firm's liquid capital sits at HK$2.5 million against a required HK$2.5 million, then a debt it owes becomes payable. What is the risk?
Answer: Paying reduces its liquid assets and hence liquid capital below the minimum, so the firm would breach the Financial Resources Rules and face notification obligations.
36. 36. Client Securities: Safe Custody and Segregation
The rules on client securities require firms to account for client securities separately from the firm's own property and to hold them in safe custody so clients' holdings are protected if the firm fails. Dealing with client securities, such as pledging them, is only permitted within the rules' limits.
Example. Hypothetically, a firm lends out a client's share certificates as collateral for its own borrowing without authority; the client's assets have been put at risk contrary to the safe custody regime.
Watch out. Assuming physical possession is the issue. The core duty is segregation and safeguarding, whether the securities are paper or electronic.
Self-check: Why does a hypothetical firm's insolvency matter so much in the client securities rules?
Answer: Segregation ensures client securities are identifiable and protected from the firm's creditors rather than swept into the insolvent estate.
37. 37. Client Money: Segregated Accounts
Client money rules require firms dealing with client money to place it promptly into separate accounts at authorised institutions, designated as client accounts, and to withdraw it only as the rules allow. The objective is that client cash is never treated as the firm's working capital.
Example. Hypothetically, a firm holds subscription money pending settlement and temporarily uses it to pay its office rent; this misappropriates client money regardless of intention to repay.
Watch out. Believing short-term borrowing of client money is harmless if returned. The segregation rules prohibit the use itself.
Self-check: A hypothetical firm mixes HK$500,000 of client cash with its own funds in one operating account. What is the essential breach?
Answer: Failure to keep client money in designated segregated client accounts, exposing clients to the firm's own creditors and obligations.
38. 38. Reconciliations for Client Assets
Segregation only works if it is verified: firms must reconcile client money and client securities against their records at prescribed intervals, investigate discrepancies promptly and report significant matters. Reconciliation is the detective control that reveals misappropriation or error.
Example. Hypothetically, a monthly reconciliation shows a HK$150,000 shortfall in a client account; the firm must investigate the gap and treat it as a serious compliance matter, not a rounding issue.
Watch out. Treating reconciliation as clerical. An unreconciled item is a red flag that must be escalated and resolved.
Self-check: A hypothetical reconciliation difference is small and persists for months without investigation. Why is this still serious?
Answer: Because unresolved differences may indicate misappropriation or control failure, and the rules require prompt investigation and reporting of significant discrepancies.
39. 39. Record Keeping Obligations
Licensed firms must keep proper books and records of their business, including client dealings, for prescribed retention periods, in a form that is retrievable and auditable. Records are the evidence base for the firm's compliance and for regulatory investigations.
Example. Hypothetically, the SFC asks a manager to explain a series of trades from two years ago; if the underlying records were destroyed early or kept in an unusable format, the firm has breached record keeping obligations.
Watch out. Assuming records only need to exist. They must be complete, organised and retrievable within the required timeframes.
Self-check: A hypothetical firm stores client transaction records on a broken legacy system nobody can access. Has it complied?
Answer: No, because records must be kept in a retrievable, auditable form for the prescribed periods, and inaccessible records fail that standard.
40. 40. Contract Notes, Statements of Account and Receipts
The rules require firms to provide transaction documentation: contract notes for trades, periodic statements of account to clients, and receipts for money or securities received, each within prescribed timeframes and with prescribed content. These documents give clients an independent record to check the firm's bookkeeping.
Example. Hypothetically, a client trades through a manager and receives no contract note; the omission deprives the client of the ability to verify terms and signals a rule breach.
Watch out. Assuming internal confirmations substitute for the prescribed documents. The rules specify what must be issued, to whom and when.
Self-check: A hypothetical firm receives securities from a client and issues nothing. What document duty has it missed?
Answer: The duty to issue a receipt for client property received within the prescribed requirements.
41. 41. Accounts and Audit Requirements
Firms must maintain proper accounting records and have their accounts audited annually by an approved auditor, with audit reports provided to the SFC. Auditing connects day-to-day bookkeeping to independent verification of compliance with the financial and client asset rules.
Example. Hypothetically, an auditor discovers client money discrepancies during the annual audit; the audit regime channels that finding to the regulator rather than leaving it internal.
