Under the Securities and Futures Ordinance (SFO), there is a clear division of regulatory responsibilities. Hong Kong Exchanges and Clearing Limited (HKEX), as the recognized exchange controller, and its subsidiaries like The Stock Exchange of Hong Kong (SEHK), are primarily responsible for maintaining a fair, orderly, and efficient market. This includes overseeing market operations, administering and enforcing their own trading and listing rules, and managing risks associated with the exchange and clearing systems. However, the front-line regulation of market participants’ conduct, including investigating potential market manipulation and taking disciplinary action against licensed corporations or individuals for misconduct, is the statutory responsibility of the Securities and Futures Commission (SFC). While HKEX’s market surveillance function may detect suspicious activities, the investigation and enforcement related to breaches of the SFO, such as market misconduct, fall under the SFC’s purview. The SFC is empowered to sanction licensed persons, including imposing fines and suspending or revoking licenses.

According to the Rules of the Exchange of Hong Kong (SEHK), short selling of designated securities is subject to the ‘tick rule’. This rule is a mechanism designed to prevent short selling from driving down the market price of a security in an aggressive manner. The rule specifies that a short sale order cannot be entered into the trading system at a price that is below the best current ask price. It is not based on the best bid price or the last traded price. Therefore, to comply, the order must be placed at a price equal to or greater than the prevailing best ask price. The SEHK’s automated trading system is designed to enforce this rule automatically for any sell order that is correctly marked as a short sale.

This question assesses the understanding of the distinct roles, limitations, and obligations of Broker Participants and Trading Participants within the SEHK Traded Options market. Statement I is incorrect; a key characteristic of a Broker Participant is that it is not permitted to have direct system access rights to the Hong Kong Futures Automated Trading System (HKATS). It must conduct its business by routing orders through a Trading Participant. Statement II is correct; the rules require a Broker Participant to clearly identify whether an instruction given to its Trading Participant is for a client’s account or for its own proprietary (or an affiliate’s) account. This ensures proper segregation and transparency. Statement III is incorrect; a Broker Participant is restricted to having only one options broking agreement with a single Trading Participant at any given time. This rule simplifies the clearing and settlement structure. Statement IV is correct; the Trading Participant bears the responsibility of monitoring the financial and operational ability of each Broker Participant with whom it has entered into an options broking agreement. This is a crucial risk management function. Therefore, statements II and IV are correct.

This question assesses the understanding of the principles governing an independent credit risk management function within a licensed intermediary, as expected by the SFC.

Statement I is incorrect. While the credit risk function sets the initial limit, the trading desk cannot independently adjust it. Any changes, particularly exceeding a limit, require approval from senior management, not the traders themselves. This separation of duties is crucial for effective risk control.

Statement II is correct. A core principle of credit risk management is its independence from the sales and trading functions. To avoid conflicts of interest, traders who have a vested interest in executing transactions must be kept separate from the objective assessment of a client’s creditworthiness.

Statement III is correct. Master agreements (like ISDA Master Agreements) are a critical risk management tool. They establish a standardized legal framework for transactions, covering key terms, definitions, and procedures for events like default, which provides legal certainty and mitigates counterparty risk.

Statement IV is incorrect. The duty of the credit risk function is not complete after the initial limit is set. The function is responsible for the continuous monitoring of a counterparty’s financial status and must conduct regular reviews (at least annually) to ensure the credit limit remains appropriate. This is an ongoing process, not a one-time task. Therefore, statements II and III are correct.

This question assesses understanding of the Internal Control Guidelines, specifically the principle of segregation of duties. A licensed corporation must segregate incompatible functions to prevent errors, abuse, and fraud. The core principle is that no single individual should be in a position to both perpetrate and conceal an error or fraudulent act. A critical conflict arises when an individual responsible for initiating or recording transactions is also responsible for the reconciliation or verification of those same transactions. This combination removes an essential independent check and balance. Other combinations of duties, while perhaps not ideal from an efficiency standpoint, may not constitute a critical breach of this control principle if they do not create an opportunity for an individual to conceal their own actions or errors related to financial assets or records.

