The Securities and Futures Commission (SFC) is structured into several operational divisions, each with distinct responsibilities. The Supervision of Markets Division is primarily tasked with overseeing market infrastructure, which includes exchanges and clearing houses. A key part of its mandate is formulating policies that facilitate market development and enhance connectivity with other markets, particularly Mainland China. The scenario described involves creating a new clearing and settlement link, which falls directly under the category of market infrastructure development and cross-border linkage. In contrast, the Intermediaries Division focuses on the licensing and ongoing supervision of licensed corporations (like asset management firms), ensuring their financial soundness and proper business conduct. While asset managers would use the new infrastructure, the Intermediaries Division’s role does not extend to creating the market-level systems themselves. The Corporate Finance Division handles matters related to listed companies, takeovers, and the authorization of investment products for public sale, which is distinct from the underlying market plumbing. The Enforcement Division is responsible for investigating and taking action against market misconduct and breaches of regulations, a function that is separate from the initial policy formulation for market structure.

Under the Companies Ordinance (Cap. 622) of Hong Kong, members (shareholders) in a general meeting hold ultimate authority over certain fundamental corporate actions. Statement I is correct because altering the company’s articles of association requires a special resolution passed by the members. Statement II is correct as an off-market share buy-back requires approval by an ordinary resolution of the members, and if the shares are from a connected person like a director, that person and their associates typically cannot vote. Statement III is correct because members have the power to remove a director before the end of their term by passing an ordinary resolution, provided special notice of the resolution has been given. Statement IV is correct because the commencement of a members’ voluntary winding-up and the appointment of a liquidator for this purpose requires a special resolution from the members. Since all four actions require member approval in a general meeting, all statements are correct. Therefore, all of the above statements are correct.

The Securities and Futures (Keeping of Records) Rules establish the primary obligations for licensed corporations regarding record retention. The general principle is that all records must be preserved for a minimum period of seven years. However, this general rule is subject to specific exceptions for certain types of records. For instance, records that document client orders and instructions have a shorter minimum retention period of at least two years. Furthermore, telephone recordings related to client orders are governed by the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, which stipulates a distinct and shorter minimum retention period of six months. Foundational documents, such as those related to the opening of a client account, fall under the general seven-year rule as no specific shorter period is prescribed for them.

Under the Securities and Futures Ordinance (SFO), certain activities are considered ‘dealing in securities’ (Type 1 regulated activity) even if performed by a person not primarily engaged in brokerage, provided they are done for remuneration. These activities often involve acting as an intermediary between a securities dealer and a third party. Statement I, where Alex forwards a client’s purchase offer, constitutes making an offer on behalf of a third person to a securities dealer. Statement II, arranging a meeting for the purpose of opening an account, is a direct example of making introductions between a securities dealer and a third person. Statement IV, relaying a specific buy order, falls under communicating an offer from a third person to a securities dealer. Statement III, however, involves providing a general research report for internal reference, which is an act of information dissemination, not facilitating a specific securities transaction between parties. Therefore, statements I, II and IV are correct.

This question assesses the understanding of the regulations governing the issuance of advertisements for investment products under the Securities and Futures Ordinance (SFO). Statement I is correct because Section 103(3)(k) of the SFO provides an exemption for advertisements in respect of investment products that are intended to be disposed of only to Professional Investors (PIs). Therefore, issuing the advertisement exclusively to clients classified as PIs does not require prior SFC authorization. Statement II is correct as it refers to the exemption under Section 103(2)(a) of the SFO. An advertisement that is a prospectus complying with the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) is exempt from the authorization requirement under Section 104. Statement III is incorrect. While Section 103(3)(i) provides an exemption for the publisher of a newspaper who publishes such an advertisement in the ordinary course of their business, this exemption does not apply to the person who issues the advertisement (in this case, Apex Securities). The issuer remains responsible for ensuring the advertisement is authorized or falls under another exemption. Statement IV is incorrect. According to Section 105(1) of the SFO, when the SFC grants authorization for an advertisement, it is a condition that an individual has been approved by the SFC to receive notices and that the SFC has been notified of their contact details. Therefore, statements I and II are correct.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, specifically paragraph 7.2(c), a licensed or registered person is restricted in the types of benefits they can offer when promoting a specific investment product. The underlying principle is to ensure that a client’s decision to invest is based on the product’s merits and its suitability for their circumstances, rather than being swayed by extraneous inducements. The Code explicitly prohibits offering any form of rebate, gift, or other benefit to a client as an incentive to purchase a product. The only exception permitted is a direct discount on the fees or charges associated with the investment product itself, such as a reduction in the subscription fee or management charge. Offering physical goods, cash-equivalent vouchers, or entry into prize draws are all considered prohibited inducements as they are not discounts on the firm’s charges.

