Paper 1 - Fundamentals of Securities and Futures Regulation

Published by:
Hong Kong Securities Institute

Hong Kong Securities Institute 2004
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permission of the copyright owner.
ISBN: 988-97716-1-6
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Disclaimer
This is an educational booklet only and does not provide legal advice or expert advice in whatsoever form.
Every effort has been made to ensure its accuracy, however, no responsibility for loss occasioned to any
person acting or refraining from action as a result of any materials in this publication will be accepted by the
publisher and/or individual contributors.
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Paper 1 - Sample Questions
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Sample Questions
Question 3.
Which ONE of the following statements is CORRECT?
A
A licensed corporation must within 1 business day notify the Securities and Futures
Commission (SFC) in writing if it is unable to comply with the required amounts of capital
specified under the Securities and Futures (Financial Resources) Rules (FRR) and must cease
carrying on any regulated activity within 3 days.
A licensed corporation must within 1 business day notify the SFC in writing if it is unable to
comply with the required amounts of capital specified under the FRR and must cease
carrying on any regulated activity within 7 days.
A licensed corporation must as soon as reasonably practicable notify the SFC in writing if it
is unable to comply with the required amounts of capital specified under the FRR and must
immediately cease carrying on any regulated activity.
A licensed corporation must as soon as reasonably practicable notify the SFC in writing if it
is unable to comply with the required amounts of capital specified under the FRR and must
cease carrying on any regulated activity within 7 days.
Question 4.
Under the Securities and Futures Ordinance (SFO), which TWO of the following requirements apply to
associated entities of intermediaries?
I
An associated entity of an intermediary must notify the Securities and Futures Commission
(SFC) in writing within 7 business days of becoming or ceasing to be such an associated
entity.
II
An associated entity of an intermediary cannot be a company incorporated overseas.
III
An associated entity of an intermediary must appoint a compliance officer within 3 months

of becoming such an associated entity.
IV
An associated entity of an intermediary has to comply with the audit provisions of the SFO.
I and II only.
I and IV only.
II and IV only.
III and IV only.

Question 5.
Which of the following statements are CORRECT?
I
The laws passed by the HKSAR Executive Council are called ordinances.
II
The independence of the judiciary is a basic concept of HKSAR law and has been inherited
from the English legal system.
III
The State Council of China endorses the judges appointed in Hong Kong.
IV
The Securities and Futures Commission (SFC) has extensive powers to make rules under the
Securities and Futures Ordinance (SFO).
I and III only.
II and IV only.
I, II and IV only.
II, III and IV only.
Question 6.
Which of the following are examples of agency relationships?
I
A stockbroker and his client.
II
An account executive and his broker employer.
III
A husband and a wife.
IV
An accountant and his client.
I, II and III only.
I, II and IV only.
I and IV only.
Sample Questions
Question 7.
Which of the following CORRECTLY describe the courts of Hong Kong?
I
The Court of Final Appeal is the highest Court in Hong Kong and it is headed by the Chief
Justice.
II
The Court of First Instance has limited jurisdiction in respect of criminal and civil cases.
III
The District Courts also hear serious criminal cases including murder and manslaughter.
IV
The Magistrates Courts deal with less serious criminal offences and impose lesser sentences
than the District Courts.
I and IV only.
I, II and III only.
I, II, III and IV.
Question 8.
Which of the following statements are CORRECT under the Companies Ordinance?
I
A private company is one which may not offer shares to the public and may not have more
than 50 members.
II
Companies incorporated in Hong Kong may not issue redeemable preference shares and
redeemable ordinary shares.
III
The first annual general meeting (AGM) of a company should be held within 15 months of
incorporation and subsequent AGMs should be held within 12 monthly intervals thereafter.
IV
The capital clause in the memorandum of association must specify the authorized capital,
each class of shares and the nominal value of each share.
I and III only.
III and IV only.
I and IV only.
I, II and III only.