Watch out. Treating the audit as a formality for shareholders. For licensed firms it is a regulatory safeguard with direct SFC reporting consequences.
Self-check: Why does a hypothetical licensed firm's annual audit differ from an ordinary private company's audit?
Answer: Because the firm must use an approved auditor and the audit must address the SFO's financial and client asset requirements, with reporting links to the SFC.
42. 42. Formation of Open-Ended Fund Companies
The OFC rules govern how an OFC comes into existence: registration requires SFC approval, the vehicle is a body corporate with variable capital, and it must have a board of directors and a custodian. OFCs may be public or private, with private OFCs restricted to professional investors.
Example. Hypothetically, a manager wants to launch a sub-fund umbrella for institutional clients only; a private OFC fits, but it cannot be offered to retail investors.
Watch out. Assuming OFCs are registered like ordinary companies at the Companies Registry without SFC involvement. SFC approval is central to formation.
Self-check: A hypothetical promoter plans a private OFC marketed to the general public. What is the structural error?
Answer: Private OFCs are limited to professional investors, so retail offering would require a public OFC with the corresponding authorisation and structure.
43. 43. Operating an OFC: Governance in Practice
Once operating, an OFC's board of directors bears corporate responsibilities, delegating investment management to a manager while the custodian safeguards assets, and its share capital varies as investors subscribe and redeem. Governance blends company law duties with fund regulation duties.
Example. Hypothetically, heavy redemptions shrink an OFC's net asset value; capital simply reduces with share cancellation, unlike a fixed-capital company where capital reduction rules would bite.
Watch out. Analysing OFCs purely as companies. Their variable capital and custodian requirements make them a hybrid regulated by fund rules too.
Self-check: In a hypothetical OFC, who is accountable for a valuation error: the board, the manager or the custodian?
Answer: The board bears corporate accountability for the OFC, though the investment manager performing valuation duties and the custodian overseeing them share operational responsibility under the delegation and oversight framework.
44. 44. Reporting OTC Derivative Transactions
The OTC derivative reporting rules require specified persons to report details of specified over-the-counter derivative transactions to specified repositories, covering defined data fields within prescribed timeframes. The purpose is to give regulators visibility of the OTC derivatives market and its risk concentrations.
Example. Hypothetically, a firm enters an overnight FX forward that falls within the specified categories; the required transaction data must be reported to the designated repository on time.
Watch out. Assuming only exchange-traded products are visible to regulators. The reporting regime exists precisely because OTC trades are off-exchange.
Self-check: A hypothetical dealer asks why it must report a privately negotiated swap. What is the regulatory rationale?
Answer: The reporting rules create central visibility of OTC derivative exposures so regulators can monitor systemic and counterparty risk.
45. 45. Record Keeping for OTC Derivatives
Alongside reporting, the rules require firms to keep records of their OTC derivative transactions for prescribed periods, sufficient to reconstruct transactions and respond to regulator queries. Good records back up the reported data and allow errors to be identified and corrected.
Example. Hypothetically, a regulator queries a reported swap valuation months later; the firm must retrieve the trade records, confirm or correct the data and evidence the check.
Watch out. Confusing the two obligations: reporting sends data out at the time; record keeping preserves the full picture for later scrutiny. Both apply.
Self-check: A hypothetical firm reports accurately but cannot retrieve underlying trade terms. Is accurate reporting enough?
Answer: No, the record keeping obligation is separate and requires retrievable transaction records for the prescribed period, so missing records breach the rules.
Topic 3: Asset management regulations
The product and manager rulebooks: the Fund Manager Code of Conduct, the SFC Handbook, authorisation and investment requirements for authorised schemes, the OFC Code, REITs, liquidity and climate risk requirements, mutual recognition of funds, and MPF-related SFC codes.
46. 46. The Fund Manager Code of Conduct: Scope and Core Duties
The FMCC applies to managers of CISs and discretionary accounts, layering asset-management-specific requirements onto general conduct standards. Its core duties are to act with due skill, care and diligence, to act in clients' best interests and to manage conflicts, applied through detailed operational requirements.
Example. Hypothetically, a manager trades for its own account in the same securities as a client fund on the same day; the FMCC's conflict management rules dictate how priority and disclosure must work.
Watch out. Treating the FMCC as a repeat of the Code of Conduct. It adds fund-specific obligations on valuation, dealing, liquidity and delegation.