Under the Securities and Futures Ordinance (SFO), specifically sections 278 and 299, stock market manipulation is defined by two key elements: the act and the intention. The act involves entering into two or more transactions that have, or are likely to have, the effect of increasing, reducing, maintaining, or stabilizing the price of securities. The intention must be to induce another person to subscribe for, sell, or purchase securities, or to refrain from doing so. A crucial aspect of this rule is its jurisdictional scope. The SFO applies to manipulative transactions conducted in Hong Kong for securities traded on an overseas market. Therefore, the physical location where the trading decisions and orders are executed is a determining factor for the SFC’s jurisdiction, even if the securities themselves are listed and traded exclusively on a foreign exchange. The provisions for market misconduct apply to any person committing the act in Hong Kong, not just those licensed by the SFC. Furthermore, the definition of manipulation explicitly includes actions taken to ‘stabilize’ or ‘maintain’ a price, not just those intended to increase it.

This question assesses understanding of the procedures and obligations for an Options Exchange Participant under the SEHK’s Options Trading Rules when a position limit is breached. Statement I is correct because the rules explicitly require an Options Exchange Participant to immediately notify the SEHK upon exceeding any position limits. This is a critical and non-negotiable first step. Statement II is also correct, as the SEHK has the authority to direct the participant to take remedial action, which includes closing out or giving up contracts to bring the position back into compliance. This power is essential for maintaining market order. Statement III is incorrect; the rules mandate immediate notification, and there is no provision for an automatic grace period to rectify the breach before informing the exchange. Statement IV is incorrect because the SEHK may give notice orally, especially in urgent market conditions, to be followed by a written notice. The rules do not restrict communication solely to formal written notices. Therefore, statements I and II are correct.

The creation and redemption mechanism is a core feature of Exchange Traded Funds (ETFs) that distinguishes them from traditional mutual funds and closed-end funds. Statement I is correct because participating dealers create new ETF units by delivering a specified basket of the underlying securities (an ‘in-kind’ transaction) to the ETF manager. Statement II is also correct as the redemption process is the reverse; participating dealers surrender a block of ETF units (a ‘creation unit’) to the manager in exchange for the corresponding basket of underlying securities. Statement III is incorrect; this primary market creation and redemption process is only accessible to institutional investors known as participating dealers who transact in large blocks. Retail investors buy and sell ETF units on the secondary market (the Stock Exchange of Hong Kong) like any other stock. Statement IV is correct because this dual-market mechanism allows for arbitrage. If the ETF’s market price deviates significantly from its Net Asset Value (NAV), participating dealers can profit by creating or redeeming units, a process which in turn pushes the market price back in line with the NAV. Therefore, statements I, II and IV are correct.

This question assesses the understanding of the end-to-end process for an options trade, from execution on HKATS to clearing via SEOCH and potential settlement through CCASS. Statement I is correct because once a trade is matched on the Hong Kong Futures Automated Trading System (HKATS), the trade information is automatically and electronically transmitted to The SEHK Options Clearing House Limited (SEOCH) for registration and clearing. Statement II is correct as SEOCH acts as the central counterparty (CCP) for all cleared options trades. Through the legal process of novation, SEOCH steps in between the buyer and seller, guaranteeing the performance of the contract. Statement IV is also correct. When an option is exercised, it results in an obligation to buy or sell the underlying stock. SEOCH processes the exercise and assignment and then passes the resultant stock transaction details to the Central Clearing and Settlement System (CCASS) for final settlement between the relevant CCASS participants. Statement III is incorrect because the Options Trading Exchange Participant does not directly report the trade to CCASS for settlement purposes. The communication for stock settlement resulting from an option exercise is managed by SEOCH, which interfaces with CCASS. The participant’s primary interface for clearing is with SEOCH via the Derivatives Clearing and Settlement System (DCASS). Therefore, statements I, II and IV are correct.