Question 9.
Which of the following safeguards are provided under the Companies Ordinance to protect the
interests of minority shareholders?
I
Members with 5% of the paid up capital of a company which carries voting rights may
request the directors to call a general meeting.
II
5% of the holders of the issued shares of a company may ask the Registrar of Companies to
appoint an investigator into the companys affairs.
III
10% of the holders of the issued shares of a company listed on the Stock Exchange of Hong
Kong (SEHK) may ask the SEHK to suspend listing of the companys shares.
IV
A member may petition for a winding up of a company.
I and IV only.
II and III only.
I, II, III and IV.
Question 10.
Under the Companies Ordinance, a company may be wound up by the court under which of the
following circumstances?
I
The company is unable to pay its debts.
II
The company has suspended its business for 1 year.
III
The court is of the opinion that it would be just and equitable to wind up the company.
IV
The company has by special resolution resolved that the company should be wound up by the
court.
I and II only.
I and III only.
I, II, III and IV.
Sample Questions
Question 11.
Financial regulators will be able to enhance the quality of the markets they regulate through which of
the following measures?
I
Restricting the development of high-risk financial products.
II
Providing training courses to financial market practitioners.
III
Providing investor education programmes to the general public.
IV
Encouraging small local firms to merge in order to compete with large overseas companies.
I and III only.
II and III only.
I, II and IV only.
Question 12.
Which of the following statements relating to the Securities and Futures Commission (SFC), its rules
and codes are CORRECT?
I
The SFC may refer serious cases to the Commercial Crime Bureau (CCB) of the Police for
investigation and action.
II
Breaches of the rules made by the SFC will be offences under law and will be investigated by
the SFC.
III
Codes and guidelines issued by the SFC have the force of law and are legally enforceable.
IV
The SFC may apply to the courts for an injunction to restrain a person from carrying on his
business.
I and IV only.
II and III only.
I, II and IV only.
I, II, III and IV.

Question 13.
Which ONE of the following statements CORRECTLY describes the exchange controller, the
exchanges and the clearing houses in Hong Kong?
A
The Hong Kong Exchanges and Clearing Limited (HKEx) is a recognised exchange controller
under the Securities and Futures Ordinance (SFO).
There are two clearing houses in Hong Kong and they are the Hong Kong Securities Clearing
Company Limited (HKSCC) and the HKFE Clearing Corporation Limited (HKCC).
There are three exchanges in Hong Kong and they are the Stock Exchange of Hong Kong
Limited (SEHK), the Hong Kong Futures Exchange Limited (HKFE) and the Hong Kong Stock
Options Exchange Limited (HKSOE).
Members of the exchange controller approve the rules of the exchanges in Hong Kong.
Question 14.
The Registrar of Companies in Hong Kong DOES NOT administer aspects of which of the following
Ordinances?
I
Securities and Futures Ordinance.
II
Bankruptcy Ordinance.
III
Money Lenders Ordinance.
IV
Limited Partnerships Ordinance.
I and II only.
III and IV only.
I, II and III only.
10
Sample Questions
Question 15.
The Securities and Futures Ordinance (SFO) provides for the implementation of the licensing regime
including which ONE of the following features?
A
The setting up of a single licensing system to cover 10 specified regulated activities.
The licensing of compliance officers who are responsible for the compliance functions of
licensed corporations.
The prohibition of a licensed representative to be accredited to more than one principal.
The cessation of exempt status for the previous category of exempt persons after the
commencement of the SFO.
Question 16.
The Securities and Futures Commission (SFC) may grant temporary licences to overseas corporations
to carry out which of the following regulated activities in Hong Kong?
I
Type 1 dealing in securities.
II
Type 4 advising on securities.
III
Type 8 securities margin financing.
IV
Type 9 asset management.
I and II only.
II and IV only.
I and III only.
I, II and IV only.
11

Question 17.
Under the Securities and Futures Ordinance (SFO), persons who are not licensed or registered for the
Type 1 regulated activity (dealing in securities) are prohibited to use which of the following titles?
I
Financial analyst.
II
Bond dealer.
III
Stock dealer.
IV
Financial consultant.
II and III only.
I, II and III only.
I and IV only.
Question 18.
An applicant must satisfy which of the following requirements to demonstrate to the Securities and
Futures Commission (SFC) that he is a fit and proper person to be licensed as a representative?
I
He must have some experience in the financial market in Hong Kong.
II
He has not been involved in managing an insolvent corporation.
III
He should be at least 18 years old.
IV
He must be fluent in either English or Chinese (Putonghua or Cantonese).
I and IV only.
II and III only.
I, III and IV only.
I, II, III and IV.
12
Sample Questions
Question 19.
Which ONE of the following statements regarding the principal codes of conduct issued by the
Securities and Futures Commission (SFC) is CORRECT?
A
The Code of Conduct for Persons Licensed by or Registered with the SFC does not apply to
leveraged foreign exchange traders.
The Fund Manager Code of Conduct requires a fund manager to have an effective compliance
function and a designated compliance officer.
The Code of Conduct for Securities Margin Financiers applies to licensed corporations and
licensed representatives engaged in the Type 8 (securities margin financing) regulated
activity.
The Code of Conduct for Investment Advisers applies to licensed corporations and licensed
representatives engaged in the Type 4 (advising on securities) regulated activity.
Question 20.
Which of the following are general principles stated in the Code of Conduct for Persons Licensed by or
Registered with the Securities and Futures Commission?
I
Diligence.
II
Best Advice.
III
Compliance.
IV
Information about clients.
I and II only.
I, III and IV only.
I, II, III and IV.
13

