Statement I is correct. The Securities and Futures (Keeping of Records) Rules generally require licensed corporations to keep records for a period of not less than 7 years. Statement II is correct. A fundamental principle of an effective compliance framework, as outlined in the SFC’s Management, Supervision and Internal Control Guidelines, is that the compliance function must have full and timely access to all necessary records to perform its duties. This includes records held by external parties on behalf of the firm. Statement III is incorrect. While client complaint handling requires confidentiality, records must be accessible to the compliance function and regulators like the SFC for oversight and investigation purposes. Restricting access solely to senior management and legal counsel would impede the compliance monitoring process and regulatory supervision. Statement IV is correct. It is a critical requirement that all records, whether physical or electronic, must be maintained in a manner that allows for their prompt retrieval and reproduction in a clear, legible format for auditors, the SFC, or other authorized parties. Therefore, statements I, II and IV are correct.

This question assesses understanding of the core obligations of a Credit Rating Agency (CRA) under the SFC’s Code of Conduct for Persons Providing Credit Rating Services (‘CRA Code’) and related regulations.

Statement I is correct. Paragraph 4.10 of the CRA Code explicitly states that a CRA should ensure that its analysts are not compensated or evaluated on the basis of the amount of revenue that the CRA derives from rated entities that the analysts rate or with which the analysts have regular interaction. This is a critical measure to mitigate conflicts of interest.

Statement II is correct. Paragraph 5.5 of the CRA Code requires a CRA to establish procedures to protect confidential information provided by a rated entity. It must ensure this information is not used for any purposes other than its credit rating activities, such as trading or advising other entities.

Statement III is correct. To promote transparency and public confidence, Paragraph 5.1 of the CRA Code requires a CRA to disclose its methodologies, procedures, and significant assumptions on its website. This allows users of ratings to understand how a rating was derived.

Statement IV is correct. While the CRA Code itself mandates robust record-keeping, the specific time frame is governed by the Securities and Futures (Keeping of Records) Rules (Cap. 571S). These rules apply to all SFC-licensed corporations, including those licensed for Type 10 (Providing Credit Rating Services), and require records to be kept for a period of not less than seven years.

Since all four statements describe mandatory policies and procedures for a licensed CRA in Hong Kong, all are correct. Therefore, all of the above statements are correct.

Under the Securities and Futures (Financial Resources) Rules (FRR), a licensed corporation is required to continuously maintain a liquid capital level that is not less than its required liquid capital (RLC). To ensure the SFC can monitor compliance, there are specific notification triggers. One critical trigger is when a licensed corporation becomes aware of any event that would cause its liquid capital to fall below 120% of its RLC. This 20% buffer is a key early warning threshold. Another trigger is when a claim is made against the corporation that, if deducted from its liquid capital, would reduce it to below this 120% threshold. Upon becoming aware of such a situation, the corporation has a strict and immediate obligation to inform the SFC in writing. The specified timeframe for this notification is within one business day. This requirement is distinct from the regular submission of periodic FRR returns and from the process of applying for waivers or modifications, which are separate regulatory interactions.

The SFC’s regulatory framework is built on three pillars: licensing, ongoing supervision, and discipline. This question assesses the practical application of these pillars in the context of a licensed corporation’s internal controls. Statement I is correct because the SFC expects compliance manuals to be specifically tailored to a firm’s business, not generic templates. They must contain procedures to mitigate key corporate governance risks, such as abusive connected transactions. Statement II is correct as monitoring employee dealings is a fundamental supervisory requirement under the Code of Conduct to prevent market misconduct like insider dealing. Statement III is correct because financial markets are global, and the SFC actively cooperates with overseas regulators. Licensed corporations with international operations are expected to be able to facilitate this cooperation. Statement IV is correct as a firm’s internal disciplinary process is a critical component of its governance and control framework. The SFC expects firms to hold individuals, including senior management, accountable for misconduct, which aligns with its own disciplinary mandate. Therefore, all of the above statements are correct.