Self-check: A hypothetical manager handles only segregated mandates, no funds. Does the FMCC concern it?
Answer: Yes, because the FMCC covers managers of discretionary accounts as well as collective investment schemes.
47. 47. Independent Valuation and Pricing of Fund Assets
The FMCC requires fund assets to be valued independently of the investment function and net asset value to be calculated regularly under documented procedures, with pricing errors identified and remedied. Independence prevents managers from marking their own performance through biased valuations.
Example. Hypothetically, a portfolio manager insists an illiquid bond is worth par to protect his bonus; if valuation is independent, his view cannot set the fund's NAV.
Watch out. Assuming the manager can set NAV when no market price exists. Independent valuation sources and procedures must govern hard-to-price assets.
Self-check: A hypothetical fund repeatedly misprices an asset and overcharges redemption investors. What does the FMCC expect beyond correcting the price?
Answer: Documented procedures should have detected the error, and the manager must remedy the error, compensate affected investors as required and fix the root cause.
48. 48. Fair Allocation, Aggregation and Cross Trades
The FMCC governs how managers allocate investment opportunities: aggregated orders must be allocated fairly, usually pro-rata to participating accounts, and cross trades, where the manager matches a buyer and seller from its own accounts, are permitted only in restricted circumstances with proper pricing and procedures.
Example. Hypothetically, two funds and a pension mandate all want the same limited bond issue; the manager must aggregate and allocate pro-rata, not favour the account paying the highest fee.
Watch out. Assuming any internal matching is efficient. Cross trades bypass the market, so the rules confine them to tightly defined cases.
Self-check: A hypothetical manager crosses a sale from Fund A to Fund B at the day's market price. Why might this still be problematic?
Answer: Because cross trades are only permitted within the FMCC's restricted conditions and procedures; convenience or fee motives cannot justify bypassing market execution.
49. 49. Staff Personal Account Dealing
The FMCC requires managers to impose a personal account dealing regime on staff: pre-approval of trades, restricted dealing periods around client activity, and reporting into a register. The aim is to stop employees profiting ahead of, or at the expense of, client portfolios.
Example. Hypothetically, an analyst learns his fund will buy a small-cap stock tomorrow and buys it personally today; front-running through a personal account is exactly what the regime prevents.
Watch out. Assuming the regime covers only portfolio managers. Research and other staff with knowledge of client activity are typically within its scope.
Self-check: A hypothetical operations clerk with access to trade flows wants to mirror fund trades in his own account. What should the firm's regime require?
Answer: Pre-clearance, adherence to restricted periods around client dealing and full reporting, given his access to information about client activity.
50. 50. The SFC Handbook: Unit Trusts, ILAS and Unlisted Structured Products
The SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products consolidates product requirements across three retail-facing families: authorised unit trusts and mutual funds, the investment-linked funds used in ILAS policies, and unlisted structured investment products. It sets authorisation, operational and disclosure standards so investors in these products receive consistent protections.
Example. Hypothetically, an insurer bundles an ILAS policy investing into SFC-authorised funds; the SFC's Handbook governs the underlying product standards and disclosures.
Watch out. Treating ILAS policies and unlisted structured products as outside SFC product regulation simply because an insurer or product issuer is involved. The Handbook applies to those product categories as well.
Self-check: For a hypothetical unlisted equity-linked investment sold to retail investors, which product rulebook applies?
Answer: The Handbook's requirements for unlisted structured investment products, covering authorisation, disclosure and suitability-focused protections.
51. 51. Authorising a Fund: The UT Code Procedure
To offer a fund to the Hong Kong public, the manager seeks SFC authorisation under Part IV, submitting offering documents and constitutional documents that must comply with the UT Code, and then meeting ongoing obligations. Authorisation is a regulatory gate, not a quality endorsement or guarantee of performance.
Example. Hypothetically, a manager tailors its offering document to add required risk warnings and fee disclosures; authorisation only comes once the documents meet UT Code standards.
Watch out. Assuming authorisation means the SFC approves the fund's merits. It certifies compliance with requirements, not future returns.
Self-check: A hypothetical adviser tells clients an authorised fund cannot lose money because the SFC authorised it. What is wrong?
Answer: Authorisation means the fund meets regulatory requirements; it is not an endorsement of investment merit or any assurance against loss.
