HKSI LE Paper 1 Past Paper (4)

HKSI LE Paper 1 (Dec 2006) - Q&A 46~60 (with explanations):

46(D) - The function of stock borrowing & lending is similar to money borrowing & lending.

47(C) - (I) is right because over-concentration of securities collaterals is a margin control risk. (II) is wrong because the written agreement must be completed before the provision of margin service. (III) and (IV) are standard requirements for securities margin financing.

48(B) - (A), (C) & (D) are wrong as there are no such requirements under the rules of SEHK.

49(C) - (A), (B) & (D) are the functions performed by the clearing house. Market maker's role is to provide market liquidity by quoting both bid & ask prices.

50(D) - All options are services provided by the HKSCC.

51(C) - Offer for sale is not a recognized method of listing for already listed securities.

52(C) - Meetings of the Takeovers & Mergers Panel are definitely not open to public. The role of Takeovers Appeals Committee is to review disciplinary rulings of the Takeovers and Mergers Panel for determining whether any sanction imposed is unfair or excessive, rather than setting aside the entire proceedings of the Panel. The Takeovers Appeals Committee is a regulatory committee under the SFC, thus not independent.

53(C) - (A) is wrong as both codes have no force of law. (B) is wrong as both codes have impact on a person's fitness & properness in case of non-compliance. (D) is wrong as the Code on REITs has been promulgated by the SFC instead of the HKMC.

54(A) - Management of mutual funds, collective investment schemes and discretionary portfoliios are all related to asset management (Type 9 regulated activity). Securities margin financing is only Type 8 regulated activity.

55(B) - Recognized counterparty is not regarded as a "client" of a leveraged foreign exchange trader. This is an exemption under the SFO.

56(D) - All options are within the 6 Data Protection Principles under the Personal Data (Privacy) Ordinance.

57(B) - Covered short selling is not a misconduct. Corporate misgovernance is a misconduct but not market misconduct. (I) & (III) are market misconducts defined under the SFO.

58(C) - Rat trading and churning are misconducts but they are not defined under the SFO. (III) & (IV) are market misconducts defined under the SFO.

59(A) - Actually only price rigging is an offence of market misconduct in those options, but the answer "(II) only" is not available. This question is wrongly designed by treating also (I) as a market misconduct.

60(D) - By common sense all options are examples of good internal control measures.

HKSI LE Paper 1 Past Paper (3)

HKSI LE Paper 1 (Dec 2006) - Q&A 31~45 (with explanations):

31(A) - (I) & (III) are the risk disclosure statements set out in Schedule 1 of the Code of Conduct. (II) is wrong as the true risk of holding assets outside assets is that such assets are not protected by the Client Securities Rules. (IV) is wrong as the true risk of margin trading is the financial leverage which may cause the margin collaterals to be liquidated by the intermediary.

32(B) - (I) is the Client Identity Rules. (III) is a standard know-your-client requirement. (II) is not chosen because it may not be a problem if the client's cash settlement is a small amount. (IV) is not chosen because obtaining the client's latest tax return is not specified by SFC's codes & guidelines. Intermediary has flexibility to evaluate the client's financial position by different means.

33(D) - All of them are requirements specified in the Fund Manager Code of Conduct.

34(D) - (D) is wrong because the Code of Conduct allows the intermediary to set its own restrictions on staff dealings.

35(D) - (I) is wrong because complete reliance on internet for communication is too risky. When the server is out of order, clients should be allowed to contact the service provider by other means. (III) is wrong because shifting all responsibilities for errors and omissions to the client is unreasonable.

36(B) - Segregation of duties is a control requirement. (III) & (IV) are obviously not for this purpose.

37(D) - Receiving trade instructions from clients is definitely a front office function. Trade confirmations with clients may be performed by back office.

38(D) - The Code of Conduct does not encourage, but not strictly prohibit, taking client orders by mobile phone. Since mobile phone can't create central tape records, the dealer should record the order details in writing or on the office telephone recording system.

39(D) - (A) is wrong as the Guidance Note is not applicable to AFIs. (B) is wrong as the Guidance Note is not statutory and thus can't make offences or prescribe sanctions. (C) is wrong as the Guidance Note lets the licensed corporations decide whether trading for high risk clients.

40(D) - (I) is not chosen because it should not be an intermediary to check the credit worthiness of its counterparty's client. This should be done by its counterparty instead.

41(B) - (I) is wrong because senior management is ulitmately responsible for internal controls and can't delegate all of their supervisory functions to line management. (II) is wrong because the major focus of line staff (e.g. dealers) should be the regulated activities rather than compliance and audit.

42(D) - (I) doesn't make sense as it is not abnormal that a well-known very wealthy businessman trades through different accounts. (II), (III) & (IV) are all examples of suspicious transactions given by the Guidance Note.

43(D) - (I) is wrong as cash market means spot market. (III) is wrong as the definition of securities is set out in the SFO, which is not freely extended by SFC.

44(A) - (A) is wrong because a SEHK dealer must be registered as a trading (instead of clearing) participant.

45(D) - (II) is wrong because a speculator dealing for himself as principal (rather than as agent) is not subject to any licensing requirement.

HKSI LE Paper 1 Past Paper (2)

HKSI LE Paper 1 (Dec 2006) - Q&A 16~30 (with explanations):

16(C) - Code of Conduct is simply providing the standards of good practices for intermediaries and their representatives to follow.

17(D) - Unlike (II), (III) & (IV), (I) appears not to be an effort with the intention to frustrate an audit.