According to the SFC’s circular on remote onboarding of overseas individual clients, a licensed corporation must implement several key safeguards. One of the most critical is the verification of the client’s identity through the banking system. This is achieved by requiring an initial deposit of at least HK$10,000 (or its equivalent) to be transferred from a bank account held in the client’s name at a regulated bank in an eligible jurisdiction. This specific bank account must then be designated as the sole account for all future deposits and withdrawals, creating a secure and traceable channel for funds. This measure provides an external layer of verification, as the overseas bank would have already conducted its own customer due diligence. While technology is central to the process, such as using biometric data and electronic signatures, the initial deposit from a designated, regulated source is a fundamental requirement. Procedures like video calls alone are generally considered insufficient for this specific onboarding method, and requiring physical documents contradicts the purpose of a fully remote process.

This question assesses the ability to distinguish how different features of a virtual asset determine its primary regulatory classification in Hong Kong. A virtual asset’s nature is not defined by its name (e.g., ‘token’) but by its underlying structure and the rights it confers. According to the Securities and Futures Ordinance (SFO), an arrangement can be classified as a Collective Investment Scheme (CIS) if it involves pooling contributions from participants to be managed collectively by an operator, with the expectation of profits arising from the management of the property. In the given scenario, the pooling of proceeds from the token sale for collective investment and the distribution of profits to token holders are hallmark features of a CIS. Since a CIS is defined as a ‘security’ under the SFO, the token falls under the SFC’s regulatory purview for securities. While the token also has characteristics that would subject it to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) (e.g., being a medium of exchange and electronically tradable), its fundamental nature as an investment product (a CIS) makes the SFO the primary framework governing its offering and management. The prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) would apply if the CIS were structured as a share or debenture, but the SFO is the overarching ordinance that first defines it as a security.

The division of regulatory responsibilities between the Securities and Futures Commission (SFC) and the Mandatory Provident Fund Schemes Authority (MPFA) is a key concept. The SFC’s role focuses on the investment management and distribution aspects of MPF products. Statement I is correct because the SFC is responsible for the initial approval and ongoing supervision of firms acting as investment managers for MPF products. Statement II is correct as the SFC Code on MPF Products requires that all marketing materials related to SFC-authorised MPF funds be vetted and authorised by the SFC before publication. Statement IV is correct because the SFC is the designated body to handle complaints concerning the conduct of SFC-licensed persons, such as the investment manager of an MPF fund. Statement III is incorrect; the approval and supervision of MPF scheme trustees is a primary responsibility of the MPFA, not the SFC. The SFC regulates the investment manager, while the MPFA regulates the overall scheme and its trustee. Therefore, statements I, II and IV are correct.

Under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), a breach of specified provisions is a criminal offence. Statement I is correct because the AMLO explicitly states that employees or managers of a licensed corporation who knowingly cause or permit the entity to breach a specified provision are also committing a criminal offence. Statement II is correct as it accurately reflects the maximum penalty for such an offence, which is a fine of HK$1 million and imprisonment for two years. Statement III is also correct; the AMLO provides for a more severe penalty where there is an intent to defraud a relevant authority (like the SFC), increasing the maximum term of imprisonment to seven years while the fine remains at HK$1 million. Statement IV is incorrect because liability under the AMLO is not contingent on the source of illicit funds being from drug trafficking. The AMLO covers a broad range of predicate offences for money laundering. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTRPO) is a separate piece of legislation that specifically deals with the proceeds of drug trafficking, but a breach of AMLO stands on its own. Therefore, statements I, II and III are correct.

According to the Securities and Futures Ordinance (SFO), certain entities are defined as ‘recognised counterparties’. These include Authorised Financial Institutions (AFIs), institutions specifically recognised as such by the SFC, and, crucially, another corporation licensed for Type 3 regulated activity (Leveraged Foreign Exchange Trading) when conducting a transaction with a fellow Type 3 licensee. The primary regulatory implication of this classification is that for the purpose of that specific transaction, the recognised counterparty is not considered to be a ‘client’ of the licensee. This distinction is significant because many of the client protection requirements stipulated in the SFC’s Code of Conduct, such as the need for a formal client agreement, risk disclosures, and suitability assessments, are predicated on the existence of a client relationship. Therefore, when a Type 3 licensee engages in a transaction with a recognised counterparty, these specific client-centric obligations may not apply in the same manner as they would when dealing with a retail or professional investor client.

