Under the Mandatory Provident Fund Schemes Ordinance (MPFSO), specific requirements must be met for registration as an MPF intermediary. Statement I is correct because a firm seeking to become a principal intermediary must be licensed by the Securities and Futures Commission (SFC) for Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activities, or alternatively, be licensed by the Insurance Authority (IA). Statement III is also correct as a fundamental condition for a principal intermediary’s registration is the concurrent application for approval of at least one subsidiary intermediary who will be attached to it to carry out the regulated MPF activities. Statement II is incorrect because the qualifying examination for an individual to be registered as a subsidiary intermediary must have been passed within the past one year, not three years. Alternatively, the individual could have been registered as a subsidiary intermediary within the past three years. Statement IV is incorrect; while industry experience is valuable, the MPFSO does not prescribe a mandatory minimum of two years of experience as a prerequisite for an individual to be registered as a subsidiary intermediary. The primary requirements are passing the specified examination or having recent prior registration. Therefore, statements I and III are correct.

According to the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (GAML), licensed corporations and licensed Virtual Asset Service Providers (VASPs) must adopt a risk-based approach (RBA). This involves conducting two distinct types of risk assessments. The first is an ‘institutional risk assessment’, which is a holistic evaluation of the firm’s overall exposure to ML/TF risks. This assessment considers broad factors such as the nature of the business, the products and services offered, the delivery channels used (e.g., online vs. face-to-face), and the general types of customers and geographic locations the firm deals with. The outcome of this firm-wide assessment informs the design of the company’s entire AML/CFT system, policies, and controls. The second type is the ‘customer risk assessment’, which is conducted for each individual business relationship. This assessment focuses on the specific risks presented by a particular client, considering factors like their background, source of funds, and intended transaction patterns. The level of due diligence applied to that client (e.g., simplified, standard, or enhanced) is determined by this individual assessment.

This question assesses your understanding of the specific investment restrictions for different types of Pooled Retirement Fund (PRF) portfolios as stipulated in the Code on Pooled Retirement Funds (PRF Code). A PRF structured as a ‘cash management portfolio’ has a very narrow and conservative investment mandate. It is permitted to invest only in cash and cash equivalents, which are explicitly defined as short-term bank deposits, bank current accounts, and certificates of deposit. This is to ensure maximum liquidity and capital preservation. Other investment types, such as SFC-authorised equity funds, would be permissible for a PRF structured as a ‘fund of funds’. Similarly, instruments providing a capital guarantee are characteristic of a ‘guaranteed fund’ PRF. Government bonds, while often considered low-risk, do not fall under the strict definition of cash or cash equivalents for a cash management portfolio.

The Mandatory Provident Fund Schemes Authority (MPFA) is the primary regulator for the MPF system in Hong Kong, established under the Mandatory Provident Fund Schemes Ordinance (MPFSO). A core function of the MPFA is to protect the interests of scheme members. This involves a multi-faceted approach to supervision. Before any new MPF scheme or constituent fund can be offered to the public, it must be registered with the MPFA. This registration process ensures that the scheme meets the legal and structural requirements set out in the MPFSO. Furthermore, the MPFA plays a crucial role in regulating the sales and marketing activities associated with MPF products. It issues specific guidelines and codes of conduct that govern how trustees and intermediaries can promote their schemes. These rules are designed to ensure that all promotional materials are clear, fair, and not misleading, providing members with a balanced view that includes both potential returns and associated risks. The authority does not, however, assess the commercial viability or endorse the investment strategy of a fund, nor does it guarantee its performance. Its focus is on regulatory compliance, proper disclosure, and the conduct of industry participants, not on the merits of the investment itself.

According to Paragraph 7.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a licensed person must obtain written authority from a client before operating a discretionary account. This authority must be confirmed with the client on an annual basis. The Code provides a specific mechanism for this annual confirmation: it is permissible for the licensed person to notify the client in writing before the expiry date that the authority will be automatically renewed unless the client specifically revokes it in writing before that date. This is often referred to as a ‘negative consent’ or ‘opt-out’ mechanism. Requiring a new, physically signed agreement each year is more stringent than what the Code mandates. A verbal confirmation, even if recorded, does not meet the requirement for written notification and potential revocation. The initial opening of a discretionary account requires senior management approval, but the annual confirmation process is focused on reaffirming the client’s authority, not repeating the internal approval process.