18(C) - Part III of SFO clearly states that exchange companies (i.e. SEHK & HKFE) and clearing houses should be recognized by SFC. Official Receiver is not an institution specific to securities industry and thus not regulated by SFC. Listed companies are approved by SEHK instead of SFC.

19(A) - (I) refers to the EO for a licensed corporation, while (IV) refers to the EO for an associated entity. An EO is not necessarily a designated compliance officer. An EO is supervising regulated activities of a licensed corporation and its licensed representations, but "marketing executives" is not mentioned in SFO.

20(A) - Client Securities Rules ("CSR") could only cover securities received or held in HK (not overseas). (III) is wrong because CSR would not regulate securities neither handled by an intermediary nor its associated entity.

21(B) - The general rule under S&F (Keeping of Records) Rules is that records should be kept for at least 7 (instead of 10) years. Under S&F (Contract Notes, Statements of Account & Receipts) Rules, contract notes should be retained for at least 2 years (instead of 2 months). Under Code of Conduct, telephone recording of order instructions should be retained for at least 3 months (instead of 2 years).

22(A) - (II) is wrong because compliance staff is not subject to any particular qualification requirement. (IV) is obviously irrelevant.

23(A) - (III) is definitely correct as SFC emphasizes that clients must know they have the right to revoke the standing authority. (II) & (IV) are wrong because standing authority must be renewed for every 12 months and the renewal notice should be given to the cliennt 14 days prior to the expiry date. Though (I) is regarded as correct in the answer, I have reservation on the phrase "with the written consent of the client" - standing authority may be renewed by negative consent.

24(C) - (I) is wrong because records should be kept for at least 7 years. (IV) is wrong because telephone records should be kept for at least 3 months.

25(D) - By common sense all of those negative factors should be considered by SFC in judging a person's character and integrity.

26(C) - (III) is factually wrong - the benchmark of indirect "control" should be 35% of voting power.

27(D) - (III) is wrong because any exclusion of legal rights of the client should not appear in the client agreement.

28(D) - (I) is wrong because a fund manager is not only subject to FMCC, but also other codes and guidelines, like Code on Unit Trusts & Mutual Funds, Management Supervision & Internal Control Guidelines, etc.

29(B) - Responsibities of senior management should be more "high level". If only two options could be taken, (I) and (IV) are the best choices.

30(D) - Simply by memory, diligence and conflicts of interest are 2 of the 9 General Principles.

HKSI LE Paper 1 Past Paper (1)

Recently Hong Kong Securities Institute (HKSI) has eventually released the past Q&A for certain papers of the Licensing Exam for Securities and Futures Intermediaries. Of course candidates are most concerned about Paper 1 because this paper is almost a must-take and its pass rate has been relatively lower.

You can download the only one past Q&A (Dec 2006) for Paper 1 (Fundamentals of Securities and Futures Regulation). While answers are provided at the end of the script, explanations are not. Let me try to provide my own explanations in this blog in 4 parts.

HKSI LE Paper 1 (Dec 2006) - Q&A 1~15 (with explanations):

1(A) - Serving public interest and helping another regulator are legitimate reasons for SFC to disclose confidential information, as permitted by the secrecy provisions of SFO (S.378). (II) is wrong as the disclosure is for private interest. (IV) is obviously nonsense - How come SFC work for a debt collection agency?

2(B) - Financing terrorist activities and international speculators attacking a currency are obviously the role of financial regulators in developed countries. Preventing the activities of (II) and (III) is against the principles of free economy.

3(C) - Provision of a loan is a financial service and thus should be regulated by a financial services regulator.

4(C) - Onsite visits are done by Intermediaries Supervision Department. Collective investment schemes are authorized by Policy, China & Investment Products Division. Licensing Department is responsible for reviewing annual returns submitted by licensed persons. I don't really agree that Licensing Department monitors CPT but I can't choose only (II). Given that (I) is definitely wrong, the best answer seems to be (II) & (IV).

5(A) - SFC has the legitimate powers to refer cases to CCB / ICAC and suspend licences for breach of codes & guidelines. It is not within the legal scope of SFC to seize and dispose an intermediary's property. (IV) is ridiculous - SFC can't exclude a person's right to appeal.

6(D) - This question is straighforward. All answers are correctly describing the nature of a company as a separate legal entity.

7(C) - In criminal law, the standard of proof should be "beyond reasonable doubt". "Balance of probabilities" is for civil law.

8(C) - This question tests only your memory - 18 months.

9(C) - Case law (common law) is derived from the doctrine of precedent. The principles of equity is for equity law.

10(B) - With independence of jurisprudence in Hong Kong, judges should not be politically appointed. Even the Chief Executive can't override the decision of the court in a case involving political matters.

11(C) - Such activity is obviously "boiler room operation" which makes use of slick, professional-sounding salespeople to "cold call" and use high pressure sales tactics to lure investors into lucrative-sounding investment opportunities. On the other hand, even the call is cold call, it may not be illegal if Bernard is an existing client.

12(C) - (A) refers to Type 7 regulated activity and (B) refers to Type 6. Both are subject to SFC's licensing regime. Registered institutions are registered with SFC. Trust companies are not deemed as carrying out any regulated activity.

13(B) - (I) and (II) are legitimate grounds to trigger an investigation by the Financial Secretary. (II) and (III) are unreasonable interventions of a company in a free economy.

14(A) - Each of (B), (C) and (D) seems to be too minor to trigger a special report.

15(C) - Licensed persons and professional investor are exempt from the prohibition on unsolicited calls.