Question 21.
Under the rebates and soft dollars provisions of the Code of Conduct for Persons Licensed by or
Registered with the Securities and Futures Commission, which of the following goods and services
MAY NOT be received by an intermediary?
I
Clearing and custodial services.
II
Data and quotation services.
III
General administrative services.
IV
General office equipment and premises.
I and II only.
II and III only.
III and IV only.
I, III and IV only.
Question 22.
Which of the following are requirements under the Code of Conduct for Persons Licensed by or
Registered with the Securities and Futures Commission?
I
Employees of an intermediary should generally be prohibited from trading for their own
accounts in securities or future contracts.
II
Spouse, parents and siblings of an employee of an intermediary should generally be required

to trade through the intermediary or its affiliates.
III
An intermediary should not knowingly deal for an employee of another intermediary without
the consent of the other.
IV
If dealings through other intermediaries are allowed, duplicate copies of trade confirmations
and statements of account should be provided to the employer intermediary.
I and II only.
III and IV only.
I, II and III only.
I, II, III and IV.
14
Sample Questions
Question 23.
Under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures
Commission (the Code), the agreement between an intermediary and a client should contain which of
the following minimum details?
I
Addresses of the client and the intermediary in both English and Chinese.
II
Relevant risk disclosure statements specified in the Code.
III
An undertaking that each of the parties to the agreement will inform the other of any
material changes in the information contained in the agreement.
IV
A statement that the legal rights of a client may be excluded and the terms of the agreement
will prevail.
I and II only.
II and III only.
I, III and IV only.
Question 24.
Under the Securities and Futures Ordinance (SFO), which of the following are professional investors?
I
Corporations licensed under the SFO.
II
Approved trustees of Mandatory Provident Fund Schemes.
III
The Law Society of Hong Kong.
IV
The Stock Exchange of Hong Kong Limited (SEHK).
I and II only.
III and IV only.
I, II and IV only.
I, II, III and IV.
15

Question 25.
The risk disclosure statements specified in the Code of Conduct for Persons Licensed by or Registered
with the Securities and Futures Commission deal with which of the following risks?
I
The risk that when trading futures and options, investors may lose their initial margins very
quickly and will have to meet extra margin calls.
II
The risk that when trading growth enterprises market (GEM) stocks, investors may buy high
because a lot of people speculate in GEM stocks.
III
The risk that when client assets are received and held outside Hong Kong by an intermediary,
those assets may not benefit from the protection of Hong Kong law.
IV
The risk that when a client gives authority to an intermediary to hold mail on his behalf
without sending him the contract notes and statements of account, the intermediary will lose
those documents.
I and II only.
III and IV only.
I and III only.
I, III and IV only.
16
Sample Questions
Question 26.
Which of the following statements CORRECTLY describe the Management, Supervision and Internal
Control Guidelines (ICG) issued by the Securities and Futures Commission (SFC)?
I
The ICG does not have the force of law and a failure to observe it will not be an offence
leading to prosecution.
II
The SFC does not expect the provisions of the ICG to be strictly observed.
III
A failure to follow the substance of the ICG may affect the ability of an intermediary to
retain a licence or registration.
IV
The ICG has identified eight key areas of business controls.
I and II only.
III and IV only.
I, II and III only.
I, II, III and IV.
Question 27.
According to the Management, Supervision and Internal Control Guidelines (ICG) issued by the
Securities and Futures Commission (SFC), an intermediary should maintain effective internal controls
to achieve which of the following objectives?
I
To ensure that it complies with all applicable laws and regulations.
II
To ensure that its business can generate profits.
III
To ensure that it can compete with overseas intermediaries.
IV
To ensure that its own assets and the assets of its clients are properly safeguarded.
I and IV only.
I, III and IV only.
I, II and III only.
17