The Market Misconduct Tribunal (MMT) is a civil tribunal established under the Securities and Futures Ordinance (SFO) to handle cases of market misconduct. Its powers are distinct from those of the criminal courts. Statement I is correct; the MMT can issue a ‘cold shoulder’ order under section 257(1)(c) of the SFO, prohibiting a person from acquiring, disposing of, or dealing in any securities for a period of up to five years. Statement III is also correct; under section 257(1)(b), the MMT can order a person to disgorge the amount of any profit gained or loss avoided. Statement IV is correct as well; section 257(1)(d) allows the MMT to recommend that a professional body, such as the SFC, take disciplinary action against the person. However, Statement II is incorrect. The MMT does not have criminal jurisdiction and cannot impose criminal sanctions like imprisonment. Such penalties can only be imposed by a court of law following a successful criminal prosecution. Therefore, statements I, III and IV are correct.

This question assesses understanding of the key obligations for Credit Rating Agencies (CRAs) under the SFC’s Code of Conduct for Persons Providing Credit Rating Services (the ‘CRA Code’).

Statement I is incorrect. The CRA Code imposes strict obligations on CRAs to protect confidential information received from rated entities. Sharing non-public, draft rating details with an affiliated investment banking division would be a serious breach of confidentiality and create a significant conflict of interest. CRAs must have procedures to prevent such disclosures.

Statement II is correct. A core procedural requirement under the CRA Code is that, where feasible and appropriate, a CRA should communicate a proposed rating to the rated entity before its public dissemination. This provides the entity with an opportunity to clarify any factual misperceptions or other considerations relevant to the accuracy of the rating.

Statement III is correct. The CRA Code explicitly prohibits CRAs from entering into contingent fee arrangements for providing credit rating services. A fee that is dependent on achieving a specific rating outcome, such as an investment-grade rating, is a clear example of a prohibited contingent fee.

Statement IV is incorrect. While the CRA Code requires public disclosure regarding compensation, it is the ‘general nature’ of the CRA’s compensation arrangements with rated entities that must be disclosed. It does not mandate the disclosure of the specific fee amount for each individual rating engagement, which is considered commercially sensitive information. Therefore, statements II and III are correct.

Under the Securities and Futures (Accounts and Audit) Rules, an auditor appointed by a licensed corporation has specific statutory duties that extend beyond a standard financial audit. The auditor is required to submit a report to the SFC along with the audited financial statements. This report must explicitly state whether, during the course of the audit, the auditor became aware of any non-compliance with the requirements of the Securities and Futures (Keeping of Records) Rules, the Securities and Futures (Client Money) Rules, or the Securities and Futures (Financial Resources) Rules. This obligation is absolute. The fact that a breach was identified and corrected by the management before the end of the financial year does not negate the auditor’s duty to report the historical non-compliance. The purpose of this requirement is to ensure the SFC has a complete picture of a licensed corporation’s compliance history, as even temporary lapses can indicate underlying weaknesses in internal controls.

Under the Securities and Futures Ordinance (SFO) and its subsidiary legislation, particularly the Securities and Futures (Keeping of Records) Rules, licensed corporations are mandated to maintain comprehensive records for a specified period, typically not less than seven years. The primary objective of this requirement is to ensure accountability and transparency in the financial markets. These records create a verifiable audit trail of all business activities, including client instructions, trade executions, communications, and advice given. This trail is crucial for several parties. Regulators, such as the Securities and Futures Commission (SFC), rely on these records to conduct inspections, surveillance, and investigations into potential misconduct, such as insider dealing or market manipulation. External and internal auditors use the records to verify the firm’s financial health and the effectiveness of its internal control systems. Furthermore, the intermediary itself needs these records to manage operational risks, resolve client disputes, and demonstrate that it has fulfilled its fiduciary and regulatory duties. Therefore, a robust record retention policy is not merely an administrative task but a fundamental pillar of a firm’s compliance framework, designed to protect clients, maintain market integrity, and prove adherence to legal and regulatory standards.