The suitability requirement under paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission is triggered when a licensed person makes a recommendation or solicitation. For complex products, this assessment must be particularly rigorous. Statement I is correct because a client’s experience in trading equities (generally non-complex) does not imply understanding of complex structured products or their underlying derivatives. The intermediary must make a specific assessment of the client’s knowledge in the relevant product type. Statement II is correct as providing the Product Key Facts Statement (KFS) and explaining the features, risks, and worst-case scenarios are fundamental to ensuring the client makes an informed decision. This addresses a key concern of the SFC regarding mis-selling. Statement III is correct because paragraph 5.2 of the Code of Conduct requires intermediaries to document and provide the client with the rationale for their recommendation, demonstrating why it is suitable. Statement IV is incorrect because a long-standing relationship or activity in a different product category is not a valid substitute for a thorough, product-specific suitability assessment. Relying on such factors would be a significant compliance failure and a form of mis-selling. Therefore, statements I, II and III are correct.

According to the SFC’s Code on Unit Trusts and Mutual Funds, when a management company applies to withdraw the authorisation of a Collective Investment Scheme (CIS) that will continue to operate outside of Hong Kong, its primary duty is to protect the interests of existing investors. While communicating the changes, providing redemption options, and detailing expenses are all mandatory procedural steps, the SFC’s core concern for investors who may choose to remain in the fund is ensuring their ongoing protection. Therefore, the management company must satisfy the SFC that adequate safeguards are in place. A typical and acceptable measure is to demonstrate that the CIS will remain subject to supervision by a foreign regulatory authority that the SFC deems acceptable. This ensures that even after the Hong Kong authorisation is withdrawn, the fund continues to be governed by a robust regulatory framework, protecting the interests of any remaining unitholders.

This question assesses the understanding of investment restrictions for MPF constituent funds under the Mandatory Provident Fund Schemes (General) Regulation. Statement I is incorrect because MPF constituent funds are generally prohibited from investing in unlisted securities, as they are not included in the list of permissible investments in Schedule 1 of the Regulation. Statement II is incorrect because the Regulation restricts borrowing by a constituent fund to a maximum of 10% of its net asset value (NAV), and only for temporary liquidity purposes, not for leveraging investment opportunities. The proposed 15% limit for leveraging exceeds this restriction. Statement III is correct; the use of financial futures and options is permitted, but strictly for hedging purposes to manage existing risks within the portfolio, not for speculation. Statement IV is also correct; the Regulation permits securities lending provided that, among other conditions, the fund receives collateral of at least 100% of the market value of the securities lent (105% is a common and prudent market practice that is compliant) and all income derived from the activity, net of direct operational costs, is credited to the fund. Therefore, statements III and IV are correct.

According to the Fund Manager Code of Conduct (FMCC) issued by the SFC, when a fund manager engages in securities lending and receives cash collateral, the policy for reinvesting this cash must address several key risks. A primary concern is liquidity risk. The fund must be able to recall the lent securities or meet redemption requests from its investors without delay. Reinvesting cash collateral introduces the risk that the reinvested assets cannot be liquidated quickly enough or at a fair price, especially during periods of market stress. Therefore, the FMCC mandates that the fund manager’s policy must include provisions for managing this liquidity risk. This involves conducting appropriate stress tests to assess the fund’s ability to meet both foreseeable and unexpected cash needs. These tests should simulate adverse market scenarios to ensure the reinvestment strategy does not compromise the fund’s overall liquidity profile. While other elements like credit risk management and disclosure are important, the explicit requirement to address liquidity risk through stress testing is a cornerstone of the policy for reinvesting cash collateral.

The Code of Conduct for Licensed Insurance Agents, issued by the Insurance Authority, establishes the professional and ethical standards expected of agents. A central tenet of this code is the requirement to act in the best interests of the client. In the scenario presented, the agent is aware of the client’s low risk tolerance and capital preservation goals. Recommending a high-risk, equity-focused product, primarily motivated by a higher personal commission, is a clear failure to prioritize the client’s needs. While this action also touches upon other principles, such as providing suitable advice and disclosing information accurately (by downplaying risks), the root of the misconduct is the decision to not act in the client’s best interest. The principles of exercising care and maintaining competence are less relevant here, as the agent’s action appears to be a deliberate choice rather than a result of negligence or lack of knowledge.