Question 28.
The Securities and Futures Commission (SFC) expects proper segregation of duties and functions in an
intermediary for which of the following reasons?
I
To help to detect errors and mistakes.
II
To help to establish an efficient operation.
III
To help to ensure proper allocation of manpower.
IV
To help to reduce opportunities for abuse and malpractices.
I and IV only.
II and III only.
I, II and IV only.
I, II, III and IV.
Question 29.
Which of the following are general requirements of the Securities and Futures Commission (SFC)
regarding the compliance function of an intermediary?
I
Compliance staff should be approved by and registered with the SFC.
II
Compliance staff should monitor the effective functioning of the sales operations.
III
Compliance staff should, as far as practicable, be allowed to get access to all necessary
records and documentation.
IV
The compliance function should be independent of all operational business functions.
I and III only.
II and IV only.
III and IV only.
I, III and IV only.
18
Sample Questions
Question 30.
Which ONE of the following is an operations control recommended by the Securities and Futures
Commission (SFC)?
A
Orders for the account of an intermediary should have priority over client orders.
Tape records of communications with clients should be listened to by senior management on

a regular basis.
The staff dealing policy should prohibit staff from investing in securities and futures
contracts.
Order handling procedures should cover circumstances in whi ch client orders may be delayed
or withheld.
Question 31.
Which ONE of the following statements regarding terrorist financing is INCORRECT?
A
Property belonging to terrorists may be frozen or forfeited under the United Nations (AntiTerrorism Measures) Ordinance (UNATMO).
Under the UNATMO, it is an offence if a person fails to report knowledge of terrorist

property to an authorised officer.
The UNATMO includes provisions regarding disclosure and immunity.
Lists of terrorists and terrorist associates are published from time to time in one English and
one Chinese newspaper with general circulation in Hong Kong.
19

Question 32.
Which of the following policies are specified in the Guidance Notes issued by the Securities and
Futures Commission (SFC) on Prevention of Money Laundering and Terrorist Financing (MLGN)?
I
Intermediaries should segregate funds belonging to clients from the Middle East.
II
Intermediaries should ensure that their staff understand the MLGN.
III
Intermediaries should, as far as practicable, retain whatever records may be useful for at
least 10 years.
IV
Intermediaries should use reputable sources to verify overseas accounts and should not
permit anonymous accounts.
I and III only.
II and IV only.
I, II and IV only.
I, II, III and IV.
Question 33.
Under the Securities and Futures (Insurance) Rules, a licensed corporation is required to take out
insurance to cover risk of loss to clients resulting from which of the following?
I
A drastic reduction in the value of client stocks due to movements of foreign exchange rates.
II
Incorrect advice given to clients by employees of the licensed corporation due to limited
knowledge of newly developed financial products.
III
Forgery or fraudulent alteration of cheques or negotiable instruments.
IV
Fraudulent acts of employees of the licensed corporation.
I and II only.
II and III only.
III and IV only.
20
Sample Questions
Question 34.
Which of the following persons are EXCEPTED from the definition of dealing in securities under the
Securities and Futures Ordinance (SFO)?
I
Persons issuing prospectuses.
II
Brokers dealing in securities traded on overseas exchanges only.
III
Securities brokers acting as introducing agents who do not handle clients assets.
IV
Trust companies registered under the Trustee Ordinance acting for a collective investment
scheme.
I and IV only.
II and III only.
I, II and III only.
I, II, III and IV.
Question 35.
Which of the following statements are CORRECT?
I
Hong Kong Exchanges and Clearing Limited (HKEx) is the holding company of the Stock
Exchange of Hong Kong (SEHK).
II
HKEx is a company listed on the SEHK.
III
Options on securities are traded on the SEHK.
IV
The terms Broker, Trader and Merchant Trader are used to denote different classes of SEHK
participants.
I and III only.
II and IV only.
I, II and III only.
I, II, III and IV.
21

Question 36.
Which ONE of the following is a requirement for short selling carried out on the Stock Exchange of
Hong Kong (SEHK)?
A
SEHK participants must indicate short sell orders when inputting the order.
SEHK participants must not enter into more than 50 short sell orders in one trading day.
Short selling may be undertaken in all securities traded on the SEHK.
Short selling may be undertaken only by dealers registered with the SEHK as approved short
sellers.
Question 37.
Which of the following statements CORRECTLY reflect the requirements of the Securities and Futures
Commission (SFC) for conducting securities margin financing?
I
A securities margin financier (SMF) must not start trading for a margin client before entering
into a written client agreement.
II
The client agreement with a margin client should be confirmed by the margin client on an
annual basis.
III
A company which provides financial accommodation to individuals in order to facilitate

acquisition of securities under a prospectus does not require a licence from the SFC.
IV
An SMF may pledge client securities to its wholly-owned subsidiaries at its discretion.
I and III only.
II and IV only.
I, II, III and IV.
22
Sample Questions
Question 38.
Which of the following apply to traded options on the Stock Exchange of Hong Kong (SEHK)?
I
An Options Exchange Participant (OEP) may be an Options Broker Exchange Participant