This question assesses the understanding of order handling in the Hong Kong Stock Exchange’s trading system, specifically concerning orders placed during the Pre-opening Session (POS) and their transition to the Continuous Trading Session (CTS).

Statement I is correct. According to the rules of the AMS/3 trading system, at-auction orders are valid only for the POS. They are intended to be matched at the final Indicative Equilibrium Price (IEP). Any part of an at-auction order that remains unfilled after the POS concludes is automatically cancelled and does not proceed to the CTS.

Statement II is correct. For an at-auction limit buy order to be eligible for matching, its specified price must be at or more competitive than the final IEP. In the case of a buy order, this means the price must be equal to or higher than the final IEP. A specified price below the final IEP is not competitive and will therefore not be matched.

Statement III is incorrect. While an outstanding at-auction limit order from the POS can be carried forward to the CTS (provided its price does not deviate excessively from the nominal price), it is treated as a standard limit order, not an enhanced limit order. An enhanced limit order is a distinct order type available only during the CTS.

Statement IV is incorrect. The matching priority during the POS is given to at-auction orders first, followed by at-auction limit orders. At-auction orders have a higher priority because they do not have a price limit and are matched at the final IEP, which helps in the price discovery process. Therefore, statements I and II are correct.

Under Section 103(1) of the Securities and Futures Ordinance (SFO), it is an offence to issue an advertisement or document which contains an invitation to the public to acquire an interest in a Collective Investment Scheme (CIS), unless the issuance is authorized by the Securities and Futures Commission (SFC) or falls under a specific exemption. The scenario describes a brochure for a new CIS being distributed to the public, which clearly constitutes such an invitation. Therefore, it requires prior authorization from the SFC as stipulated in Section 105(1) of the SFO. While exemptions exist, such as for materials targeted exclusively at professional investors, they do not apply in this public context. The requirement for an SFC-approved contact person is a condition for obtaining authorization, not a substitute for it. The authorization process under the SFO is distinct from the prospectus registration requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, which typically apply to offers of shares or debentures by a company, not units in a CIS.

This question assesses the understanding of how different order types are handled at the conclusion of the Pre-opening Session (POS) and the transition to the Continuous Trading Session (CTS) on the Hong Kong Stock Exchange’s AMS/3 system. It is critical to distinguish between an at-auction order and an at-auction limit order. An at-auction order is an order without a specified price, intended for execution at the final Indicative Equilibrium Price (IEP). Due to its nature, any part of an at-auction order that remains unexecuted after the POS matching is automatically cancelled. In contrast, an at-auction limit order has a specified price. If it remains outstanding at the end of the POS, it is not cancelled but is instead carried forward to the CTS. Upon entering the CTS, it is treated as a standard limit order at its specified price, provided that this price does not deviate by 9 times or more from the nominal price. This rule ensures a smooth transition of liquidity while filtering out potentially erroneous orders.

This question assesses the understanding of different types of securities listed on the Stock Exchange of Hong Kong (SEHK).

Statement I is correct. H shares are issued by companies incorporated in mainland China that have received approval from the China Securities Regulatory Commission (CSRC) to list their shares in Hong Kong. The ‘H’ signifies Hong Kong.

Statement II is correct. A key criterion for a company to be classified as a red chip is having at least a 30% aggregate shareholding by mainland China entities, which collectively form the single largest shareholder group. This distinguishes them from H shares, as red chip companies are incorporated outside mainland China.

Statement III is incorrect. The GEM (formerly Growth Enterprise Market) is designed for growth companies and has less stringent initial listing requirements compared to the Main Board, particularly regarding profit history. It operates on a ‘buyer beware’ philosophy, which is balanced by a strong post-listing disclosure regime.

Statement IV is incorrect. Holders of debt securities, such as bonds or notes, are creditors to the issuing entity, not owners. They lend money to the issuer in exchange for interest payments and the return of principal. They do not hold any equity or ownership rights in the company. Therefore, statements I and II are correct.