52. 52. Investment and Concentration Requirements for Authorised Funds
The UT Code sets investment requirements, including diversification and concentration limits that cap how much of a scheme's assets may be exposed to a single issuer or class of asset. The purpose is to stop authorised retail funds becoming one-bet vehicles disguised as diversified products.
Example. Hypothetically, if the applicable rule caps single-issuer exposure at a fixed percentage of NAV, a fund that loads a far larger share into one corporate bond breaches the limit and must rebalance.
Watch out. Memorising limits without purpose. Exam scenarios usually ask whether a portfolio breaches the concept of the limit, so understand what each restriction protects.
Self-check: A hypothetical fund justifies a large single-issuer position by the issuer's excellent credit rating. Why does that not help?
Answer: Concentration limits apply regardless of credit quality; the requirements manage diversification risk structurally, not issuer by issuer.
53. 53. Borrowing by Authorised Funds
The UT Code permits authorised funds to borrow only within limits, distinguishing short-term borrowing for dealing and redemption purposes from borrowing for investment purposes, which is more tightly constrained and must be disclosed in the offering documents. Limits keep retail fund leverage modest.
Example. Hypothetically, a fund borrows briefly to meet a wave of redemptions pending asset sales; this dealing-purpose borrowing fits the framework, whereas using leverage to gear the portfolio would not.
Watch out. Treating all borrowing alike. The permitted purpose and the type of limit differ between operational borrowing and investment gearing.
Self-check: A hypothetical manager wants to borrow to double a bond fund's exposure. Under the borrowing framework, what is the problem?
Answer: Investment-purpose borrowing is tightly limited and disclosed; leveraging the portfolio beyond those limits breaches the UT Code regardless of market views.
54. 54. Managers and Trustees of Authorised Schemes: Independence and Duties
Authorised schemes need both a manager and a trustee or custodian, and the trustee must be independent of the manager or structured with sufficient separation. The trustee safekeeps scheme property and oversees the manager's compliance with the trust deed and UT Code; the manager runs investment, administration and marketing.
Example. Hypothetically, a trustee notices the manager investing outside permitted instruments; its oversight duty requires it to act on the breach, not simply record it.
Watch out. Viewing the trustee as a passive document holder. Active oversight of the manager is a defining duty of the role.
Self-check: Why does the framework insist a hypothetical trustee not be controlled by the manager?
Answer: Because the trustee must independently check the manager's actions and protect investors; dependence would compromise the safeguard the structure exists to provide.
55. 55. The OFC Code for Authorised Public OFCs
The OFC Code applies fund standards to OFCs: a public OFC seeking authorisation must satisfy requirements comparable to the UT Code, with its board delegating investment management to a qualified manager and a custodian safeguarding assets. The Code adapts unit-trust style protections to a corporate vehicle.
Example. Hypothetically, a public OFC's board delegates portfolio management to an SFC-licensed manager; the OFC Code governs that delegation and the ongoing authorisation conditions.
Watch out. Assuming OFCs escape the UT Code standards because they are companies. Public OFCs meet equivalent authorisation standards through the OFC Code.
Self-check: A hypothetical public OFC argues company law alone suffices since it is a corporation. What is missing from that argument?
Answer: As a publicly offered scheme it must satisfy the OFC Code's authorisation and ongoing requirements, including manager and custodian arrangements.
56. 56. The Code on Real Estate Investment Trusts
A REIT is a collective investment scheme investing primarily in income-producing real estate, authorised under the Code on REITs with a manager and trustee structure like other schemes, but subject to property-specific rules, including limits on development activity and borrowing. The design channels investor money into rental-income assets rather than speculative development.
Example. Hypothetically, a REIT manager wants to buy land and build speculative offices; the Code's restrictions on development activity would limit or prohibit that strategy compared with owning completed, income-producing property.
Watch out. Assuming a REIT is just a property company. It is a CIS with trust structure, authorisation and portfolio restrictions.
Self-check: Why is a hypothetical REIT treated as a CIS rather than a listed property developer?
Answer: Because it pools investors' money into managed real estate with no day-to-day investor control and a view to income, satisfying the CIS concept, with the Code on REITs as its product rulebook.