(OBEP) or an Options Trading Exchange Participant (OTEP).
II
An OEP may require a client to pay premiums in advance of accepting his instructions.
III
An OEP may treat a client as being in default if he does not pay the required premium
promptly.
IV
An OBEP may apply to the SEHK to make a market in a particular options class.
I and II only.
III and IV only.
I, II, and III only.
I, II, III and IV.
Question 39.
Which ONE of the following persons is required to obtain a licence from the Securities and Futures
Commission (SFC) in order to advise on securities and futures contracts?
A
A corporation which issues analyses and reports solely to its group companies.
A financial journalist who gives advice on investments to the public.
A professional accountant whose advising activities in securities and futures contracts are
wholly incidental to his main activities.
A financial planner who gives advice on investments in securities and futures contracts in his
professional capacity.
23

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Sample Questions
Question 42.
The Stock Exchange of Hong Kong (SEHK) may suspend listings of shares in which ONE of the
following situations?
A
The SEHK considers that a company is not making a profit.
The SEHK considers that there are substantial amounts of listed shares in the hands of a
small group of high net worth individuals.
The SEHK considers that a company does not have sufficient assets to warrant the
continued listing of its shares.
The SEHK considers that the company has not paid reasonable dividends to its shareholders
although it has made excessive profits.
Question 43.
Which ONE of the following is a general principle of the Hong Kong Codes on Takeovers and Mergers
and Share Repurchases?
A
Minority shareholders rights, but not substantial shareholders rights, must first be
protected.
Persons concerned with offers must disclose all confidential information within 1 month.
A general offer should be made if control of a company changes, or it is acquired or

consolidated.
Shareholders of the offeree company may get advice directly from auditors of the offeree
company in an extraordinary general meeting (EGM).
25

Question 44.
The Mandatory Provident Fund Schemes Ordinance (MPFSO) provides for which of the following
matters?
I
The appointment of the Securities and Futures Commission (SFC) to supervise operations of
the Mandatory Provident Fund Authority (MPFA).
II
Arrangements for contributions to, and the registration and regulation of, MPF schemes.
III
The approval, control and regulation of trustees for registered MPF schemes.
IV
The exemption of certain MPF intermediaries from complying with the MPFSO.
I and III only.
II and III only.
I, II and IV only.
I, II, III and IV.
Question 45.
The Market Misconduct Tribunal (MMT) may impose which of the following sanctions?
I
Prohibit an offender from investing or trading in Hong Kong markets for up to 5 years.
II
Disqualify an offender from acting as a director of a company for 10 years.
III
Require that all profits made, plus compound interest, be paid to the Government.
IV
Require a professional body of which an offender is a member to expel him from membership.
I and III only.
I, II and IV only.
I, II, III and IV.
26
Sample Questions
Question 46.
Which of the following is NOT a market misconduct offence specified in the Securities and Futures
Ordinance (SFO)?
A
Price rigging.
False trading.
Corporate misgovernance.
Stock market manipulation.
Question 47.
Which ONE of the following is NOT a possible defence against a charge of insider dealing in Hong
Kong?
A
Insider dealing took place solely for a charitable purpose.
Making a profit or avoiding a loss was not the purpose of the insider dealing.
The insider dealer acted as an agent and did not know that his principal was a connected
person.
The action included the introduction of a person to trade with a substantial shareholder
whom the other person knew was a substantial shareholder.
27

Question 48.
Which ONE of the following statements regarding the investor compensation arrangements in Hong
Kong is INCORRECT?
A
The Chief Executive of the HKSAR is empowered under the Securities and Futures Ordinance
(SFO) to set the maximum levels of compensation.
The Financial Secretary of the HKSAR shall, under the SFO, establish and maintain an
Investor Compensation Fund (ICF).
The Securities and Futures Commission (SFC) is empowered under the SFO to make rules for
the detailed operations of investor compensation.
The Investor Compensation Company (ICC) may make rules for its business operations
subject to their approval by the SFC.
Question 49.
Which of the following are data protection principles stated in the Personal Data (Privacy) Ordinance
(PDPO)?
I
Where data is collected from an individual, he should be informed of the purpose for which
his personal data is to be used.
II
An individual shall be entitled to request and receive access to his personal data kept by a
data user free of charge.
III
Personal data held about other persons should be accurate, up-to-date and rectified if known
to be incorrect.
IV
Personal data held about other persons should be protected by practical measures against
unauthorized access.
I and III only.
II and IV only.
I, III and IV only.
I, II, III and IV.
28
Sample Questions
Question 50.
Which ONE of the following is a possible and appropriate means to be adopted by senior management
in order to promote an effective compliance culture?
A
Opening access for complaints which should be promptly and satisfactorily dealt with by
appropriate staff.
Identifying competitors in the market and establishing good relationships with them.
Establishing a small team of professionals as a fire-fighting unit to deal with emergencies.
Delegating the compliance function to a senior account executive who has close relationships
with clients.
Question 51.
Which of the following groups would normally be classified as institutional investors?
I
Insurance companies.
II
Pension funds.
III
Unit trusts and mutual funds.
IV
Private banks.
I and III only.
II and IV only.
I, II and III only.
I, II, III and IV.
29

