The Securities and Futures Commission (SFC) places significant emphasis on Continuous Professional Training (CPT) as a means for licensed individuals to maintain their professional competence and stay updated on market and regulatory developments. The Guidelines on Continuous Professional Training stipulate the minimum annual CPT requirements. A critical aspect of this regime is record-keeping. Both the licensed corporation and the individual licensed representative are responsible for keeping adequate records of CPT activities, including proof of attendance, for a minimum of three years. For a Responsible Officer (RO), this falls under their supervisory and management responsibilities. An RO must ensure the firm has robust internal controls and procedures to monitor and document CPT compliance for all licensed staff. A failure in record-keeping is a serious compliance breach. It can call into question the fitness and properness of not only the individual representatives but also the licensed corporation and its management, including the RO. The SFC expects firms to take prompt and effective remedial action when such deficiencies are identified. This involves investigating the lapse, rectifying the situation where possible, and, most importantly, strengthening the internal control systems to prevent recurrence. A failure to act decisively could be viewed as a weakness in the firm’s overall risk management and compliance culture, potentially leading to disciplinary action.

The rules governing Traded Options business specify the conditions under which a ‘give-up’ can occur. A give-up is a client-initiated process to transfer a matched options contract from one Trading Participant to another. Statement I is correct because the rules explicitly state that a give-up request can only be made by a SEOCH participant if a client so requests. The Trading Participant cannot initiate this for its own purposes. Statement II is correct as it accurately describes the legal mechanism of novation, where the acceptance of a give-up results in the original client contract being immediately replaced by a new client contract with the accepting Trading Participant. Statement III is incorrect; the procedure is strictly for accommodating client requests, not for a Trading Participant’s internal operational convenience or risk management. Statement IV is correct because SEOCH, as the clearing house, has the authority to demand evidence from the initiating Trading Participant to substantiate that the give-up was genuinely requested by the client, ensuring the facility is not misused. Therefore, statements I, II and IV are correct.

The Stock Exchange of Hong Kong (SEHK) has the authority to suspend trading in a security to maintain a fair, orderly, and informed market. All four statements describe valid grounds for such a suspension under the Listing Rules.

Statement I: The Listing Rules (specifically Rule 8.08) require a listed issuer to maintain a minimum public float, which is generally 25% of the issuer’s total issued shares. If the public float falls below this level, the SEHK may suspend trading until the issuer takes remedial action.

Statement II: Rule 13.24 of the Listing Rules requires an issuer to carry out a business with a sufficient level of operations and to have assets of sufficient value to warrant its continued listing. If an issuer sells its main business and becomes a ‘shell company’, the SEHK may determine that it no longer meets this requirement.

Statement III: A fundamental obligation for listed issuers is to comply with the Listing Rules. A material breach, such as the failure to disclose price-sensitive information in a timely manner, undermines market integrity and is a clear basis for the SEHK to suspend trading to protect investors.

Statement IV: The SEHK retains a broad discretion to suspend an issuer if it considers that the issuer is no longer suitable for listing. This can encompass a wide range of issues, including concerns about management integrity, the nature of the business, or other factors that compromise the issuer’s appropriateness for a public listing. Therefore, all of the above statements are correct.

Statement I is incorrect. Securities traded through the Northbound link are held in scripless form within CCASS in an omnibus account maintained by HKSCC with ChinaClear. Physical deposit or withdrawal of these share certificates is not permitted.

Statement II is incorrect. According to the rules governing Stock Connect, HKSCC and ChinaClear do not participate in each other’s risk management pools. The HKSCC Guarantee Fund is not used to cover losses arising from a default by ChinaClear. In such an event, HKSCC would seek to recover assets through legal and liquidation processes on behalf of participants.

Statement III is incorrect. The rules for Stock Borrowing and Lending (SBL) are specific to the purpose. For meeting pre-trade checking requirements, the SBL agreement cannot exceed one day and cannot be rolled over. The one-calendar-month limit applies to SBL for the purpose of covered short selling, not pre-trade checking.