57. 57. The Liquidity Risk Management Circular
The SFC's liquidity risk management requirements expect managers to have a liquidity management framework: understanding their funds' liquidity profiles, conducting stress testing, and having liquidity management tools available to deal with redemption pressure, with oversight resting ultimately with the management company. The circular operationalises the general FMCC duty to manage liquidity risk.
Example. Hypothetically, a fund holds mostly private company shares but offers daily dealing; the mismatch between asset liquidity and redemption terms is precisely what the framework requires managers to identify and manage.
Watch out. Assuming liquidity rules only matter in a crisis. Managers must assess liquidity in advance and be ready with tools before redemptions surge.
Self-check: A hypothetical manager runs a daily-dealing fund with heavily illiquid assets. What should its liquidity framework drive it to do?
Answer: Recognise the structural mismatch, stress test redemption scenarios and prepare appropriate liquidity management tools and disclosures before pressure arises.
58. 58. The Climate-Related Risks Circular
The SFC's requirements on climate-related risks expect managers to integrate climate risk into governance, strategy, risk management and disclosure, following the four-pillar structure used internationally. The approach is proportionate: expectations scale with the manager's size and the nature of its funds.
Example. Hypothetically, a fund marketed with a green investment label must be able to support its climate-related disclosures with real strategy and risk processes, not just wording.
Watch out. Assuming climate requirements are disclosures only. Governance and risk management are the base; disclosure follows from what is actually done.
Self-check: A hypothetical small manager asks whether climate risk requirements apply to it at all. What is the correct framing?
Answer: They apply proportionately: the manager should integrate climate considerations in a manner matching its business and funds, rather than claim blanket exemption.
59. 59. The Mutual Recognition of Funds Arrangement
The MRF is a framework between the SFC and the Mainland regulator allowing qualifying funds from each market to obtain streamlined authorisation for offering in the other, subject to eligibility conditions such as management track record and scheme size requirements. Ongoing obligations are split between the home and host jurisdictions, with local representative arrangements for incoming funds.
Example. Hypothetically, a Hong Kong fund meeting the MRF eligibility conditions can seek streamlined authorisation for Mainland distribution, while a qualifying Mainland fund does the same in Hong Kong through a local representative.
Watch out. Assuming MRF funds are authorised identically to domestic funds. Streamlined recognition works alongside home-jurisdiction supervision, with host obligations added.
Self-check: A hypothetical Mainland MRF fund is distributed in Hong Kong. Who supervises it and what extra local requirement applies?
Answer: Its home regulator supervises the fund's operation, while the SFC handles Hong Kong recognition and ongoing host obligations, and the fund needs a Hong Kong representative.
60. 60. The Recognised Jurisdiction Scheme
The RJS allows funds domiciled in jurisdictions the SFC has recognised, with comparable home regulation, to obtain streamlined Hong Kong authorisation, relying on home-jurisdiction oversight with specified host obligations. It differs from the MRF by covering a broader list of recognised jurisdictions rather than a single bilateral market.
Example. Hypothetically, a fund from a recognised jurisdiction with strong home regulation applies for Hong Kong authorisation under the RJS and supplies home-jurisdiction documents rather than rebuilding full local compliance from scratch.
Watch out. Mixing up the MRF and RJS: the MRF is the bespoke Mainland arrangement; the RJS is the wider recognition route based on the SFC's list of recognised jurisdictions.
Self-check: A hypothetical fund from a recognised jurisdiction asks how its Hong Kong pathway differs from a Mainland fund's. What should you say?
Answer: It uses the RJS streamlined recognition based on home supervision, rather than the MRF's bilateral Mainland framework with its own eligibility conditions.
61. 61. SFC Codes for MPF and Retirement Products
Retirement products carry their own SFC rulebooks: the Code on MPF Products governs authorisation and ongoing requirements for MPF schemes' constituent funds and related pooled investment funds, the Code on MPF Investment Funds sets investment standards for MPF funds, and the PRF Code covers pooled retirement funds used in occupational retirement schemes. The MPFA supervises schemes while the SFC authorises the products.
Example. Hypothetically, a trustee designs a new constituent fund for an MPF scheme; it must satisfy the SFC's MPF product and investment fund codes before the product can be used.
Watch out. Applying ordinary UT Code standards and assuming they are the whole story. Retirement products have dedicated codes with their own requirements.