Statement I is correct. Under section 157 of the Securities and Futures Ordinance (SFO), an auditor who resigns or does not seek reappointment from a licensed corporation must notify the SFC in writing within one business day, providing reasons for the cessation of their role or stating that there are no such reasons to be given. Statement II is correct. Section 158 of the SFO provides statutory immunity to an auditor who communicates information to the SFC in good faith in connection with their duties. This protects them from being held to have breached any duty to the licensed corporation. Statement III is correct. According to section 159 of the SFO, the SFC has the authority to appoint an auditor to examine a licensed corporation if it has reasonable cause to believe that the corporation has not complied with the Financial Resources Rules (FRR). Statement IV is incorrect. The powers of an auditor appointed by the SFC are extensive. Under section 162 of the SFO, such an auditor has the power to examine on oath the officers and employees of the licensed corporation, not just its financial records. Therefore, statements I, II and III are correct.

The Code of Conduct for Persons Providing Credit Rating Services (the ‘CRA Code’), issued by the Securities and Futures Commission (SFC), establishes the principle of objectivity and independence as paramount for Credit Rating Agencies (CRAs). A core requirement under this code is that the determination of a credit rating must only be influenced by factors relevant to the credit assessment itself. The code explicitly states that a CRA should not take into consideration the potential effect of a rating—whether economic, political, or otherwise—on the CRA itself, the rated entity, its investors, or any other market participant. This is to ensure that ratings are credible, objective, and free from commercial, political, or other undue pressures. Therefore, arguments regarding market stability, investor impact, or the business relationship with the rated entity, while significant in other contexts, must be excluded from the process of determining the credit rating.

The SFC Code of Conduct for Persons Providing Credit Rating Services (the “CRA Code”) establishes strict rules to manage conflicts of interest and maintain the independence and objectivity of credit rating agencies (CRAs). A key area of concern is the provision of ancillary services to entities that the CRA also rates. The CRA Code explicitly prohibits a CRA from providing consultancy or advisory services to a rated entity or its related parties regarding its corporate or legal structure, or its assets or liabilities. Such services create a clear conflict, as the CRA’s advice could influence the very financial or structural elements it is supposed to be rating objectively. Providing advice on corporate restructuring to improve a company’s financial ratios falls directly into this prohibited category. Other services, such as providing general, non-tailored market research or industry analysis, are typically considered permissible ancillary businesses, provided they are properly disclosed and managed to avoid potential conflicts. Similarly, while compensation arrangements tied to rating outcomes are also a source of conflict, they are addressed by different provisions of the code and are distinct from the prohibition on specific types of advisory services.

Under the Securities and Futures (Financial Resources) Rules (FRR), a licensed corporation is required to maintain liquid capital at all times that is not less than its required liquid capital. The FRR establishes specific notification triggers to ensure the SFC is promptly informed of any potential financial instability. If a licensed corporation’s liquid capital falls below 120% of its required liquid capital, it must notify the SFC. The requirement becomes more urgent if the liquid capital falls below 100% of the required amount. In such a scenario, the corporation must notify the SFC in writing of the deficit immediately or, at the latest, by the end of the next business day. While ceasing business might be a consequence of a severe and unresolved deficit, it is not the automatic, immediate obligation upon discovery. Similarly, while a remediation plan will be necessary, the primary and most immediate duty is notification. Consulting an auditor does not supersede the direct obligation to inform the regulator.

The SFC’s Code of Conduct for Persons Providing Credit Rating Services (the ‘CRA Code’) establishes strict rules to manage conflicts of interest. Statement I is a prohibited activity because the CRA Code explicitly forbids a CRA from providing advisory services to a rated entity regarding its assets or liabilities. Advising on debt restructuring falls directly into this category. Statement II describes a compensation arrangement that creates a clear conflict between the CRA’s duty to provide an objective rating and its self-interest in earning a higher fee. Such arrangements are prohibited as they compromise the integrity and independence of the rating process. Statement IV is also a prohibited activity, as the CRA Code expressly prohibits providing consultancy services to a rated entity concerning its corporate or legal structure. Statement III, however, describes an ancillary business (publishing general macroeconomic research) that is not provided specifically to the rated entity. While the CRA must define this business, justify why it does not create a conflict, and disclose it publicly, the activity itself is not expressly prohibited in the same way as direct advisory services to a rated client. Therefore, statements I, II and IV are correct.