Under the Companies Ordinance (Cap. 622), specific protections are afforded to minority shareholders when a company proposes to vary the rights attached to a particular class of shares. While a company can alter these rights, typically through a special resolution passed at a general meeting and with the consent of the holders of the affected class of shares, this power is not absolute. To safeguard against unfair prejudice, the Ordinance provides a statutory remedy for dissenting shareholders. Specifically, members holding at least 10% of the total voting rights of the shares in the affected class, who did not consent to or vote in favour of the variation, may apply to the court to have the variation cancelled. The court will then assess whether the variation would unfairly prejudice the members of that class. The decision of the court on such a petition is final. This mechanism ensures that the interests of minority shareholders are considered and protected from potential oppression by the majority.

According to the procedures of the SEHK Options Clearing House (SEOCH), intra-day margin calls are a critical risk management tool used to address significant market movements during the trading day. When a SEOCH participant’s open positions incur potential losses that exceed their existing collateral, the SEOCH can issue an intra-day margin call. The rules are very specific regarding the settlement of such a call. If the participant’s collateral is insufficient, the demand must be satisfied by a payment in cash. Furthermore, there is a strict time limit for this payment, which is designed to mitigate counterparty risk swiftly. The participant is required to make the cash payment no later than one hour after the demand is made. This ensures that the clearing house is not exposed to prolonged risk from a participant’s deteriorating financial position.

Under the Listing Rules of The Stock Exchange of Hong Kong Limited (SEHK), the Listing Committee has a range of disciplinary powers it can exercise when a listed issuer or its directors breach the rules. These sanctions are designed to maintain market integrity and protect investors. The powers include issuing private reprimands, public statements of criticism, and the more severe public censures. The Committee can also direct the relevant parties to take remedial actions, such as appointing an independent compliance adviser or requiring directors to attend specific training on their duties and obligations under the Listing Rules. In very serious cases, the SEHK can suspend dealings in the issuer’s securities or even cancel the listing altogether. It is crucial to distinguish these powers from those of other bodies. For instance, the Securities and Futures Commission (SFC) is responsible for licensing intermediaries and taking disciplinary action against them, including license suspension or revocation. Criminal proceedings and the imposition of criminal penalties fall under the jurisdiction of the Hong Kong courts, often following an investigation and prosecution by the SFC or the Department of Justice.

Under Hong Kong’s anti-money laundering framework, specifically the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRPO), there is a strict prohibition against ‘tipping off’. This means that once a suspicion has been formed and a report is made or contemplated to be made to the Joint Financial Intelligence Unit (JFIU), no one in the financial institution should disclose this information to the client or any third party. Such a disclosure could prejudice a potential investigation. Therefore, when a client inquires about a delayed transaction that is subject to a Suspicious Transaction Report (STR), staff must provide a plausible reason for the delay that does not reveal the existence of the STR or the underlying suspicion. Common practice is to cite ‘internal compliance checks’ or ‘standard processing delays’ without giving specific details. Directly or indirectly mentioning the JFIU, a police investigation, or the term ‘suspicious’ would constitute tipping off, which is a criminal offense. Proceeding with a suspicious transaction without guidance from the MLRO or JFIU could facilitate the crime, while refusing all communication could also inadvertently alert the client.

Under the Securities and Futures Ordinance (SFO), a criminal conviction for market misconduct does not preclude civil remedies for those who have suffered financial harm. Section 281 and Section 305 of the SFO establish a private right of action for any person who has suffered pecuniary loss as a result of market misconduct. This right allows the affected person to seek compensation by way of damages. Importantly, this claim can be made whether or not the person entered into a transaction with the wrongdoer. The criminal conviction can be used as evidence in the civil proceedings to support the claim. Furthermore, Section 280 of the SFO explicitly states that a transaction is not rendered void or voidable solely on the grounds that it was entered into as a result of, or in connection with, market misconduct. This provision is crucial for maintaining the integrity and finality of transactions in the market.