Self-check: A hypothetical PRF and an ordinary authorised retail fund both offer diversified portfolios. Why are their rulebooks different?
Answer: Because the PRF serves occupational retirement schemes and follows the PRF Code, while the retail fund follows the UT Code; each product code addresses its own market's risks and investors.
Topic 4: Misconduct
Market misconduct under the SFO: the civil and criminal routes, the Market Misconduct Tribunal, each type of misconduct, consequences and civil remedies, the unsolicited calls prohibition, improper trading practices, and why the SFC takes enforcement action.
62. 62. MMT Proceedings versus Criminal Prosecution
The SFO creates twin regimes for the same categories of market misconduct: a civil regime dealt with by the Market Misconduct Tribunal, and a criminal regime prosecuted in the courts. The routes differ in decision-maker, procedure and standard of proof: the MMT applies the civil standard, while criminal courts require proof beyond reasonable doubt. The authorities select one route based on the evidence and the public interest, and the SFO's double-jeopardy safeguards (sections 283 and 307) prevent the same person facing both MMT proceedings and criminal proceedings for the same conduct.
Example. Hypothetically, the SFC investigates suspected insider dealing and refers the case; depending on the evidence and public interest, the matter may go to the MMT or to criminal prosecution.
Watch out. Assuming a person found liable before the MMT can then also be prosecuted criminally for the same conduct. Sections 283 and 307 SFO bar this, though licensing discipline and private civil compensation claims are separate routes that remain available.
Self-check: Could the same person face MMT proceedings and criminal proceedings for the same market-misconduct conduct?
Answer: No. The statutory safeguards prevent both routes against that person for the same conduct. The MMT uses the civil standard of proof and the criminal court uses the criminal standard; licensing discipline and private civil claims are separate.
63. 63. The Market Misconduct Tribunal: Role and Procedures
The MMT is the tribunal that hears market misconduct cases referred to it, conducting its own hearing on the SFC's application, making findings of whether market misconduct occurred, and imposing civil sanctions. Its procedures are civil in nature, focusing on facts and appropriate outcomes rather than punishment of crimes.
Example. Hypothetically, the SFC completes an investigation into suspected price rigging and applies to the MMT, which hears evidence from the persons involved before determining whether the conduct constituted the misconduct.
Watch out. Confusing the MMT with a criminal court. It determines civil market misconduct and civil sanctions, not guilt of a crime.
Self-check: A hypothetical person argues the MMT must follow criminal trial procedures. What is the error?
Answer: The MMT is a civil tribunal with its own procedures for determining whether market misconduct occurred and what civil orders are appropriate.
64. 64. Insider Dealing
Insider dealing occurs when a person connected with a listed company deals in its securities while holding information about the company that is not generally known and would, if known, materially affect the price, or incites or advises others to do so. The essence is trading on unequal, price-sensitive information.
Example. Hypothetically, a director learns of an unannounced takeover bid, buys shares for her family trust, and profits when the bid is announced: the dealing while holding the undisclosed information is the misconduct.
Watch out. Assuming only employees can be insiders. Connected persons and those who receive the information through connected chains can fall within the provision.
Self-check: A hypothetical friend of a director receives a tip about an unannounced acquisition and trades. Why is he exposed?
Answer: Because dealing while in possession of materially price-sensitive undisclosed information received through a connected person can constitute insider dealing, whether or not he is employed by the company.
65. 65. False Trading, Price Rigging and Stock Market Manipulation
These provisions target manufactured market activity. False trading covers conduct intended, or recklessly likely, to create a false or misleading appearance of active trading or of the market or price, including on-market wash sales (no change in beneficial ownership) and matched orders, which are deemed misconduct with the person bearing a statutory defence of proving an innocent purpose. Price rigging covers wash sales or fictitious or artificial transactions or devices with an actual, intended or recklessly likely effect of maintaining, increasing, reducing, stabilising or causing fluctuations in prices. Stock market manipulation involves two or more transactions in a corporation's securities that increase, reduce, or maintain or stabilise their price, carried out with the intention of inducing others to buy, sell or subscribe for, or to refrain from dealing in, those securities. All attack the integrity of the price discovery process.
Example. Hypothetically, a trader buys and sells the same stock between accounts he controls to create visible volume and lure other buyers; the transactions were never genuinely independent.
Watch out. Assuming genuine-looking trades are safe. If the transactions lack genuine openness and are designed to mislead, the substance is market misconduct.