The SFC’s Fit and Proper Guidelines require a comprehensive assessment of an individual’s character, competence, and financial integrity. Statement I is relevant because involvement as a director in an insolvent corporation is a specific criterion the SFC examines. The SFC will assess the nature and extent of the candidate’s involvement and conduct. Statement II is relevant because a past disqualification from acting as a director by a court is a serious matter reflecting on the individual’s integrity and compliance history, even if the disqualification period has expired. Statement III is relevant as an individual’s financial status is a key part of being fit and proper. An outstanding judgment debt, even if under appeal, indicates potential financial distress or irresponsibility, which the SFC must consider. Statement IV is not relevant to the candidate’s personal fitness and properness, as the sanction was against their former employer for issues in a division where the candidate had no responsibility. Therefore, statements I, II and III are correct.

This question tests your understanding of the relationship between findings by the Market Misconduct Tribunal (MMT) and the rights of individuals to seek compensation for losses under the Securities and Futures Ordinance (SFO). The SFO provides a specific pathway for investors who have suffered pecuniary loss due to market misconduct to launch a private civil action for damages. A crucial aspect of this provision is that a finding of market misconduct by the MMT can be used as evidence in such a civil case, which can substantially help the claimant. It is important to differentiate the MMT’s powers from those of a court in a civil claim. The MMT imposes sanctions like disqualification orders and fines but does not award damages to private litigants. Furthermore, the SFO clarifies that transactions resulting from market misconduct are not automatically void or voidable (s. 280). The right to pursue a civil claim is also independent of any criminal proceedings, meaning an investor does not have to wait for a criminal conviction to seek compensation.

Under the Securities and Futures Ordinance (SFO), a transaction is not automatically considered void or voidable simply because it was connected to an act of market misconduct. This principle, outlined in section 280 of the SFO, is crucial for maintaining certainty and stability in the market. However, the SFO provides a specific right for individuals who have suffered a financial loss due to such misconduct. Sections 281 and 305 of the SFO empower these individuals to initiate a private civil action to seek compensation for their losses. This right to sue for damages is independent of any proceedings or findings by the Market Misconduct Tribunal (MMT) or a criminal court. While a finding of market misconduct by the MMT can be used as evidence in a civil case, it is not a prerequisite for starting one. The court will award damages only if it deems it ‘fair, just and reasonable’ in the circumstances of the case.

According to Section 135 of the Securities and Futures Ordinance (SFO), a licensed corporation must notify the SFC of specific changes. When a person becomes or ceases to be a director of the corporation, this event must be reported in writing. The regulation specifies that this notification must be given no later than seven business days after the change occurs. This requirement is distinct from other notification timelines, such as the advance notice required for changing a business address or ceasing a regulated activity. It is also an event-driven notification, separate from the submission of the annual return, which follows a different schedule based on the anniversary of the license.

Statement I is correct. Under section 156(1) of the Securities and Futures Ordinance and the Securities and Futures (Accounts and Audit) Rules, a licensed corporation must submit its audited financial statements and other required documents to the SFC within four months after the end of its financial year.

Statement II is correct. The auditor’s report is a critical component of the submission. According to the Securities and Futures (Accounts and Audit) Rules, the report must contain the auditor’s opinion on, among other things, whether the licensed corporation has complied with the requirements of the Securities and Futures (Financial Resources) Rules (FRR) during the financial year.

Statement III is incorrect. If a licensed corporation becomes aware that its auditor will issue a modified opinion, it must notify the SFC in writing immediately. The Code of Conduct for Persons Licensed by or Registered with the SFC requires licensed corporations to report any material breach, infringement or non-compliance with regulations, which includes receiving a modified audit opinion. A 14-business day timeframe is incorrect; the obligation is to report as soon as practicable or immediately.