This question assesses the understanding of the requirements for daily statements of account under the SFC Code of Conduct. Statement I is correct because the Code requires intermediaries to provide a daily statement of account no later than the end of the second business day after the specified events (e.g., transactions) occur. If a client trades on Monday, the statement must be provided by the end of Wednesday. Statement II is correct as the statement must include the outstanding balance of the account at the beginning and end of the trading day. Statement III is incorrect because the daily statement must explicitly include all charges levied during the day, such as brokerage fees and stamp duty; it cannot omit them on the basis that they are on the contract note. Statement IV is correct; with the client’s prior written consent, intermediaries are permitted to provide statements and contract notes electronically to the client’s last known electronic mail address. Therefore, statements I, II and IV are correct.

According to the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules, an asset manager is obligated to provide a client with a monthly statement of account under specific conditions. These conditions include any activity occurring in the account during the month, the existence of any client asset or money balances at any time during the month, or an open position at the end of the month. In this scenario, although there were no transactions, a cash balance was maintained in the account throughout the month. This presence of a balance triggers the requirement to issue a statement. The rules specify that this statement must be provided no later than the end of the tenth business day following the end of the monthly accounting period. The exemption for this requirement applies to the management of a Collective Investment Scheme (CIS), not to a standard discretionary managed account. The two-business-day deadline relates to the issuance of receipts for client assets, not monthly statements.

This question assesses the understanding of functional separation and segregation of duties as required by the SFC’s Fund Manager Code of Conduct (FMCC). Statement I is incorrect because the FMCC explicitly requires that front office functions (like investment decisions made by portfolio managers) and back office functions (like trade settlement) should be physically segregated where practicable, with different staff and separate reporting lines. Combining them in an open-plan office violates this core principle. Statement II is correct as it describes the implementation of a ‘Chinese Wall,’ which is an effective system of functional barriers required to prevent the flow of confidential and price-sensitive information between a fund manager and other business units within the same group, such as a corporate finance arm. Statement III is incorrect because the FMCC mandates that the investment decision-making process must be clearly delineated from the dealing process. Assigning both responsibilities to one individual creates a significant control weakness and potential for conflicts of interest. Statement IV is correct because the compliance function must be independent and segregated from other functions. A direct and separate reporting line to the Board of Directors ensures this independence and is considered a best practice under the FMCC. Therefore, statements II and IV are correct.

Under the Securities and Futures (Financial Resources) Rules (FRR), a licensed corporation is required to maintain liquid capital equal to or greater than its required liquid capital at all times. The rules impose strict and immediate obligations in the event of a deficit. Upon becoming aware that its liquid capital has fallen below the required level, the corporation must notify the Securities and Futures Commission (SFC) in writing of this failure as soon as reasonably practicable. Simultaneously, the corporation must cease carrying on the regulated activities for which it is licensed. This cessation is a critical step to prevent the firm from incurring further liabilities or increasing its risk exposure, thereby protecting its clients and the integrity of the market. The firm may only continue to perform actions necessary to fulfill its existing obligations or as otherwise permitted by the SFC. Simply planning for a capital injection or informing auditors does not satisfy the immediate regulatory requirement to notify the SFC and halt relevant business activities.

This question assesses the understanding of the seven General Principles (GPs) in the SFC Handbook, which apply to all SFC-authorized products. The scenario describes a marketing advertisement that highlights potential high returns while minimizing the visibility of associated risks. This directly relates to the principle governing product advertisements. While other principles like ensuring complete disclosure (GP2) and acting with due skill and care (GP6) are broadly relevant, the most specific principle breached here is GP7. GP7 explicitly states that advertisements must be clear, fair, and present a balanced picture, with risk disclosures being adequate and prominent. Placing risks in a small-print footnote while prominently displaying high potential returns fails the ‘balanced picture’ and ‘prominent risk disclosure’ tests. The purpose of this principle is to prevent promotional materials from misleading potential investors by creating an overly optimistic impression of the product’s performance without giving equal weight to the potential downsides.

According to Chapter 5 of the SFC Code on MPF Products, the offering document must provide comprehensive information to prospective scheme participants. Statement I is correct because the investment management agreement is a material contract, and copies of such contracts must be made available for inspection by the public. Statement II is correct as the offering document must disclose that the trustee has provided written approval for the delegation of its investment management functions to the new investment manager. Statement III is incorrect because the Code explicitly prohibits the inclusion of any performance forecasts in the offering document to avoid misleading potential investors. Statement IV is correct as the offering document must include a statement confirming the trustee’s consent to the exchange of information between the SFC and the MPFA, which is a key regulatory requirement for oversight. Therefore, statements I, II and IV are correct.