Statement I is correct because arrangements like ‘paper gold schemes’ are specifically classified as Collective Investment Schemes (CIS) under the Securities and Futures (Collective Investment Schemes) Notice, which was made under the authority of the Securities and Futures Ordinance (SFO). This classification brings them under the regulatory oversight of the SFC. Statement II is also correct. Once a product is deemed a CIS, any related advertisements, invitations, or documents intended for the public must be authorized by the SFC under Section 105 of the SFO before they can be issued. Statement III is incorrect. The Registrar of Companies administers ordinances such as the Companies Ordinance and the Money Lenders Ordinance, but it is not the primary authority for registering or supervising a CIS; that responsibility falls to the SFC. Statement IV is incorrect. While the CGSE is a self-regulatory body for its members, this status does not exempt their products from Hong Kong’s securities laws. If a product, such as a paper gold scheme, meets the legal definition of a CIS under the SFO, it is subject to the SFC’s authorization and advertising rules, regardless of the provider’s CGSE membership. Therefore, statements I and II are correct.

The Securities and Futures Commission (SFC) places significant emphasis on the segregation of duties and independence between the key operators of an authorised Collective Investment Scheme (CIS) to protect the interests of investors. According to the Code on Unit Trusts and Mutual Funds, the trustee/custodian and the management company must be independent of each other. Statement I is correct because they must be separate legal entities. Statement II is correct as this independence is a fundamental requirement to ensure that the trustee can effectively carry out its fiduciary duty to safeguard the scheme’s assets without being influenced by the management company. The scenario presented, where both the management company and the trustee are subsidiaries of the same parent, would violate this independence requirement. Statement III is incorrect; the SFC is highly unlikely to grant an exemption for public funds simply because the entities belong to the same well-established group, as this structure inherently creates a conflict of interest. Statement IV is also incorrect because having a Responsible Officer of the management company also serve as a director of the trustee would be a clear and direct breach of the independence principle. Disclosure in the offering document cannot remedy such a fundamental structural conflict. Therefore, statements I and II are correct.

Under the Securities and Futures Ordinance (SFO), the definition of a ‘substantial shareholder’ of a corporation is specific and crucial for regulatory oversight of licensed corporations. One of the tests to determine this status involves an indirect control structure. A person is considered a substantial shareholder of a licensed corporation if they, either alone or with associates, can exercise 35% or more of the voting power at a general meeting of another corporation, and that other corporation, in turn, can exercise more than 10% of the voting power at a general meeting of the licensed corporation. In the scenario presented, the first condition is met as the holding company exercises 40% of the voting power in the intermediary corporation, which exceeds the 35% threshold. The second condition is also met because the intermediary corporation exercises 15% of the voting power in the licensed corporation, which is more than the 10% threshold. Therefore, both parts of this specific test are satisfied, establishing a regulatory relationship between the ultimate holding company and the licensed corporation.

Statement I is correct. The core principle of the Securities and Futures (Financial Resources) Rules (FRR) is that a licensed corporation must maintain, at all times, liquid capital that is not less than its required liquid capital. This ensures the firm has sufficient liquid assets to meet its liabilities and operate soundly. Statement III is also correct. To monitor compliance, the SFC requires licensed corporations to submit periodic financial returns, typically on a monthly basis, detailing their financial position, including their liquid capital computation. Statement II is incorrect because the FRR applies to licensed corporations and is enforced by the SFC. Registered institutions, which are typically banks, are supervised by the Hong Kong Monetary Authority (HKMA) and are subject to its capital adequacy requirements, not the FRR. Statement IV is incorrect as it confuses the firm’s capital with client assets. The Securities and Futures (Client Money) Rules and (Client Securities) Rules mandate that client assets must be strictly segregated from the firm’s own assets and cannot be used to meet the firm’s capital requirements. Therefore, statements I and III are correct.