Question 52.
Which of the following statements about the Securities and Futures Appeals Tribunal are CORRECT?
I
It is an independent statutory body appointed by the Chief Executive of the HKSAR.
II
It is headed by the Chairman of the Securities and Futures Commission (SFC).
III
It hears appeals against decisions made by the SFC relating to the licensing and registration
of intermediaries and certain other matters.
IV
It hears appeals against disciplinary rulings of the Takeovers and Mergers Panel.
I and III only.
I and IV only.
II and IV only.
I, II and III only.
Question 53.
The Financial Secretary of HKSAR may appoint an inspector to investigate and report on the affairs
of a company under which of the following circumstances?
I
He suspects oppressive conduct in the operations of the company.
II
He suspects the persons concerned with the formation of the company have been guilty of
fraud.
III
He thinks the company has not paid reasonable dividends to its shareholders although it has
made excessive profits.
IV
He thinks shareholders have not been given information regarding the company s affairs.
I and II only.
III and IV only.
I, II and IV only.
I, II, III and IV.
30
Sample Questions
Question 54.
Which ONE of the following is a CORRECT definition of intermediary under the Securities and
Futures Ordinance (SFO)?
A
Intermediary means a licensed corporation only.
Intermediary means a licensed representative only.
Intermediary means a licensed corporation or a licensed representative.
Intermediary means a licensed corporation or a registered institution.
Question 55.
Regulated activities under the Securities and Futures Ordinance (SFO) include which of the
following?
I
Share Registration.
II
Asset Management.
III
Providing custodial services.
IV
Providing automated trading services.
I and III only.
II and III only.
II and IV only.
I, II and IV only.
31

Question 56.
Under the Securities and Futures Ordinance (SFO), the Securities and Futures Commission (SFC) has
which of the following disciplinary powers?
I
The SFC may suspend the licence of a licensed person.
II
The SFC may publicly reprimand a regulated person.
III
The SFC may order a regulated person to pay a fine.
IV
The SFC may impose an imprisonment order on a licensed individual.
II and IV only.
I, II and III only.
I, III and IV only.
I, II, III and IV.
Question 57.
A licensed representative shall NOT be regarded as contravening the unsolicited calls provisions of the
Securities and Futures Ordinance (SFO) if he makes an unsolicited call to which of the following?
I
A money lender.
II
A registered institution.
III
A professional investor.
IV
A solicitor in his professional capacity.
I and II only.
III and IV only.
I, II, III and IV.
32
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36
Explanations
(Please refer to the Study Manual for Paper 1)

Question 1
Items II and IV are rules under the SFO. (Topic 3: Schedule)

There are no Securities and Futures (Client Agreement) and (Client Identity) Rules.
The requirements regarding client agreements and client identities are specified in
the Code of Conduct for Persons Licensed by or Registered with the SFC. (Topic 5:
paragraphs 2.8 2.12)
Question 2
A is not an objective of the SFO. (Topic 3: paragraph 1.5)
Question 3
See Topic 3: paragraph 7.3.
Question 4
Items I and IV apply to an associated entity of an intermediary. (Topic 3: paragraphs 7.9

& 7.16)
The associated entity may be a company incorporated overseas which has

established a place of business in Hong Kong (Topic 3: paragraph 7.8). There is no
requirement to appoint a compliance officer.
Question 5
Items II and IV are correct. (Topic 2: paragraphs 1.7 & 1.8)

Ordinances are laws passed by the HKSAR Legislative Council (Topic 2: paragraph 1.7).
The appointment of judges does not require endorsement of the State Council in
China.
Question 6
Items I, II and IV are examples of agency relationships. (Topic 2: paragraphs 1.16 & 1.17)
Question 7
Items I and IV correctly describe the courts of Hong Kong. (Topic 2: paragraph 1.25)
The Court of First Instance has unlimited jurisdiction in respect of criminal and civil
cases, and the District Courts have no jurisdiction in respect of serious offences
such as murder and manslaughter. (Topic 2: paragraph 1.25)
Question 8
Items I and IV are correct. (Topic 2: paragraphs 2.3 & 2.9)