Statement IV is correct. Section 156(6) of the Securities and Futures Ordinance explicitly states that any person who, without reasonable excuse, fails to submit the required documents within the specified period commits an offence and is liable to a fine and, in the case of a continuing offence, a further daily fine. Therefore, statements I, II and IV are correct.

The Market Misconduct Tribunal (MMT) has a range of civil sanctions it can impose. Statement I is correct; under Part XIII of the Securities and Futures Ordinance (SFO), a person who has suffered a pecuniary loss due to market misconduct can bring a private civil action to claim damages. The findings of the MMT can be used as evidence in such proceedings. Statement II is incorrect; section 280 of the SFO explicitly states that a transaction is not void or voidable by reason only that it was entered into as a result of market misconduct. Statement III is correct; the MMT can recommend that a professional body of which the person is a member should take disciplinary action against them, which can affect their ‘fit and proper’ status. Statement IV is also correct; the MMT has the power to order the person found to have engaged in market misconduct to pay the reasonable costs and expenses incurred by the Government and the SFC in relation to the proceedings and any investigation. Therefore, statements I, III and IV are correct.

Statement I is correct. Under section 121 of the Securities and Futures Ordinance (SFO), the SFC may grant a temporary licence to an individual from an overseas firm to conduct a regulated activity for a period not exceeding three months. Statement II is also correct. The SFO stipulates that the total period for which temporary licences can be held by the same person may not exceed six months within any 24-month period. Therefore, obtaining a second three-month licence 12 months after the first one is permissible as it falls within this limit (3 months + 3 months = 6 months in a 12-month span). Statement III is incorrect. While the analyst can apply for a provisional licence, it is not granted automatically upon submission of the full licence application. The provisional licence itself must be approved and granted by the SFC before the individual can act as a representative. One cannot ‘immediately begin work’ simply by virtue of having applied. Statement IV is incorrect. A provisional licence, as per section 120 of the SFO, is temporary and covers the period until the SFC makes a final decision. It is revoked upon either the approval or refusal of the full representative licence application; it does not automatically convert into a full licence after a set period. Therefore, statements I and II are correct.

The Code of Conduct for Persons Providing Credit Rating Services (CRA Code) places significant emphasis on maintaining independence and managing conflicts of interest. A core principle is the separation of analytical functions from commercial activities. When a credit analyst, who is responsible for determining an entity’s rating, becomes involved in negotiating or promoting other fee-generating services to that same entity, a serious conflict of interest arises. This involvement could compromise, or be perceived to compromise, the analyst’s objectivity. The rated entity might feel pressured to purchase the ancillary services to secure a favourable rating, or the CRA might be tempted to link a positive rating outcome to a successful commercial deal. Therefore, CRAs must have robust policies to ensure that rating decisions are not influenced by the sale of other products or services. While issues like an analyst’s personal trading in a rated entity’s securities or contingent fee arrangements are also serious conflicts, they represent different types of breaches. Corporate mis-governance, on the other hand, relates to the conduct of the rated company’s management, not the practices of the CRA itself.

This question assesses the understanding of the initial considerations and internal governance standards a Credit Rating Agency (CRA) must adhere to under the SFC’s regulatory framework, specifically the Code of Conduct for Persons Providing Credit Rating Services (the CRA Code).

Statement I is correct. When a CRA considers rating a financial product of a type materially different from those it currently rates, the CRA Code requires that the feasibility of providing such a rating be subject to a formal review function. This review must be conducted by one or more senior staff members who possess the appropriate experience to make an informed judgment.

Statement II is incorrect. The CRA Code explicitly states that the responsibility for assigning credit ratings must lie with the CRA itself (or its affiliates), not with individual representatives. While an individual analyst provides input and analysis, the final rating is a corporate decision. Delegating this authority to an individual, even a senior one, would violate this core principle of collective responsibility and internal control.