Statement I is correct. Under Section 6(2) of the Client Securities Rules, an intermediary licensed for asset management may, with the client’s prior written agreement, withdraw client securities from a segregated account to settle a sale order on behalf of that client. Statement II is correct. The Client Securities Rules explicitly require an intermediary licensed for Type 13 regulated activity (providing depositary services) to ensure that any securities of a Collective Investment Scheme (CIS) it receives are deposited into a segregated safe custody account as soon as reasonably practicable. Statement III is incorrect. The Client Securities Rules do not apply to client securities that are maintained by the client in an account in their own name with a person other than the intermediary or its associated entity. The fact that Apex has discretionary authority does not bring these US-held securities under the scope of Hong Kong’s Client Securities Rules. Statement IV is incorrect. For a Type 13 intermediary, any subsequent dealings in the CIS securities must be made in accordance with written instructions from the relevant party. Verbal instructions are not sufficient under the rules. Therefore, statements I and II are correct.

This question assesses the understanding of the regulatory status of SFC codes and guidelines and the consequences of their breach. Statement I is incorrect because SFC codes and guidelines, such as the Advertising Guidelines, do not have the force of law. A breach is not in itself a criminal offence, although it can be used as evidence in legal proceedings and forms a basis for disciplinary action. Statement II is correct; the SFC has the power to withdraw or impose conditions on the authorisation of a product or its offering documents if a relevant code is breached. Statement III is also correct, as the SFC will consider a firm’s compliance history, including such breaches, when deciding whether to authorise future products from that firm, having regard to the interests of the investing public. Statement IV is correct because a failure to comply with SFC codes and guidelines can be considered by the SFC in determining whether a licensed corporation, and its management, continue to be fit and proper to remain licensed. Such a breach reflects on the firm’s competence and integrity. Therefore, statements II, III and IV are correct.

According to the Code of Conduct for Persons Licensed by or Registered with the SFC, specifically Schedule 7 concerning electronic trading, licensed corporations must adhere to stringent record-keeping requirements. These rules distinguish between different types of records and their corresponding retention periods. For records concerning the design, development, testing, and modification of an electronic trading system, as well as the comprehensive documentation of its risk management controls, the retention period is at least two years after the system has been decommissioned or ceased to be used. In contrast, audit logs of system activities and reports on material incidents must be kept for a period of at least two years from the date the record was created. It is crucial for candidates to differentiate between a retention period that starts upon the cessation of a system’s use versus a rolling retention period that applies to ongoing operational records.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, licensed corporations engaging in non-centrally cleared Over-the-Counter Derivative (NCC OTCD) transactions with covered entities are required to exchange margin. This framework distinguishes between two types of margin: Initial Margin (IM) and Variation Margin (VM). Variation Margin is specifically designed to cover the current, mark-to-market exposure of a transaction. As the value of the derivative fluctuates daily due to market movements, one party will have an unrealized gain while the other has an unrealized loss. VM is the collateral collected (often daily) from the party with the loss to cover this current exposure, thereby preventing the build-up of a large uncollateralized credit risk. In contrast, Initial Margin is collected at the start of the transaction to protect against potential future exposure—the risk that the counterparty defaults and the market moves adversely before the position can be closed out.

This question assesses understanding of the Internal Control Guideline (ICG) issued by the SFC, specifically focusing on the principles of ‘Information Management’ and ‘Compliance’. The ICG requires licensed corporations to maintain proper records and ensure the reliability of information. When an error is discovered, even if historical and with a minor financial impact, a firm’s internal control framework must ensure the incident is properly handled. This involves a structured process: first, thoroughly documenting the nature of the error, the investigation process, and the remediation steps. This creates a clear audit trail and demonstrates accountability. Second, the firm must have a process to assess its obligations, which includes reviewing internal policies and relevant regulations to determine if notification to clients or the regulator is necessary. Simply ignoring the issue because it is resolved or has a negligible impact would be a failure of internal controls. Likewise, reacting without a proper internal assessment (e.g., immediate mass communication or premature regulatory reporting) is not aligned with the pragmatic and risk-based approach the SFC expects. The core principle is to manage the information reliably and comply with all applicable requirements in a considered manner.