This question assesses understanding of the key functions and risk management mechanisms of the Hong Kong Securities Clearing Company Limited (HKSCC), the central counterparty for securities traded on the SEHK.

Statement I is correct. HKSCC acts as a central counterparty (CCP). Through a process called novation, HKSCC interposes itself between the buying and selling Exchange Participants for every matched trade. It becomes the seller to every buyer and the buyer to every seller, thereby guaranteeing the settlement of trades and managing counterparty risk.

Statement II is correct. The Continuous Net Settlement (CNS) system is the primary settlement method used by HKSCC for most securities. It nets a participant’s buy and sell transactions in the same security on a given settlement day, resulting in a single net quantity of shares to be delivered or received. This significantly reduces the number of transactions that need to be settled.

Statement III is incorrect. The HKSCC Guarantee Fund is a critical risk management tool designed to cover losses arising from the default of a Clearing Participant. It is not used for covering HKSCC’s operational or administrative expenses, which are funded through fees and other revenue sources.

Statement IV is correct. HKSCC collects Marks (also known as variation adjustment) from Clearing Participants to cover the potential market risk on their open positions. Marks are calculated daily based on the mark-to-market valuation of these positions, protecting HKSCC from losses if a participant defaults amid adverse price movements. Therefore, statements I, II and IV are correct.

The explanation should clarify the Continuous Professional Training (CPT) requirements under the SFC’s guidelines. A key concept is that licensed individuals must complete a minimum of five CPT hours per calendar year for each Regulated Activity (RA) they are licensed for. However, the SFC has established ‘competence groups’ which bundle certain RAs together. If an individual is licensed for multiple RAs within the same competence group (e.g., Type 1 Dealing in Securities and Type 4 Advising on Securities), they only need to complete a total of five CPT hours for that group. In this scenario, the individual is licensed for Type 1 (Dealing in Securities) and Type 9 (Asset Management). These two RAs belong to different competence groups. Therefore, the individual must complete five hours for the group containing Type 1 and another five hours for the group containing Type 9, resulting in a total minimum requirement of 10 CPT hours for the year. The activities mentioned, such as attending seminars and workshops, are generally considered qualifying CPT activities. Conversely, the guidelines explicitly state that general reading of financial journals or newspapers does not count towards CPT hours. The individual in the scenario has only completed 5 hours of qualifying training, which is insufficient to meet the 10-hour requirement.

According to Section 129 of the Securities and Futures Ordinance (SFO) and the related Fit and Proper Guidelines, the SFC assesses an applicant’s financial status and integrity. Statement I is relevant because being a ‘recently discharged bankrupt’, even in another jurisdiction, is a specific factor the SFC considers when evaluating an individual’s financial reliability and past conduct. An 18-month timeframe is considered recent. Statement II is also a key adverse factor, as an outstanding and unpaid judgment debt directly indicates a failure to meet financial obligations, which reflects poorly on the applicant’s financial integrity. Statement IV is a critical concern; being currently involved in bankruptcy proceedings is a direct and immediate challenge to the applicant’s solvency. However, Statement III is generally not a direct criterion for assessing the applicant’s personal fitness and properness. The financial status of a spouse is considered separate unless it directly impacts the applicant’s own financial position (e.g., through joint liabilities or guarantees), which is not specified in the statement. The assessment focuses on the individual applicant. Therefore, statements I, II and IV are correct.