Statement IV is correct. The SSE and SZSE monitor margin trading activity closely. They may suspend further margin trading in a specific eligible stock if the ‘margin trading indicator’ for that stock reaches a threshold of 25%. Therefore, statement IV is correct.

This question assesses the application of the Investor Compensation Fund (ICF) rules regarding claimant eligibility, compensation limits, and product coverage. Statement I is correct because the ICF provides separate compensation limits for exchange-traded securities and exchange-traded futures contracts. A single claimant can receive a maximum of HK$150,000 for securities losses and another HK$150,000 for futures losses from the same defaulting intermediary, for a total of HK$300,000. Statement II is incorrect as the ICF explicitly does not cover any losses on A-shares purchased through the Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect. Statement III is correct because each holder of a joint account is treated as an individual claimant. Therefore, both Mr. Chan and Mrs. Chan are each entitled to claim up to HK$150,000 for their share of the loss in the joint account, resulting in a collective maximum compensation of HK$300,000 for that account. Statement IV is incorrect because the ICF is designed to protect retail investors. Corporations licensed by the SFC, such as Chan Capital Ltd., are considered institutional investors and are explicitly excluded from claiming compensation. Therefore, statements I and III are correct.

This question assesses the understanding of HKSCC’s risk management tools, specifically the distinction between ‘marks’ and ‘margin’ collected from CCASS Clearing Participants.

Statement I is correct. HKSCC collects ‘marks’ to manage its market risk exposure arising from unfavourable price movements on a Clearing Participant’s unsettled stock positions specifically under the Continuous Net Settlement (CNS) system. This is done by marking these positions to market.

Statement II is correct. Margin is a broader risk management tool than marks. HKSCC is entitled to compute and collect margin on all of a Clearing Participant’s unsettled stock positions, not just those under the CNS system, and can do so at any time, whether the positions are due for settlement or not.

Statement III is incorrect. While cash is the normal method for collecting both marks and margin, the CCASS rules explicitly state that HKSCC may, in exceptional cases, accept collateral securities from CCASS Clearing Participants.

Statement IV is incorrect. A key feature of HKSCC’s risk management is its proactive nature. HKSCC has the right to collect marks and compute margin on all unsettled stock positions, ‘whether or not due for settlement’. This allows HKSCC to manage risk before a potential default occurs, not just after a settlement has failed. Therefore, statements I and II are correct.

Statement I is correct. According to the Rules of the Exchange, if an Exchange Participant is suspended from trading, it is under a duty to appoint another Exchange Participant to carry out any instructions already received from its clients prior to the suspension. Statement III is also correct. Expulsion is the most severe disciplinary action and results in the permanent loss of all rights and privileges of an Exchange Participant, including the right to trade on the SEHK. Statement II is incorrect; the Investor Compensation Levy has been suspended by the SFC since 19 December 2005 and is not charged on any transactions, regardless of the circumstances of the executing broker. The suspension of one firm does not reactivate the levy for its clients’ trades. Statement IV is incorrect; the rules specify that the suspended Exchange Participant must immediately notify the SEHK in writing of the appointment of the replacement firm. While the SFC is the front-line regulator for overall conduct, the operational notification for this specific event is directed to the SEHK. Therefore, statements I and III are correct.

Statement I is incorrect. The Companies Registry’s role is primarily administrative, focusing on company incorporation, maintenance of statutory records, and dissolution of defunct companies. It does not engage in prudential supervision or the regulation of a company’s business conduct; such functions are carried out by specific sectoral regulators like the SFC for licensed corporations or the HKMA for banks.

Statement II is correct. Under the Money Lenders Ordinance, a licence to carry on business as a money lender is granted by the Licensing Court. The application process involves an investigation by the Commissioner of Police and processing by the Registrar of Money Lenders (a post concurrently held by the Registrar of Companies), both of whom can raise objections to the application.