The SFC’s Code of Conduct on Unlisted Structured Investment Products (the SIP Code) establishes strict eligibility requirements for issuers. An entity can be an eligible issuer if it falls into one of several categories. The first category includes entities regulated by the HKMA, corporations licensed by the SFC, or overseas banks with acceptable regulatory oversight. If an issuer does not meet these criteria, it may still qualify under this first category if it has a high credit quality, specifically a credit rating that is one of the top three investment grades from an internationally recognized rating agency acceptable to the SFC. A separate category of eligibility applies to SIPs that are either fully guaranteed or fully collateralised. For a non-collateralised SIP, the issuer’s obligations must be fully guaranteed by an entity that itself meets the eligibility requirements. For an SIP issued by a Special Purpose Vehicle (SPV), the product must be fully collateralised according to the SIP Code’s specific requirements. Therefore, for a non-regulated entity issuing a non-collateralised and non-guaranteed SIP, its credit rating is the critical qualifying factor.

This question assesses the understanding of key operational and security requirements for electronic trading systems as stipulated by the SFC. Statement I is correct; the Code of Conduct and related guidelines mandate that licensed corporations must regularly stress test the capacity of their electronic trading systems and document the findings to ensure system resilience. Statement II is also correct; firms must have documented contingency arrangements to manage situations where client order flow exceeds the system’s capacity, ensuring alternative means of order execution are available to clients to avoid service disruption. Statement IV is correct; a fundamental security control is to ensure system access is restricted to approved personnel on a ‘need-to-have’ basis, using reliable authentication methods to prevent unauthorised use. Statement III is incorrect. While licensed corporations must keep proper records of all client orders and trades, the specific requirement for documenting the electronic trading system itself pertains to its design, development, testing, reviews, modifications, and upgrades, not the daily transactional data flowing through it. Therefore, statements I, II and IV are correct.

Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO), a court may order the winding up of a company if it is of the opinion that it is ‘just and equitable’ to do so. One of the established grounds for a ‘just and equitable’ winding up is the breakdown of the fundamental basis of mutual trust and confidence upon which the company was formed. This is particularly relevant for companies that are essentially ‘quasi-partnerships,’ where the shareholders are also involved in the management and have a personal relationship. In such cases, a shareholder, who is considered a ‘contributory,’ is the appropriate party to petition the court. While other parties like creditors, the Registrar of Companies, or the SFC can also petition for winding up, their grounds are different. A creditor typically petitions on the basis of insolvency. The Registrar petitions for statutory non-compliance (e.g., failure to file returns) or if the company’s purpose is unlawful. The SFC can petition in the public interest, usually concerning regulated activities or listed companies, which is not the primary issue in a dispute among founders of a private entity.

This question assesses the understanding of managing conflicts of interest as required by the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. General Principle 6 states that a licensed person should try to avoid conflicts of interest, and where they cannot be avoided, must ensure that clients are fairly treated. The Code requires firms to establish, maintain, and enforce written policies to identify and manage actual and potential conflicts. When a significant personal conflict arises, such as a close family relationship with the management of a potential investment, the primary duty is to protect the client’s interests. The most effective way to manage such a direct conflict is for the individual to disclose it internally to their superiors or compliance department and to be removed from the decision-making process related to that specific transaction. Simply documenting the rationale, disclosing after the fact, or limiting the transaction size does not adequately mitigate the risk that the individual’s judgment could be compromised, or be perceived as compromised, thereby failing to ensure the client is treated fairly.

This question assesses the understanding of specific record-keeping requirements for licensed corporations providing internet trading or Direct Market Access (DMA) services, as stipulated in paragraph 18 and Schedule 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. Statement I is correct because the Code requires that comprehensive documentation of the risk management controls of a system must be retained for a period of not less than two years after the system has ceased to be used. Since the system was decommissioned on 30 June 2022, the documentation must be kept until at least 30 June 2024. Statement II is correct as the Code also mandates that audit logs on activities and incident reports must be kept for a period of not less than two years. The two-year period for an audit log starts from the date the log was created. Therefore, a log from 15 January 2022 must be kept until at least 15 January 2024. Statement III is incorrect because the retention period for incident reports is tied to the date of the report itself, not linked to the implementation date of a new system. Statement IV is incorrect because it confuses the specific two-year retention rule for these system records with the general seven-year record-keeping requirement under the Securities and Futures (Keeping of Records) Rules, which applies to other records like transaction orders and client agreements. Therefore, statements I and II are correct.