Self-check: A hypothetical trader argues his wash trades were real executed transactions at market prices. Why does that defence fail?
Answer: Because the wrong lies in creating a false or misleading appearance through non-genuine transactions; execution formalities do not cure the manufactured impression.
66. 66. False or Misleading Information and Prohibited Transaction Disclosures
Separate provisions cover information offences: disclosing, circulating or disseminating information likely to induce dealings, where the information is false, misleading or reckless as to its accuracy, and disclosing information about transactions prohibited as market misconduct, such as matched orders. Words can manipulate markets as effectively as trades.
Example. Hypothetically, a commentator spreads an invented rumour that a company will be acquired; the share price jumps, and the falsity of the price-moving information engages the disclosure provisions.
Watch out. Assuming only the person who created the rumour is liable. Disseminating false or misleading information likely to induce transactions is itself covered.
Self-check: A hypothetical investor forwards a fabricated takeover rumour without checking. What is the risk under the SFO?
Answer: Dissemination of information that is false or misleading in a material respect and likely to induce transactions can constitute market misconduct even if he did not invent it, where he knew, was reckless or, in the civil regime, negligent as to its falsity.
67. 67. Consequences of Market Misconduct
Following an MMT finding, the tribunal's orders (SFO section 257) include disgorgement of profit gained or loss avoided, disqualification from acting as a director or in the management of listed or unlisted companies, cold-shoulder orders restricting dealings in the Hong Kong financial market, cease-and-desist orders, costs orders, and possible disciplinary referral or recommendation. The MMT cannot imprison anyone and cannot impose a free-standing fine for the market misconduct itself. Criminal prosecution, where the authorities pursue that alternative route instead, exposes the person to fines and imprisonment imposed by the courts.
Example. Hypothetically, a trader found by the MMT to have engaged in insider dealing could be ordered to disgorge profits, be disqualified from company management and face a cold-shoulder order, while if the authorities had chosen the criminal route instead, the court could convict and impose a fine and imprisonment.
Watch out. Assuming sanctions are only financial, or that the MMT can fine or imprison. Disqualification and cold-shoulder orders can end careers; criminal courts can fine and imprison on the alternative criminal route, but the MMT cannot impose fines or imprisonment for market misconduct.
Self-check: A hypothetical trader is found by the MMT to have engaged in insider dealing. What orders might follow, and can he also be prosecuted criminally for the same conduct?
Answer: Disgorgement, disqualification, a cold-shoulder order, a cease-and-desist order, costs and possible disciplinary referral could all follow. No: the double-jeopardy safeguards in sections 283 and 307 SFO bar both MMT and criminal proceedings for the same conduct, although licensing discipline and private civil compensation claims are separate routes that remain available.
68. 68. Private Civil Actions by Affected Persons
The SFO provides a private civil remedy allowing persons who suffer loss from market misconduct to claim compensation, complementing public enforcement by the SFC and the MMT. Public action punishes and deters; the civil route restores victims.
Example. Hypothetically, investors who bought shares at inflated prices after a rigging scheme are identified could pursue compensation claims for the loss caused by the misconduct.
Watch out. Assuming only the SFC can act. Affected persons have their own statutory compensation avenue alongside regulatory outcomes.
Self-check: A hypothetical investor loses money relying on a manipulated price. What personal remedy does the SFO framework offer beyond complaining to the SFC?
Answer: A private civil action to claim compensation for loss suffered as a result of the market misconduct.
69. 69. The Prohibition on Unsolicited Calls
Rules made under the SFO restrict intermediaries from entering into transactions that result from unsolicited calls with persons who are not professional investors, generally requiring that the transaction be initiated by the client. The protection guards retail investors from pressure selling of products they never asked about.
Example. Hypothetically, a salesperson cold-calls a retail investor, pushes a complex product and takes an order in the same call; without a genuine client-initiated request, the transaction falls within the prohibition.
Watch out. Assuming the ban depends on the product's quality. The trigger is the solicited versus unsolicited nature of the call and the client's status.
Self-check: A hypothetical client who is a professional investor receives an unsolicited call and trades. Why might this be treated differently?
Answer: Professional investors fall outside the protective scope of the unsolicited calls restriction, which is designed for non-professional investors.