This question assesses the understanding of the scope of application for Initial Margin (IM) and Variation Margin (VM) requirements for Non-Centrally Cleared Over-the-Counter Derivatives (NCC OTCD) under the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

Statement I is correct. The requirements apply to a licensed corporation entering into an NCC OTCD transaction with a counterparty that is a ‘covered entity’. A large conglomerate exceeding the specified notional amount threshold for its derivative portfolio fits this definition.

Statement II is incorrect. The definition of a ‘covered entity’ specifically excludes certain parties, including multilateral development banks as specified by the Hong Kong Monetary Authority (HKMA). Therefore, transactions with such entities are not subject to these margin requirements.

Statement III is incorrect. The margin requirements provide for certain product-level exceptions. Physically settled foreign exchange forward contracts are one of the specified exceptions, meaning IM and VM are not required for these transactions.

Statement IV is correct. While Registered Institutions (RIs) are regulated by the HKMA regarding their own compliance, a Licensed Person (like the Type 9 asset manager) still has obligations under the SFC Code of Conduct when transacting with them. If the RI counterparty meets the definition of a ‘covered entity’, the licensed person is required to exchange margin with that RI for the NCC OTCD transaction. The RI’s regulatory status does not exempt the licensed person from its own obligations. Therefore, statements I and IV are correct.

The Mandatory Provident Fund Schemes Ordinance (MPFSO) sets out strict requirements for the governance and structure of MPF schemes to protect members’ interests. Statement I is correct because both master trust schemes and industry schemes, which serve multiple employers, must be operated by corporate trustees approved by the MPFA to ensure a high level of governance and operational capacity. Statement II is also correct; the MPFSO allows for individuals to act as trustees, but only for employer-sponsored schemes, which are set up for the employees of a single employer or its associated companies. Statement III is correct and reflects a fundamental principle of trust law and the MPFSO; the assets of the scheme must be held in a trust and legally segregated from the assets of the employer and the trustee. This protects the members’ benefits in case of insolvency of either the employer or the trustee. Statement IV is incorrect; the MPFSO explicitly requires that all MPF schemes must be governed by a trust established under and subject to Hong Kong law to ensure consistent regulatory oversight and legal enforceability within the jurisdiction. Therefore, statements I, II and III are correct.

Statement I is incorrect. Since REITs are listed and traded on the Stock Exchange of Hong Kong (SEHK), their unit price is determined by market supply and demand (prevailing market price), not by a calculated Net Asset Value (NAV) in the same way as unlisted funds. Therefore, the detailed NAV-based pricing error correction policies applicable to unlisted funds are generally not relevant to exchange-traded REITs. Statement II is correct. The Code on REITs places a clear responsibility on the management company to manage the REIT’s cash flows. The Depositary has an oversight duty to ensure that the management company has established and maintains adequate policies and controls to comply with this and other obligations under the law and the REIT’s constitutive documents. Statement III is correct. While assets should normally be held by the Depositary, in specific circumstances where it is in the REIT’s interest for assets to be held by the management company or a special purpose vehicle (SPV), the Depositary must ensure those assets are properly segregated and that it can exercise effective oversight to safeguard the interests of unitholders. Statement IV is correct. The regulatory framework for REITs includes a specific and comprehensive regime for handling connected party transactions, which is detailed in the Code on REITs. These specific rules supersede the more general provisions found in other codes, such as the Fund Manager Code of Conduct. Therefore, statements II, III and IV are correct.

Under the Securities and Futures (Accounts and Audit) Rules, the auditor’s report accompanying a licensed corporation’s annual submission to the SFC must contain several specific opinions. A key requirement relates to the returns specified in the Financial Resources Rules (FRR). The auditor is mandated to provide an opinion on whether these FRR returns have been correctly compiled from the licensed corporation’s underlying accounting and other records. If there are any discrepancies, the auditor must state the nature and extent of the incorrectness. This is distinct from the ‘true and fair view’ opinion, which is required for the statement of financial position and the statement of profit or loss and other comprehensive income. The auditor’s role concerning the FRR returns is to verify the accuracy of their compilation from source records, not to provide a broader opinion on their ‘fairness’ or to confirm continuous compliance with liquid capital requirements throughout the year, which is a management responsibility.