Statement III is correct. Before committing to or continuing a rating, a CRA has a fundamental obligation to consider whether it can undertake a high-quality credit assessment. This involves a critical evaluation of its internal capabilities, including having sufficient resources (e.g., personnel, technology) and access to reliable, high-quality information about the rating target.

Statement IV is correct. To maintain objectivity and independence in the rating process, the CRA Code recommends that rating teams be structured to provide for continuity while avoiding bias. An appropriate rotation mechanism for team members, where practicable given the CRA’s staffing resources, is a key control to prevent individuals from becoming too familiar with a rating target, which could impair their objectivity over time. Therefore, statements I, III and IV are correct.

According to the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism issued by the SFC, licensed corporations must implement an effective and ongoing training program for their staff. The primary objective of this training is to ensure that relevant employees are fully aware of their legal obligations and the corporation’s internal policies for preventing, detecting, and reporting money laundering and terrorist financing activities. Key components of this training should include understanding the legal framework, such as the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), the personal liabilities for non-compliance, and the specific internal procedures for client due diligence, record-keeping, and, most importantly, the process for identifying and reporting suspicious transactions to the designated Money Laundering Reporting Officer (MLRO). While broader industry knowledge and international trends are useful, the training must prioritize the practical, role-specific knowledge that enables staff to perform their duties in a compliant manner. The focus should be on actionable procedures that staff can apply directly in their daily work.

Under the Securities and Futures Ordinance (SFO), the definition of ‘inside information’ comprises three core elements. Statement I is correct as the information must be specific and relate to the corporation, its shareholders, officers, or its listed securities. Statement II is correct because the information must not have been made public; it is confidential. Statement III is also correct as the information must be price-sensitive, meaning its public disclosure would likely have a material impact on the security’s price. Statement IV is incorrect. While the person who possesses the information is often a connected person, the definition of the information itself is not contingent on its source. Information can be ‘inside information’ regardless of who discovers it, as long as it meets the criteria of being specific, non-public, and price-sensitive. Therefore, statements I, II and III are correct.

Statement I is correct. A fundamental objective of Credit Rating Agencies (CRAs), as outlined in principles from bodies like the International Organization of Securities Commissions (IOSCO), is to reduce information asymmetries. They provide an independent opinion on creditworthiness, which helps bridge the information gap between an issuer (who has detailed internal knowledge) and an investor (who relies on public information).

Statement II is correct. The Securities and Futures Commission (SFC) aims to align its regulatory oversight of CRAs with international best practices, particularly those set by IOSCO. This harmonisation is crucial to ensure that credit ratings issued by SFC-licensed CRAs are recognised and accepted in global markets, facilitating cross-border investment and maintaining Hong Kong’s status as an international financial centre.

Statement III is incorrect. The SFC licenses and supervises CRAs to ensure they have adequate systems and controls, but it does not guarantee the accuracy or outcome of their ratings. A credit rating is an opinion on future creditworthiness and is subject to limitations; it is not a guarantee against default, and investors should not treat it as such.

Statement IV is incorrect. While transparency is a key objective, the IOSCO Code explicitly aims to protect the confidentiality of material non-public information provided by issuers to CRAs during the rating process. Disclosing such sensitive information would breach confidentiality agreements and deter issuers from participating in the rating process. Therefore, statements I and II are correct.

Statement I is correct. The General Principles of the SFC Code of Conduct and the Internal Control Guidelines explicitly state that senior management of a licensed corporation bears the primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the firm. Statement III is also correct. Under the Securities and Futures Ordinance (SFO), a licensed corporation is required to have at least two responsible officers approved by the SFC. At least one of these must be an executive director of the corporation, and at least one must be ordinarily resident in Hong Kong. Statement II is incorrect. The SFC’s codes and guidelines, including the Code of Conduct for Persons Licensed by or Registered with the SFC and the specific CRA Code, do not have the force of law. However, a breach can reflect adversely on a person’s fitness and properness and may lead to disciplinary action by the SFC. Statement IV is incorrect. The SFC’s Licensing Department is responsible for processing licence applications and granting approvals. However, the ongoing supervision and on-site inspections of licensed corporations are conducted by the Intermediaries Supervision Department. Therefore, statements I and III are correct.