Companies incorporated in Hong Kong can issue redeemable preference shares and
redeemable ordinary shares if they are authorized to do so under their articles of
association (Topic 2: paragraph 2.17). Under the Companies Ordinance, the first AGM
should be held within 18 months of incorporation and subsequent AGMs should be
held within 15 monthly intervals thereafter (Topic 2: paragraph 2.24).
Question 9
Items I and IV are correct. (Topic 2: paragraph 2.32)
Question 10
All items are correct. (Topic 2: paragraph 2.55)
Question 11
Items II and III are measures for enhancing the quality of regulated markets. (Topic 1:
paragraph 1.5)
Generally speaking, financial regulators do not actively interfere in the markets

unless it is necessary and appropriate to do so (Topic 1: paragraph 1.7).
38
Explanations
Question 12
Items I, II and IV are correct. (Topic 1: paragraph 3.20)

The codes and guidelines issued by the SFC do not have the force of law and are not
legally enforceable. However, the SFC is able to penalize licensed persons breaching
its codes and guidelines. (Topic 1: paragraph 3.20)
Question 13
A is correct (Topic 1: paragraph 4.2)

There are 2 exchanges and 3 clearing houses in Hong Kong. (Topic 1: paragraph 4.1)
Question 14
Items I and II are not administered by the Registrar of Companies. (Topic 1: paragraph
2.22)
The SFO is administered by the SFC and the Registrar of Companies does not
administer the Bankruptcy Ordinance.
Question 15
Under the SFO, exempt status no longer exists. The new licensing system covers 9
regulated activities. A licensed representative may be accredited to more than one
principal within the same group of companies if approved by the SFC. There is no
licensing requirement for compliance officers to perform compliance functions. (Topic
4: paragraph 1.1)
Question 16
Under the SFO, the SFC may not grant temporary licences to overseas corporations
wishing to conduct either the Type 8 or the Type 9 regulated activities. (Topic 4:
paragraph 1.10)
Question 17
Items II and III are included in Schedule 6 of the SFO. (Topic 4: paragraph 1.12)
The terms financial analyst and financial consultant are not included in the said
schedule.
Question 18
There is no local experience requirement and there is no language proficiency

requirement. (See Topic 4: paragraphs 1.19 & 1.20)
Question 19
B is correct. (Topic 5: paragraphs 1.2 & 3.22)

The Code of Conduct for Investment Advisers and the Code of Conduct for
Securities Margin Financiers do not exist.
Question 20
Items I, III and IV are general principles stated in the Code of Conduct. (Topic 5:
paragraph 2.4)
Best Advice is not a specified general principle.

Question 21
Items III and IV are goods and services that may not be received. Allowable goods
and services include clearing and custodial services and data and quotation services.
(Topic 5: paragraphs 2.25 & 2.26)
39

Question 22
Items III and IV are employee dealing requirements under the Code of Conduct. (Topic
5: paragraph 2.29)
The Code of Conduct does not prohibit employee dealing, but intermediaries must
have written policies relating thereto (Topic 5: paragraph 2.29). Under the Code of
Conduct, there is no specific requirement on dealing by employees' family members.
Question 23
Items II and III are requirements under the Code of Conduct. (Topic 5: paragraph 2.12)
The agreement should be in writing either in Chinese or English, at the option of the
client (Topic 5: paragraph 2.11). The legal rights of a client cannot be excluded by the
agreement (Topic 5: paragraph 2.12).
Question 24
Professional Investors include intermediaries (i.e. licensed corporations or registered

institutions), approved trustees of registered MPF schemes and exchange companies.
The Law Society of Hong Kong is not included in the list. (Topic 5: paragraph 2.37)
Question 25
Items I and III are correct. (Topic 5: paragraph 2.44)
Question 26
All statements are correct descriptions of the ICG. (Topic 6: paragraphs 2.1, 2.3 & 2.4)
Question 27
Items I and IV are objectives to be achieved by maintaining effective internal

controls. (Topic 6: paragraph 2.5)
Question 28
Items I and IV are correct. (Topic 6: paragraph 2.8)