This question assesses the understanding of the specific investment restrictions applicable to constituent funds under the Mandatory Provident Fund (MPF) Schemes framework in Hong Kong. According to the Mandatory Provident Fund Schemes (General) Regulation, constituent funds are subject to stringent rules to protect scheme members’ retirement savings. These rules govern borrowing, the use of derivatives, securities lending, and the types of assets a fund can hold. MPF funds are generally prohibited from borrowing for the purpose of leveraging their investments; any borrowing is strictly limited in quantum (typically up to 10% of the fund’s net asset value) and must be for temporary, short-term liquidity purposes, such as meeting redemption requests, not for enhancing returns. In contrast, activities like securities lending are permitted, provided they are fully collateralized to mitigate risk. The use of financial futures and options is also allowed, but primarily for efficient portfolio management and hedging purposes, not for speculation. Finally, investments are restricted to ‘permissible investments’ as defined in Schedule 1 of the Regulation, which includes shares on approved stock exchanges.

According to the SFC’s Code on Unit Trusts and Mutual Funds (UT Code), specific rules are in place to manage conflicts of interest when a Collective Investment Scheme (CIS) transacts with connected persons. A connected person includes the management company, its investment delegate, directors, and their respective connected entities. When a transaction is proposed between the CIS and a connected person acting as principal, the UT Code mandates a key procedural safeguard to protect the interests of the fund’s unitholders. This primary requirement is to obtain the prior consent of the scheme’s trustee or custodian. The trustee/custodian has a fiduciary duty to act in the best interests of the unitholders and must be satisfied that the transaction is conducted at arm’s length and on terms that are fair to the CIS. While subsequent disclosure in the annual report is also required, it is not a substitute for prior approval. Similarly, while the fees should be fair, the procedural step of obtaining trustee consent is the explicit requirement. Requiring unitholder approval is generally reserved for more fundamental changes to the scheme, not for individual transactions.

The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission requires intermediaries to act with due skill, care, and diligence. When assessing a potential breach, the SFC does not apply a one-size-fits-all approach. Instead, it considers the specific circumstances and roles of the individuals involved. Statement I is correct because the SFC will consider an individual’s level of responsibility, which includes their experience, seniority, and specific duties. A junior representative’s conduct is viewed in the context of their role. Statement II is correct as the SFC places significant emphasis on supervisory responsibility. The conduct of a subordinate often reflects on the adequacy of the supervision, training, and internal controls implemented by their superiors, such as the Responsible Officer. Statement III is also correct because the level of control and knowledge a supervisor has over their team’s activities is a key determinant of their accountability. The SFC will examine whether the RO had effective systems to monitor and control the representative’s actions. Statement IV is incorrect. While a breach of the Code of Conduct can lead to disciplinary action, including license revocation, it is not an automatic consequence. The SFC has a range of disciplinary sanctions, and the outcome depends on the gravity of the breach, the person’s conduct, and other mitigating or aggravating factors. Therefore, statements I, II and III are correct.

Statement I is correct. According to the SFC Code of Conduct, a licensed corporation must avoid conflicts of interest, and where they cannot be avoided, they must be disclosed to the client and managed fairly. The relationship between Apex and Zenith constitutes a material conflict of interest that must be clearly disclosed to clients before any transaction is executed. Statement II is correct. The Securities and Futures (Client Money) Rules mandate that any client money received by a licensed corporation must be promptly paid into a segregated account maintained with an authorized financial institution. This ensures client assets are protected and not co-mingled with the firm’s own funds. Statement III is incorrect. The fundamental principle of acting in the best interests of clients, as stipulated in the Code of Conduct, prohibits a licensed corporation from subordinating client interests to its own or those of a related party. General suitability is not sufficient to override this primary duty. Statement IV is incorrect. The Client Money Rules strictly prohibit a licensed corporation from using client money for its own operational purposes, even temporarily. Such an action would be a serious breach of regulations concerning the handling of client assets. Therefore, statements I and II are correct.

This question assesses understanding of the core investment and borrowing restrictions for Collective Investment Schemes (CIS) under the SFC’s Code on Unit Trusts and Mutual Funds. Statement I is permissible because the borrowing of 8% of the NAV is within the 10% limit stipulated by the Code. Statement II is not permissible as the liability to deliver securities from short selling must not exceed 10% of the CIS’s total NAV; 12% breaches this limit. Statement III is permissible because the investment does not breach the connected party transaction rules. The individual holding of the director (0.4%) is below the 0.5% threshold, and the collective holding of all directors and officers (4.5%) is below the 5% threshold. Statement IV is not permissible because a CIS is explicitly prohibited from assuming, guaranteeing, or otherwise becoming liable for the obligations or indebtedness of any other person. Therefore, statements I and III are correct.