Statement III is incorrect. While the Insurance Authority (IA) is the direct regulator and licensor of insurance intermediaries, the appointing insurer (the Principal) retains significant supervisory responsibilities for the conduct of its appointed agents. The regulatory framework requires insurers to have effective controls and procedures to ensure their agents act in compliance with all applicable laws and regulations. The responsibility is shared, not solely vested in the IA.

Statement IV is correct. Investment-Linked Assurance Schemes (ILAS) are hybrid products with both insurance and investment elements. Consequently, they are subject to a dual regulatory regime. The SFC is responsible for authorizing the underlying investment funds and the marketing materials under the Securities and Futures Ordinance (SFO). The Insurance Authority is responsible for authorizing the insurance company that issues the ILAS policy and for regulating the insurance-related aspects of the product. Therefore, statements II and IV are correct.

Under the Securities and Futures Ordinance (SFO), a person must obtain prior approval from the Securities and Futures Commission (SFC) before becoming a substantial shareholder (i.e., holding an interest of 10% or more in the voting shares) of a licensed corporation. Becoming a substantial shareholder without such approval is an offence. However, the SFO provides a defence if the person was not aware, and could not have reasonably discovered, that they had become a substantial shareholder. Upon becoming aware, the person must apply to the SFC for approval to continue as a substantial shareholder ‘as soon as reasonably practicable’ and within three business days. A critical provision (s. 131, SFO) states that until the SFC grants this approval, the person is prohibited from exercising any voting rights associated with their shareholding in the licensed corporation. The SFC also has powers to direct the licensed corporation to forbid the shareholder’s participation in management or, if the application is rejected, to direct the shareholder to reduce their interest.

According to regulatory guidelines concerning operational controls, senior management is responsible for ensuring a robust internal audit function. When external auditors are engaged, they may coordinate with the internal audit team to improve efficiency. However, the external auditors retain ultimate responsibility for their audit opinion. Before placing any reliance on the work performed by the internal audit function, the external auditors must first conduct their own independent assessment of that function. The key criteria for this assessment are the competence, objectivity, and independence of the internal audit staff. If the external auditors are not satisfied that the internal audit function is sufficiently skilled, resourced, and free from undue influence from management, they cannot rely on its work and must perform the procedures themselves.

According to Hong Kong’s anti-money laundering and counter-terrorist financing (AML/CFT) legislative framework, including the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRPO) and the Organized and Serious Crimes Ordinance (OSCO), there is a strict legal obligation to not ‘tip off’ a client. Once a suspicious transaction report (STR) has been filed with the Joint Financial Intelligence Unit (JFIU), informing the client or any third party in a way that could prejudice an investigation is a criminal offence. The purpose of this rule is to ensure that potential criminals are not alerted to the fact they are under suspicion, which would allow them to conceal or move assets and destroy evidence. While a firm may need to freeze an account, this is typically done upon instruction from law enforcement, not automatically upon filing an STR. In many cases, the JFIU may consent for the firm to continue operating the account to avoid arousing the client’s suspicion. Any further requests for information from the client post-filing must be handled with extreme care to avoid tipping them off. The primary recipient for STRs is the JFIU, not directly the SFC’s enforcement or disciplinary departments.

Securities Borrowing and Lending (SBL) is a fundamental component of a developed securities market, as defined under Schedule 1 of the Securities and Futures Ordinance (SFO). Its primary market-wide benefit is the enhancement of liquidity. By allowing long-term holders of securities (such as custodians and institutional funds) to lend out their holdings, SBL increases the volume of securities available for trading. This can lead to tighter bid-ask spreads and a greater capacity for the market to absorb large orders, thereby improving overall market efficiency. Furthermore, SBL is the mechanism that underpins regulated short selling. Short selling allows investors who believe a security is overvalued to act on that view, which contributes to a more robust and efficient price discovery process by incorporating negative sentiment into the market price. While the Rules of the Exchange mandate strict risk management practices, such as collecting collateral of at least 100% of the value of the securities loaned, these rules are designed to mitigate counterparty risk for the participants, rather than being the primary market-wide functional benefit. It is also important to distinguish SBL from capital-raising activities; SBL involves the temporary loan of existing securities and does not provide new funding to the issuing corporation.