Under the Securities and Futures Ordinance (SFO), specifically Section 146, and the Financial Resources Rules (FRR), a licensed corporation has strict obligations upon discovering a breach of its Required Liquid Capital (RLC) or paid-up share capital. The primary purpose of these rules is to ensure the financial stability of intermediaries and protect the market and investors. A key statutory duty is the immediate notification to the Securities and Futures Commission (SFC). The SFO makes it a criminal offence to fail to notify the SFC in writing as soon as the corporation becomes aware of its inability to meet the financial resources requirement. Other related offences include continuing to conduct regulated activities after the breach without SFC consent and failing to maintain proper records that would allow for a ready ascertainment of the FRR position. While internal procedures, such as informing the board or compliance, and taking remedial actions, like securing new funding, are critical from a governance and operational perspective, the failure to perform the statutory notification to the regulator is a specific offence punishable by fine and/or imprisonment.

This question assesses the understanding of conflict of interest management within a licensed Credit Rating Agency (CRA) as stipulated by the SFC’s regulatory framework, particularly the Code of Conduct for Persons Providing Credit Rating Services (the ‘CRA Code’). The CRA Code, which is based on the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies, places a strong emphasis on ensuring the independence and objectivity of the credit rating process. A fundamental principle is that a CRA must establish, maintain, and enforce written policies and procedures to identify and manage conflicts of interest. When a potential conflict arises involving an analyst, the primary concern is to prevent that conflict from influencing the rating analysis. While disclosure is an important tool, the most effective measure to preserve the integrity of the rating is to isolate the analytical process from the source of the conflict. Therefore, firms are expected to have procedures for reassigning personnel when a significant conflict is identified. Other measures, such as enhanced supervision or relying solely on disclosure, may not be considered sufficient to mitigate the risk of actual or perceived bias in the rating outcome.

The SFC’s Code of Conduct for Persons Providing Credit Rating Services (the ‘CRA Code’) sets out specific transparency and disclosure requirements for rating announcements. Statement I is correct because paragraph 2.15 of the CRA Code requires a clear and prominent statement identifying the name and job title of the lead rating analyst and the name and position of the person primarily responsible for approving the rating. Statement II is also correct as it reflects the requirements in paragraphs 2.18(g) and 2.18(l) of the CRA Code, which mandate disclosure on whether the rated entity participated in the process and whether the rating was amended after being disclosed to the entity before issuance. Statement III is incorrect; while CRAs must publish historical default rates of their rating categories (paragraph 2.28), the CRA Code does not require a specific comparative analysis of this nature within every individual rating announcement. Statement IV is fundamentally incorrect as a credit rating is an opinion on creditworthiness and explicitly not a guarantee of future performance or a recommendation to buy, sell, or hold a security. Therefore, statements I and II are correct.

The Code of Conduct for Persons Providing Credit Rating Services (CRA Code) mandates that every licensed Credit Rating Agency (CRA) must establish and maintain its own internal code of conduct. This internal document, sometimes referred to as a ‘House Code’, serves as the practical implementation framework for the principles and rules set out by the SFC. Its primary function is to translate the regulatory requirements of the CRA Code into specific, actionable policies and procedures that are tailored to the CRA’s unique business model, structure, and operations. A critical aspect of this requirement is transparency; the CRA is obligated to make its House Code publicly accessible. This ensures that investors, issuers, and other market participants can understand the standards of integrity, independence, and analytical quality to which the CRA holds itself. While the SFC oversees the overall compliance of a CRA, the responsibility for drafting, implementing, and adhering to a compliant House Code rests with the firm itself. The focus is on embedding the regulatory standards into the firm’s culture and daily operations, rather than on competitive benchmarking or purely commercial considerations.