This question assesses understanding of the scope, limits, and exclusions of Hong Kong’s Investor Compensation Fund (ICF).
Statement I is incorrect. The ICF explicitly excludes losses arising from securities traded through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes. Therefore, the client holding only A-shares is not eligible for compensation.
Statement II is correct. For the purposes of ICF claims, each holder of a joint account is treated as a separate claimant. As such, the husband and wife can each claim up to the statutory maximum, which is currently HK$500,000, for a potential collective total of HK$1,000,000.
Statement III is incorrect. The ICF is designed to protect retail investors. Corporations licensed by the SFC, such as asset management firms, are considered institutional investors and are explicitly excluded from making claims against the fund.
Statement IV is correct. The ICF provides separate compensation limits for securities and futures contracts. The investor’s loss in securities (HK$600,000) is capped at the maximum of HK$500,000. The loss in futures contracts (HK$200,000) is fully covered as it is below the HK$500,000 limit for futures. The total maximum compensation is the sum of the two, which is HK$500,000 + HK$200,000 = HK$700,000. Therefore, statements II and IV are correct.

To become a SEOCH Participant, a firm must meet several criteria, including financial requirements that differ based on the type of participation. A Direct Clearing Participant (DCP) is permitted to clear trades for its own account and for its clients’ accounts. In contrast, a General Clearing Participant (GCP) has a broader scope, allowing it to clear trades for its own account, its clients’ accounts, and also for other non-clearing Trading Participants. Due to this expanded role and associated risk, the financial requirements for a GCP are significantly higher. Specifically, a DCP must maintain a minimum liquid capital of the higher of its FRR requirement or HK$5 million, and make an initial contribution to the SEOCH Reserve Fund of HK$1.5 million. A GCP must maintain a minimum liquid capital of the higher of its FRR requirement or HK$20 million, and its initial contribution to the Reserve Fund is HK$5 million. Understanding these distinct financial thresholds is crucial for determining the appropriate clearing participant status for a firm based on its business model.

This question tests the understanding of key obligations under the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules.

Statement I is correct. The reporting exemption for a specific product class is lost permanently once the licensed corporation’s aggregate notional amount in that class exceeds the US$30 million threshold. Even if the position subsequently falls below this level, the obligation to report all future transactions in that class remains.

Statement II is incorrect. A licensed corporation relying on the reporting exemption is still required to maintain records. These records must be sufficient to demonstrate that the exemption was properly relied upon.

Statement III is incorrect. While an affiliate can report on behalf of the licensed corporation, the relief is not automatic. The licensed corporation must obtain a written confirmation from the affiliate stating that the report has been made in order to demonstrate its own compliance with the reporting obligation.

Statement IV is correct. The rules mandate that records of specified OTC derivative transactions must be kept for a minimum of five years after the termination or maturity date of the transaction, regardless of where the transaction was conducted. Therefore, statements I and IV are correct.

A comprehensive margin lending policy, as expected under the SFC’s regulatory framework, must address several key risk management areas. Statement I is correct; the Securities and Futures (Client Securities) Rules stipulate that a licensed corporation cannot repledge client securities collateral for an amount exceeding 140% of the total margin loan extended to that client. Statement II is also correct; the Code of Conduct requires firms to establish and enforce appropriate risk management controls, which includes setting concentration limits for products, markets, and counterparties to mitigate concentration risk. Statement III is correct as a core component of a margin policy is to clearly define the triggers for a margin call and the firm’s rights and procedures for liquidating a client’s collateral if the call is not met in a timely manner. Statement IV is incorrect; there is no general requirement under SFC regulations for a licensed corporation to report all issued margin calls to the SFC on a daily basis. While firms must maintain proper records, such a reporting obligation is not a standard procedure. Therefore, statements I, II and III are correct.

Under the Securities and Futures Ordinance (SFO), any advertisement or document inviting the public to invest in securities or structured products generally requires authorization from the Securities and Futures Commission (SFC) before it is issued. This provision extends to materials distributed over the Internet. The key determinant for whether an online advertisement falls under the SFC’s jurisdiction is whether it is ‘targeted at’ the Hong Kong public. The SFC provides guidance on what constitutes targeting. An advertisement is not typically considered to be targeted at Hong Kong residents if the issuer takes specific preventative measures. These measures include displaying a prominent and clear disclaimer stating that the investment product or service is not available to residents of Hong Kong. In addition to the disclaimer, the firm must also take reasonable steps to ensure that the products or services are not actually provided to Hong Kong residents. Such steps might involve verifying client addresses, phone numbers, or using technology like IP address blocking to prevent access or applications from within Hong Kong. Simply hosting a website overseas or avoiding local media is insufficient if the content remains accessible and no active steps are taken to restrict access for Hong Kong residents.