This question tests the candidate’s ability to distinguish between issuer warrants (governed by MBLR Chapter 15) and derivative warrants (governed by MBLR Chapter 15A). Issuer warrants are issued by a listed company itself (or its subsidiary) and serve as a capital-raising instrument. When holders exercise these warrants, they subscribe for new shares from the company, which increases the company’s issued share capital and dilutes the holdings of existing shareholders. In contrast, derivative warrants are issued by an independent third party, typically an investment bank. They are structured products designed for investment, speculation, or hedging. The exercise of a derivative warrant does not involve the underlying company issuing new shares; settlement is handled by the third-party issuer, either through cash payment or by delivering existing shares sourced from the market. Therefore, derivative warrants have no dilutive effect on the underlying company’s share capital. The primary purpose for the investment bank is to profit from the warrant’s premium and trading, not to provide capital to the underlying company.

This question assesses understanding of corporate governance principles, particularly the roles and responsibilities of the Board of Directors and senior management within a licensed corporation, as guided by the SFC’s Internal Control Guidelines (ICG) and the Code of Conduct. Statement I is correct because the Board of Directors has the ultimate responsibility for the overall governance, risk management, and internal control systems of the firm. This includes ensuring that all functions, especially critical ones like compliance, are adequately resourced to operate effectively. Statement III is also correct. The Manager-In-Charge (MIC) regime was established to enhance senior management accountability. The MIC of the Compliance function is directly responsible for the firm’s compliance systems and has a clear duty to escalate significant concerns, such as a lack of resources that could lead to regulatory breaches, directly to the Board. Statement II is incorrect because while the CEO manages daily operations, the Board has an overarching oversight duty. A decision that could materially impact the firm’s risk profile and ability to comply with regulations is not merely operational; it is a strategic governance issue requiring Board scrutiny. Statement IV is incorrect because the external auditor’s role is to provide an independent opinion on the financial statements and report on internal control weaknesses they identify during their audit; they do not have the authority to approve or veto internal management decisions like departmental budgets. Therefore, statements I and III are correct.

This question assesses the understanding of the fundamental characteristics of a private company limited by shares under the Hong Kong Companies Ordinance (CO).

Statement I is correct. A core principle of company law is that a company is a separate legal entity, distinct from its members (shareholders). This means it can own property, enter into contracts, and sue or be sued in its own name. This principle grants the members limited liability.

Statement II is correct. According to section 11 of the Companies Ordinance, a defining feature of a private company is that its articles of association must restrict the right to transfer its shares. This is a key distinction from a public company, whose shares are typically freely transferable.

Statement III is incorrect. While a private company is limited to a maximum of 50 members, the count specifically excludes persons who are in the employment of the company and persons who, having been formerly in the employment of the company, were while in that employment, and have continued after the determination of that employment to be, members of the company. The statement incorrectly implies that employees are always included in the count.

Statement IV is correct. A private company is explicitly prohibited from making any invitation to the public to subscribe for its shares or debentures. This is a fundamental restriction that prevents it from raising capital from the general public. Therefore, statements I, II and IV are correct.

This question assesses the understanding of the SFC’s powers of intervention under Part X of the Securities and Futures Ordinance (SFO).

Statement I is correct. Under section 204 of the SFO, the SFC has the power to issue a restriction notice to a licensed corporation. This notice can restrict the scope of its business activities, which includes prohibiting it from taking on new clients or entering into new transactions to prevent further risk to the public.

Statement II is correct. One of the primary grounds for the SFC to exercise its intervention powers is when a licensed corporation, or its management, ceases to be ‘fit and proper’ to remain licensed. The described misconduct directly challenges the firm’s integrity and competence, justifying the SFC’s conclusion that it is no longer fit and proper.

Statement III is incorrect. The power to issue a restriction notice under section 204 of the SFO is an administrative power granted directly to the SFC. The SFC does not need to obtain a court order before issuing such a notice. This allows the SFC to act swiftly to protect investors. The licensed corporation has the right to appeal the decision to the Securities and Futures Appeals Tribunal (SFAT).

Statement IV is correct. The fundamental purpose of the SFC’s intervention powers under Part X is protective, not punitive. These powers are designed to safeguard the interests of the investing public, protect client assets, and maintain the integrity of the market. Therefore, statements I, II and IV are correct.

Under the SEHK’s disciplinary framework, decisions made by the Listing Committee are subject to a review process. A party that has been disciplined, such as a listed issuer, has the right to request that the decision be reviewed by the Listing Review Committee. Independently, the Securities and Futures Commission (SFC) also has the authority to request the Listing Review Committee to review any decision made by the Listing Committee. A critical aspect of this process arises when a review is initiated by the SFC. If, as a result of this SFC-initiated review, the Listing Review Committee overturns or modifies the original decision (for instance, by imposing a stricter penalty), the disciplined party is granted the right to a further review. This subsequent review is conducted by a new Listing Review Committee, composed of members who were not involved in the prior review, to ensure impartiality.