Proper segregation of duties does not aim at establishing an efficient operation and
proper allocation of manpower.
Question 29
Items III and IV are compliance requirements under the ICG. (Topic 6: paragraph 2.15)
There is no licensing requirement relating to compliance staff. They should be
independent of operations functions (Topic 6: paragraph 2.15) and should not be
responsible for monitoring sales operations.
Question 30
D is correct. To establish effective operational controls, there should be order

handling procedures covering circumstances where client orders are delayed or
withheld. (Topic 6: paragraph 2.26)
Question 31
Lists of terrorists and terrorist associates are published in the Gazette from time to
time. (Topic 6: paragraph 3.15)
Question 32
Items II and IV are correct. (Topic 6: paragraph 3.19)
Question 33
The Rules specify certain risks that must be covered. However, risks in relation to
foreign exchange rates and incorrect advice are not included in the Rules. (Topic 6:
paragraph 8.4)
Question 34
Items I and IV are exceptions from the definition of dealing in securities under the
SFO. (Topic 7: paragraph 2.5)
40
Explanations
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41

Question 50
A is correct. (Topic 9: paragraph 14.4)

B and C are not relevant to the promotion of an effective compliance culture. D is
not correct. The compliance function should be independent and carried out by
qualified professionals.
Question 51
All items are correct. (Topic 1: paragraph 5.4)
Question 52
Items I and III are correct. (Topic 1: paragraph 3.12)

The Securities and Futures Appeals Tribunal is headed by a judge appointed by the
HKSAR Chief Executive (Topic 1: paragraph 3.12). The Takeovers Appeal Committee
hears appeals against the disciplinary rulings of the Takeovers and Mergers Panel
(Topic 1: paragraph 3.11).
Question 53
Items I, II and IV are correct. (Topic 2: paragraph 2.51)

Payment of dividends is a commercial decision.
Question 54
Question 55
Items II and IV are regulated activities (i.e. Type 9 and Type 7) under the SFO. (Topic
3, paragraph 6.3)
Items I and III are not regulated activities under the SFO.
Question 56
Items I, II and III are correct. (Topic 3: paragraph 10.2)

The SFC is not empowered to impose an imprisonment order. (Topic 3: paragraph 10.2)
Question 57
Question 58
C is correct. (Topic 4: paragraph 6.11)
Question 59
D is correct. (Topic 3: paragraph 7.3)

The records should be kept, either in Chinese or English (Topic 4: paragraph 5.4). Every
licensed corporation must have, for each regulated activity, at least two responsible
officers (Topic 4: paragraph 1.3). Every individual licensee should clock up a minimum
of 5 CPT hours every calendar year per regulated activity (Topic 4: paragraph 1.24).
Question 60
42

5#/2.'#059'45*''6


Paper 1 - Fundamentals of Securities and Futures Regulation

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Paper 1 - Fundamentals of Securities and Futures Regulation

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Hong Kong Securities Institute

Paper 1 - Sample Questions

Hong Kong Securities Institute

An associated entity of an intermediary cannot be a company incorporated overseas.

An associated entity of an intermediary must appoint a compliance officer within 3 months

III and IV only.

Hong Kong Securities Institute

Paper 1 - Sample Questions

I and III only.

II, III and IV only.

A stockbroker and his client.

An account executive and his broker employer.

A husband and a wife.

An accountant and his client.

I, II and III only.

II, III and IV only.

Hong Kong Securities Institute

I, II and III only.

II, III and IV only.

I, II, III and IV.

I and III only.

III and IV only.

I, II and III only.

Hong Kong Securities Institute

Paper 1 - Sample Questions

A member may petition for a winding up of a company.

II and III only.

II, III and IV only.

I, II, III and IV.

The company is unable to pay its debts.

The company has suspended its business for 1 year.

I and III only.

II, III and IV only.

I, II, III and IV.

Hong Kong Securities Institute

Restricting the development of high-risk financial products.

Providing training courses to financial market practitioners.

Providing investor education programmes to the general public.

I and III only.

II and III only.

II, III and IV only.

II and III only.

I, II, III and IV.

Hong Kong Securities Institute

Paper 1 - Sample Questions

Securities and Futures Ordinance.

Money Lenders Ordinance.

Limited Partnerships Ordinance.

III and IV only.

I, II and III only.

II, III and IV only.

Hong Kong Securities Institute

The setting up of a single licensing system to cover 10 specified regulated activities.

The prohibition of a licensed representative to be accredited to more than one principal.

Type 1 dealing in securities.

Type 4 advising on securities.

Type 8 securities margin financing.

Type 9 asset management.

I and III only.

Hong Kong Securities Institute

Paper 1 - Sample Questions

II and III only.

I, II and III only.