This question assesses the understanding of the fundamental risks associated with margin trading and the disclosure obligations of a licensed corporation under the SFC Code of Conduct. Statement I is correct because a core risk of margin trading is that losses are not capped at the initial margin deposit; clients can lose more than their initial investment and may be required to deposit additional funds to cover losses. Statement II is correct as the margin agreement typically grants the licensed corporation the right to liquidate a client’s collateral (securities) without their express consent if they fail to meet a margin call, in order to cover the deficit. Statement III is also correct; while ‘stop-loss’ orders are a risk management tool, they are not a guarantee. In volatile or ‘gapping’ markets, the execution price can be significantly different from the stop price, meaning the order may not be effective in limiting losses as intended. Statement IV is incorrect. Under General Principle 5 (Information for clients) and paragraph 8.1 of the Code of Conduct, providing adequate disclosure of relevant material information, including risks, is a primary and upfront obligation. It is not a secondary formality and must be done before or at the point of entering into such trading activities to ensure the client makes an informed decision. Therefore, statements I, II and III are correct.

This question assesses the understanding of General Principle 9 of the SFC Code of Conduct and the associated Management, Supervision and Internal Control Guidelines, which outline the responsibilities of a licensed corporation’s senior management. Statement I is correct as senior management bears the primary responsibility for ensuring that comprehensive policies and procedures are established, documented, and effectively implemented to ensure compliance with regulatory requirements. Statement III is also correct; establishing a strong corporate culture that emphasizes compliance and ethics, often referred to as setting the ‘tone from the top’, is a fundamental duty of senior management. Statement II is incorrect because while senior management is responsible for ensuring that proper controls like trade reconciliation are in place and functioning effectively, they are not expected to personally conduct such day-to-day operational tasks. This function should be delegated to appropriate staff with proper segregation of duties and supervision. Statement IV is incorrect as it sets an unrealistic and absolute standard. The responsibility of senior management is to implement and maintain appropriate and effective internal controls to manage and mitigate risks, not to provide an absolute guarantee that no breaches or failures will ever occur. Therefore, statements I and III are correct.

Under the Securities and Futures Ordinance (SFO), the default principle is that a licensed representative should be accredited to only one principal (a licensed corporation). This is to ensure clear lines of supervision and accountability. However, the SFO provides an exception to this rule. The Securities and Futures Commission (SFC) may grant approval for a licensed representative to be accredited to more than one licensed corporation, provided that these corporations belong to the same corporate group. The rationale is that within a single group, supervisory structures and compliance controls can be effectively integrated, mitigating the risks of conflicts of interest and inadequate oversight. This is not an automatic right; the corporations must submit an application to the SFC, which will assess the arrangement to ensure that proper supervision of the representative can be maintained across all principals.

This question tests the specific rules for handling short selling orders, particularly the exception for oral assurance. Statement I is correct because the Securities and Futures (Short Selling and Securities Borrowing and Lending (Miscellaneous)) Rules explicitly allow an agent (the brokerage) to accept oral assurance from a principal client, provided the agent records it via tape or a time-stamped written record. Statement II is correct as it describes the core condition for the oral assurance to be valid: the seller must have a confirmation from the counterparty that the securities are available to be lent. Statement III is a fundamental requirement under the Rules of the Exchange; all short selling orders must be properly identified and marked when entered into the trading system. Statement IV is incorrect because it contradicts the specific provision allowing for oral assurance. Requiring a signed SBL agreement before execution would negate the purpose of the oral assurance rule, which is designed for situations where a firm agreement is in place but documentation is not yet finalized. Therefore, statements I, II and III are correct.