This question assesses the candidate’s ability to differentiate between the main types of financial risks faced by a licensed intermediary, as outlined in the SFC’s risk management guidelines. The scenario describes a situation where a firm cannot sell an asset quickly without causing a substantial price drop, which in turn affects its ability to meet its financial obligations. This directly relates to liquidity risk, which encompasses both asset liquidity (the ease of converting an asset to cash without significant loss) and funding liquidity (the ability to meet short-term liabilities). While market risk is also present (the initial price drop), the core problem highlighted is the inability to transact due to a lack of buyers and the resulting strain on the firm’s cash flow, which is the essence of liquidity risk. Operational risk relates to internal failures like errors or fraud, and credit risk pertains to the default of a client or counterparty, neither of which is the primary issue in this case.

Statement I is correct. According to Paragraph 11.1(b) of the SFC Code of Conduct, a licensed person must handle client orders fairly and in the order they are received. Crucially, client orders must be given priority over orders for the licensed person’s own account or the account of any of its staff. Dealing for one’s own account ahead of a client order is known as ‘front-running’ and is a serious breach of conduct. Statement II is correct. General Principle 8 of the Code of Conduct requires licensed persons to avoid conflicts of interest and ensure clients are treated fairly. Receiving an advantage, such as an all-expenses-paid trip, could be seen as an inducement that might compromise the representative’s objectivity and is generally prohibited if it is not of nominal value or could create a conflict. Statement III is incorrect. While disclosure to compliance is necessary, it does not automatically legitimize the acceptance of any advantage. If the benefit is excessive and could reasonably be expected to influence the representative’s actions, it should be declined, as it would breach the duty to act in the client’s best interests. Statement IV is incorrect. The principle of client priority overrides a simple time-based execution rule in this context. The Code of Conduct is clear that client orders take precedence over staff orders, and a firm’s internal controls must be designed to enforce this, regardless of when the staff member’s order was placed. Therefore, statements I and II are correct.

In an issuer-driven Electronic Public Offering (ePO), the SFC’s Guidelines for Electronic Public Offerings clearly delineate responsibilities. The issuer, along with its sponsor and the share registrar, assumes ultimate responsibility for the entire ePO process. This includes the coordination of all participating parties, ensuring the capacity of back-end systems, conducting thorough testing, and establishing and implementing a comprehensive contingency plan. While an Eligible Service Provider (ESP) is responsible for the integrity of its own front-end systems (such as its website and the initial collection of applications), the overarching coordination and resolution of systemic or back-end issues fall to the issuer and sponsor. The receiving bank and share registrar are key components of the back-end infrastructure, but the leadership and decision-making authority for the ePO rests with the issuer and its primary advisors. The regulator, the SFC, sets the guidelines but does not intervene in the operational management of a specific offering.

The Securities and Futures (Insurance) Rules mandate that licensed corporations maintain adequate insurance coverage as a condition for their licence, unless they meet specific exemption criteria. Statement I is correct because the rules explicitly require insurance to cover risks of financial loss arising from fraudulent acts by the corporation’s employees. Statement II is also correct; the rules apply to all licensed corporations except those that have a licensing condition preventing them from holding client assets AND are not exchange participants. Since Apex Asset Management intends to hold client assets, it is subject to this requirement. Statement III is incorrect as the mandatory insurance is designed to cover fidelity risks (like fraud and theft), not business or investment risks such as losses from market volatility or poor portfolio performance. Statement IV is incorrect because the exemption from the insurance requirement is a two-part test: the firm must not hold client assets AND must not be an exchange participant. Being a non-participant alone is insufficient if the firm holds client assets. Therefore, statements I and II are correct.