70. 70. Improper Trading Practices and the Reasons for Enforcement
Improper trading practices include front running client orders, churning accounts through excessive trading to generate commissions, and charging unreasonable arrangements, each harming the client while enriching the firm. The SFC takes enforcement action to protect investors, preserve market integrity and deter misconduct, choosing outcomes proportionate to the harm and conduct.
Example. Hypothetically, a broker trades repeatedly in a discretionary account with no investment rationale, simply to earn commissions; the pattern of churning injures the client and invites regulatory action.
Watch out. Assuming only headline market abuses matter. Client-level practices like front running and churning are equally within the enforcement lens.
Self-check: A hypothetical manager argues its frequent trades in a client's account show diligence. What test separates diligence from churning?
Answer: Whether the trading serves the client's investment objectives and interests; trading driven by commission generation with no reasonable investment purpose is improper churning.
Turn your revision into a study plan
Adjust the pace to your starting knowledge and examination date. These are suggested revision stages, not an official preparation timetable.
| Stage | What to do |
|---|---|
| Stage 1: Foundations and definitions | Work through Topic 1 concepts 1 to 15, then open your study guide and practise writing the SFO definitions of asset management, securities, futures contracts and CISs from memory, and map a hypothetical firm's activities to the regulated activities it would need licence coverage for. |
| Stage 2: Conduct, controls and compliance duties | Study Topic 1 concepts 16 to 33, then read the Code of Conduct and ICG sections of your guide and, for each, write one hypothetical breach scenario of your own; also trace which authority handles each layer of a multi-regulated product such as an MPF fund or ILAS policy. |
| Stage 3: Back-office rules and product codes | Cover Topic 2 and Topic 3 concepts 34 to 61, then in your guide compare client money and client securities rules side by side, restate the OFC lifecycle from registration to operation, and summarise each product code (UT Code, OFC Code, REITs, MPF/PRF, MRF and RJS) in a one-line purpose statement. |
| Stage 4: Misconduct and consolidation | Finish with Topic 4 concepts 62 to 70, then test yourself by classifying fresh hypothetical scenarios into the different types of market misconduct and choosing the correct consequence route; finally, redo every self-check question in this guide and revisit any concept where your answer differed from the model. |
Questions candidates ask
What is the format of the HKSI Paper 6 examination?
Paper 6 is 40 multiple-choice questions in 60 minutes, and you need a fixed pass mark of 70% to pass. The pass mark is the score required, which is different from the pass rate, meaning the proportion of candidates who pass in a sitting.
Which study guide version should I prepare from?
As at 14 September 2026, Paper 6 examinations follow the study guide version 2.7, published in November 2025, alongside the syllabus effective 12 January 2026. Always confirm the version valid for your sitting on the HKSI Institute website before you start, since updates can change examinable content.
How is Paper 6 different from Paper 12 (Asset Management)?
Paper 6 is a regulatory paper: it tests the laws, codes and supervisory framework surrounding asset management in Hong Kong. Paper 12 is a practical paper focused on asset management products, processes and industry practice. Many candidates take them as a pair, but the question styles and emphases differ.
Do I need to memorise every SFC code word for word?
No. The exam rewards understanding distinctions and applying them to scenarios, such as which activity triggers which regulated activity, or which authority governs which layer of a product. Learn the purpose and mechanics of each rule, then practise applying them to hypothetical situations like the ones in this guide.
Are breaches of SFC codes automatically criminal offences?
No, and keeping this hierarchy clear is important. Ordinances such as the SFO create legal duties and offences, while codes and guidelines are regulatory standards; breaching a code can lead to disciplinary consequences and reflect on fitness and propriety, but it is not automatically a crime. Criminal liability arises only where the law itself creates the offence.
Official sources and further reading
- HKSI Paper 6 syllabus and learning outcomes (PDF)
- HKSI current study guide versions and effective dates
- HKSI examination format and study resources
- SFC Code of Conduct
- SFC: Market Misconduct Tribunal orders in false trading case
- SFC power to institute MMT proceedings directly (effective 4 May 2012)
- SFC: Types of intermediary and licensed individual
These independent revision notes explain the public syllabus through original examples. They do not reproduce the official study guide or examination questions. Use the official study guide valid for your examination date for the full examinable detail. HKSIDataBase is an independent provider and is not endorsed by the HKSI Institute.