Statement I describes an overvalued connected transaction, where an asset is acquired from a connected person (the CEO’s spouse) at an excessively high price. This is a classic example of a corporate governance failure that harms the interests of the fund’s investors and is a breach of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, specifically concerning conflicts of interest and fair treatment of clients. Statement II describes front-running, a form of market misconduct and a serious breach of fiduciary duty where a manager personally benefits from knowledge of the fund’s trading intentions. This is a severe integrity issue and a focus of SFC enforcement. Statement III highlights a failure in record-keeping and internal controls. Under the SFO and the Code of Conduct, licensed corporations are required to maintain proper documentation to demonstrate compliance and justify their actions, and failure to do so is a regulatory breach that impedes the SFC’s supervisory function. Statement IV is not a deficiency; the use of a major international accounting standard like IFRS is a feature of good governance. The fact that another jurisdiction uses a different standard (US GAAP) is irrelevant to the firm’s compliance in Hong Kong, as long as it adheres to the required standards for its own reporting. Therefore, statements I, II and III are correct.

This question assesses the understanding of key governance, access, and operational requirements for Alternative Liquidity Pools (ALPs) as stipulated in Paragraph 19 and Schedule 8 of the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. Statement I is correct because an ALP operator must establish a formalized governance process that includes input from its risk and compliance functions to manage the associated risks effectively. Statement II is correct as a fundamental requirement is that access to ALPs is restricted to ‘qualified investors’ only, and measures must be in place to ensure orders routed to the ALP originate from such investors. Statement IV is correct, as the Code of Conduct mandates that at least one Responsible Officer (RO) or Executive Officer (EO) must be formally assigned responsibility for the overall management and supervision of the ALP. Statement III is incorrect because a defining characteristic of an ALP is the absence of pre-trade transparency. Requiring pre-trade price and volume information would contradict the fundamental nature of an ALP, which is designed to be a ‘dark pool’. Therefore, statements I, II and IV are correct.

Statement I is correct. Under section 457 of the New Companies Ordinance (NCO), a private company must have at least one director who is a natural person. Statement II is correct. The NCO provides that a court may issue a disqualification order against a person for several reasons, one of which is persistent default in relation to the requirements of the NCO, such as filing obligations. Statement III is incorrect. The definition of a ‘shadow director’ under the NCO explicitly excludes a person giving advice in a professional capacity. A retained legal advisor providing professional guidance falls under this exclusion. Statement IV is incorrect. According to section 454 of the NCO, a private company is only required to have a minimum of one director. The requirement for a minimum of two directors applies to public companies. Therefore, statements I and II are correct.

Good corporate governance, as emphasized by regulators like the SFC and the SEHK, advocates for a clear separation of powers to ensure proper checks and balances. The role of the Chairman is primarily to lead the board of directors, ensuring it functions effectively and oversees the executive management. The Chief Executive Officer (CEO) is responsible for the day-to-day management and operations of the company. Combining these two roles in a single individual concentrates significant power, potentially compromising the board’s ability to provide independent oversight and challenge the executive’s decisions. This structure can weaken accountability and is generally viewed as a deviation from best practice. The Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC require licensed corporations to establish and maintain effective internal controls, which includes a clear governance structure with well-defined responsibilities and appropriate checks and balances.

Part IX of the Securities and Futures Ordinance (SFO) grants the SFC the authority to take disciplinary action against a ‘regulated person’ who is found to be guilty of misconduct or is not considered a fit and proper person. A ‘regulated person’ includes licensed corporations, licensed representatives, and responsible officers. The purpose of these disciplinary actions is to protect the investing public and maintain the integrity of the market. The range of sanctions available to the SFC is broad and includes revoking or suspending a license, issuing a public or private reprimand, prohibiting the person from applying for a license or registration for a specific period, and imposing a financial penalty. It is important to distinguish these regulatory disciplinary actions from other remedies. For instance, criminal proceedings for market misconduct, which could lead to imprisonment, are governed by Part XIV of the SFO and are handled by the courts. Similarly, while the SFC can seek court orders for investor compensation under other sections of the SFO (e.g., Section 213), directly ordering compensation is not one of the primary disciplinary sanctions listed under Part IX.