This question assesses understanding of the paid-up share capital requirements under the Securities and Futures (Financial Resources) Rules (FRR). Statement I is incorrect. When a licensed corporation conducts more than one regulated activity, it must maintain the highest single paid-up share capital requirement applicable to its activities, not the sum of the requirements. Statement II is correct. Certain licensed corporations, including securities advisers (Type 4) that do not hold client assets, are exempt from the paid-up share capital requirement. Statement III is correct. According to the FRR, a licensed corporation that fails to maintain its required paid-up share capital must cease its regulated activities unless it obtains specific permission from the SFC to continue operating while it rectifies the breach. It must also notify the SFC of the breach. Statement IV is correct. Paid-up share capital and Required Liquid Capital (RLC) are two distinct and separate financial resource requirements under the FRR. A licensed corporation must comply with both requirements independently at all times. Therefore, statements II, III and IV are correct.

Statement I is incorrect. Common law is distinct from statute law; it is developed by judges through court decisions (case law), not through legislation passed by the Legislative Council. Statute law is created by the legislature. Statement II is correct. This reflects the doctrine of precedent (stare decisis), a fundamental principle of the common law system where decisions of higher courts are binding on lower courts. The Court of Final Appeal is the highest court in Hong Kong, and its decisions must be followed by the High Court. Statement III is incorrect. A key historical and current principle is that where the rules of common law and equity conflict, the rules of equity shall prevail. Equity was developed to mitigate the harshness of common law. Statement IV is correct. This accurately describes the source of authority for common law, which is rooted in judicial precedent and long-established customs, as opposed to a comprehensive, codified set of statutes found in civil law jurisdictions. Therefore, statements II and IV are correct.

Under the Securities and Futures (Keeping of Records) Rules, licensed corporations are subject to specific record retention periods. The general requirement is that most records must be kept for a minimum period of seven years. This applies to fundamental documents such as client agreements, account opening forms, correspondence, and ledgers. However, there are specific exceptions for certain types of records. For instance, records documenting client orders and instructions, as well as copies of contract notes, are required to be retained for a shorter minimum period of at least two years. Furthermore, telephone recordings related to client orders are governed by the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, which stipulates a minimum retention period of six months. A compliant record-keeping policy must therefore differentiate between these categories of records to ensure that the minimum retention period for each type is met or exceeded.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, intermediaries conducting securities margin financing must provide clients with daily statements. These statements must be issued no later than the end of the second business day following the transaction. For securities margin finance, the statement must contain specific details to ensure transparency and allow the client to monitor their risk exposure. Key required elements include the opening and closing balances, all movements in the account, the quantity, market price, and value of each security and collateral. Crucially, it must also include the margin ratio and margin value for each description of securities and collateral as at the end of the day. Information such as forward-looking projections, details of the specific executing representative, or aggregated data from different reporting periods (like monthly commissions) are not mandated requirements for the daily statement.

This question assesses understanding of the key principles of operational controls and risk management for licensed intermediaries, as outlined in the SFC’s Code of Conduct and the accompanying Internal Control Guidelines.

Statement I is correct. Senior management holds the ultimate responsibility for establishing and defining the firm’s risk policy. This includes approving the methodologies used for measuring and reporting risks, ensuring they are appropriate for the firm’s business size, complexity, and strategy.

Statement II is correct. The Internal Control Guidelines emphasize that comprehensive risk reviews should not only be conducted at regular intervals (e.g., annually) but also be triggered by significant changes. The departure of key personnel, such as a Head of Compliance, is explicitly considered a significant event that warrants such a review to assess potential control gaps or operational impacts.

Statement III is correct. Paragraph 6.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission specifically requires intermediaries who provide investment advice to document the rationale underlying their recommendations and to provide a copy of that rationale to the client. This ensures transparency and helps demonstrate that the advice was suitable.

Statement IV is incorrect. While certain material breaches must be reported to the SFC, the primary and regular reporting line for significant variances from risk tolerance is to the intermediary’s own senior management. This internal reporting is crucial for timely oversight and corrective action. Reporting is expected to be regular, but a strict ‘monthly’ requirement for all variances to the SFC is not the standard procedure; the focus is on internal governance first. Therefore, statements I, II and III are correct.