According to the Rules of the Exchange, an Exchange Participant engaging in securities borrowing and lending (SBL) activities must adhere to strict collateralisation requirements. The minimum amount of collateral required depends on the purpose of the borrowing. For a standard securities loan, the collateral must be at least 100% of the market value of the securities loaned. However, when the securities are borrowed specifically to support a short selling transaction, the associated risk is considered higher. To mitigate this increased risk, the SEHK mandates a higher collateral threshold. In such cases, the Exchange Participant must collect collateral equivalent to at least 105% of the value of the securities. Furthermore, all SBL positions must be marked to market at least daily against the previous day’s closing price to ensure collateral levels remain adequate.

This question assesses the understanding of the segregation of duties, a key area within the SFC’s Internal Control Guidelines (ICG). The principle is that incompatible duties should be separated to reduce opportunities for abuse, fraud, or error. Statement I is a failure because it combines a front-office dealing function with a back-office asset control function (reconciliation of the client trust account), creating a risk of concealing unauthorized trades or misappropriating client assets. Statement II represents a clear conflict of interest, as an individual cannot objectively perform a compliance review on their own advisory work; this undermines the independence of the compliance function. Statement III is also a failure because the person initiating a client relationship (and potentially motivated by business targets) should not have the final authority to approve the account, as it removes a critical layer of independent oversight in the client take-on and KYC process. Statement IV, however, describes a correct application of the segregation principle, where the internal audit function is kept independent from the operational functions it reviews. Since the question asks to identify the failures in segregation, statements I, II, and III are the correct examples. Therefore, statements I, II and III are correct.

This question assesses the understanding of management liability under the Securities and Futures Ordinance (SFO). Statement I is correct because Section 194 of the SFO establishes that a person involved in the management of a licensed corporation, such as a Responsible Officer (RO) who is also an executive director, can be held liable for misconduct if it is attributable to their neglect. A lack of adequate oversight can be considered neglect. Statement II is correct as the same provisions (ss. 194 and 196, SFO) hold that an RO can be personally liable if they have consented to or connived at the misconduct of the corporation. Being aware of issues and failing to act constitutes connivance. Statement III is incorrect because Section 125 of the SFO requires a licensed corporation to have at all times at least two ROs. If one is suspended, the firm would fall below this statutory minimum and would need to cease its regulated activities until the requirement is met again. Statement IV is incorrect because the SFO explicitly introduces personal liability for ROs and persons involved in management for the misconduct of the corporation, in addition to the liability of the corporation itself. Therefore, statements I and II are correct.

Statement I is correct. A key feature of a central counterparty (CCP) like HKSCC is novation. Through novation, HKSCC interposes itself between the original buying and selling Clearing Participants for every matched trade eligible for the Continuous Net Settlement (CNS) system. This means HKSCC becomes the legal counterparty to every trade, acting as the seller to the buyer and the buyer to the seller, which centralizes and mitigates counterparty risk. Statement II is also correct. The CNS system simplifies settlement by calculating a single net stock position for each Clearing Participant in each security for a specific settlement day. It achieves this by offsetting all of a participant’s buy and sell transactions in that security, reducing the number of shares that need to be physically settled. Statement III is correct. The Guarantee Fund is a critical risk management tool for HKSCC. All Clearing Participants are required to contribute to this fund. In the event a participant defaults on its settlement obligations, HKSCC can use the resources in the Guarantee Fund to cover the resulting losses, thereby protecting the integrity of the market. Statement IV is incorrect. Money settlement under the CNS system is not conducted on a gross, trade-for-trade basis between the original participants. Instead, HKSCC also nets the money obligations for each Clearing Participant, resulting in a single net amount to be paid or received by the participant. This net money settlement occurs between the participant and HKSCC through designated banks. Therefore, statements I, II and III are correct.

Statement I is correct. A Broker-Supplied System (BSS) is a system developed by an Exchange Participant, which allows for trading applications to be tailored to its specific needs, such as proprietary trading algorithms or specialized order management workflows, subject to SEHK’s technical specifications.

Statement II is also correct. The Orion Central Gateway (OCG) is the mandatory interface for all Exchange Participants to connect to the AMS/3 trading system. Both custom BSS and the standardized ET Trade Speed Stations (ETTSS) must route their orders through the OCG.

Statement III is correct. The automatic order matching system is the primary method for executing trades on the SEHK. However, certain transactions are handled differently. Direct business transactions (cross trades), where a broker matches a buy and sell order for the same stock internally, are an example of transactions concluded outside the central auto-matching mechanism.

Statement IV is incorrect. The New Securities Trading Device (NSTD) is a front-end trading device developed by an independent software vendor, not by the SEHK itself. The SEHK offers it to Exchange Participants under the brand name ‘ET Trade Speed Station’ (ETTSS). Therefore, statements I, II and III are correct.

The Stock Exchange of Hong Kong (SEHK) is empowered to suspend trading in a company’s securities to maintain market integrity, fairness, and order. The Listing Rules provide specific grounds for such action. One of the primary requirements for a company to maintain its listing is that it must have a sufficient level of business operations and assets. If a company disposes of its core business, leaving it as a ‘cash shell’ with minimal activities, the SEHK may determine that it no longer meets the criteria for a continued listing. Another critical requirement is maintaining a sufficient public float, ensuring there is an open and liquid market for the shares. A failure to meet this minimum level is also a direct ground for suspension. While issues like share price volatility or auditors’ opinions are relevant to market oversight, they are often symptoms of underlying problems. The fundamental basis for suspension in the described scenario relates directly to the issuer’s substance and suitability for continued listing.

According to the SFC’s Code of Conduct and the Fund Manager Code of Conduct, a licensed corporation managing discretionary accounts must establish and maintain effective internal controls. A fundamental principle of these controls is the segregation of duties to mitigate conflicts of interest and prevent potential abuse. Specifically, the investment decision-making function should be clearly separated from the dealing or trade execution function. Allowing the same individual to decide on an investment and then execute the trade creates risks, such as the potential for front-running, concealing trading errors, or executing trades that do not align with the client’s mandate. While end-of-day reconciliation and senior management oversight are important controls, they are considered supplementary and do not replace the primary requirement for functional separation. The purpose of a discretionary account is for the manager to make decisions without seeking the client’s pre-approval for every transaction, provided the decisions are within the agreed-upon investment mandate.

This question assesses the understanding of the roles, responsibilities, and independence of external auditors when engaged by a licensed corporation, as outlined in the SFC’s Internal Control Guidelines (ICG). While senior management establishes the terms of reference for an internal audit, their ability to dictate the scope of an external audit is limited. External auditors have statutory duties and professional responsibilities that extend beyond the management team to the company’s shareholders and, in a regulated entity, to the regulators. Their primary duty is to provide an independent opinion on the financial statements. To do this, they must be able to assess any internal controls that could materially impact those statements. An instruction from management to ignore key operational areas like client asset handling or compliance procedures, which carry significant financial and regulatory risk, would be an improper scope limitation. The auditors are professionally obligated to exercise their own judgment to determine the necessary scope to form their opinion and are not bound by such restrictive instructions from management.

Statement I is correct. According to the Guidelines on Continuous Professional Training, licensed or registered individuals are required to complete a minimum of five CPT hours annually to ensure they remain fit and proper. Statement II is correct. The Securities and Futures (Financial Resources) Rules (FRR) require licensed corporations to maintain prescribed levels of liquid capital at all times to cover their financial obligations. Statement III is correct. The SFC places significant emphasis on the role of senior management in fostering a robust compliance culture. They are held accountable for the firm’s adherence to regulatory requirements. Statement IV is incorrect. Licensed corporations are regulated by the SFC and must comply with the SFC’s FRR. Registered institutions (i.e., banks conducting regulated activities) are regulated by the Hong Kong Monetary Authority (HKMA) and must comply with the HKMA’s capital adequacy requirements. This statement incorrectly applies the HKMA’s requirements to an SFC-licensed corporation. Therefore, statements I, II and III are correct.