HKSI LE Paper 2 cheat sheet

The SFC is the statutory regulator for Hong Kong's securities and futures markets; the Hong Kong Monetary Authority supervises registered institutions (banks) for securities business under a delegation arrangement with the SFC.

A corporation needs a licence for Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance), Type 7 (providing automated trading services), Type 9 (asset management) or Type 13 (depositary services for relevant CIS); Type 3 (leveraged foreign exchange) and Types 8, 10, 11, 12 also exist.

Licensing tests: fit and proper, corporate structure and good standing, competent personnel (responsible officers and licensed representatives), sufficient financial resources, and a written compliance and internal control framework.

A responsible officer must be an approved person with at least three years of relevant industry experience in the previous six years plus two years of management experience, and at least one RO must be available at all times to supervise each regulated activity.

Sole proprietors and partnerships applying for a licence must themselves hold the relevant industry experience and pass the required papers; a partnership needs at least one general partner who is an approved responsible officer.

A licensed corporation must maintain paid-up share capital and shareholders' funds: for Type 1 dealing (not introducing) the minimum paid-up capital is HK$5 million and liquid capital must be at least 5% of adjusted liabilities, subject to a HK$3 million floor.

Substantial shareholders (10% or more of voting power) and any change of 10% or more require SFC approval; a licensed corporation must notify the SFC of changes in directors, ROs, and other prescribed particulars within the prescribed period.

The Securities and Futures Ordinance (Cap. 571) is the primary statute; subsidiary legislation includes the Securities and Futures (Licensing and Registration) Rules, the Securities and Futures (Financial Resources) Rules and the Code of Conduct for Persons Licensed by or Registered with the SFC.

Licences can be revoked or suspended and fines imposed for breaches; the SFC may also issue restriction notices, prohibition orders and public reprimands, and the Securities and Futures Appeals Tribunal hears reviews of specified decisions.

Type 6 (advising on corporate finance) covers advice on the Takeovers Code, the Listing Rules, share offers, and other corporate transactions; a sponsor licence additionally requires Type 6 and compliance with the SFC's Sponsor Guidelines.

The SFC's Code on Takeovers and Mergers applies to takeovers of Hong Kong public companies; the key triggers are a mandatory general offer at 30% voting rights and a chain principle extension where acquisitions are made by a person holding 30% or more.

A mandatory general offer must be at the same price as the highest price paid by the offeror (or concert parties) in the preceding six months, and must be for all outstanding shares not already held.

The Offer Document must be published within 21 days of the announcement of a firm intention to make an offer, and the offer must remain open for at least 21 days; an acceptance condition requires 50% of voting rights not already held.

Insider dealing is prohibited under Part XIII of the SFO; the insider dealer must be in possession of inside information relating to the listed corporation and deal (or counsel or procure another to deal) in its securities.

The SFC may refer insider dealing cases to the Market Misconduct Tribunal, which can impose disgorgement, cold shoulder orders, disqualification orders, and fines of up to three times the profit gained or loss avoided.

Sponsors must conduct reasonable due diligence on listing applicants, satisfy themselves the applicant is suitable for listing, and ensure the listing document contains sufficient particulars; a sponsor's appointment must be at least two months before the listing application.

Under the Listing Rules, a connected transaction requires independent shareholders' approval and an independent financial adviser's opinion where the transaction exceeds the de minimis thresholds; an IFA must be independent of the issuer and connected persons.

Directors' duties in corporate finance transactions include acting in the best interests of the company, avoiding conflicts, and ensuring shareholders receive sufficient information and independent advice.

Type 9 (asset management) covers discretionary management of securities or futures contracts; a Type 9 licence is required for managing a portfolio, but not for managing a private company's own assets or for a purely advisory service (which needs Type 4 or 5).

A Type 9 licensed corporation must have at least two responsible officers, at least one of whom must be an executive director, and must meet minimum paid-up capital of HK$1 million and liquid capital of at least 5% of adjusted liabilities (with a HK$100,000 floor for non-custodial managers).

The SFC's Fund Manager Code of Conduct applies to Type 9 managers of collective investment schemes; key requirements include segregation of client assets, best execution, fair allocation of trades, disclosure of soft commissions, and management of conflicts of interest.

Authorisation of a retail collective investment scheme by the SFC under the SFO requires the product to meet the SFC's authorisation criteria, including a management company acceptable to the SFC, a trustee or custodian, and an offering document with prescribed disclosures.

The SFC's Code on Unit Trusts and Mutual Funds sets out the requirements for authorised funds, including investment restrictions, valuation and pricing, and disclosure; authorised funds may be marketed to the public in Hong Kong.

A private fund with fewer than 50 investors, or with a minimum investment of HK$1 million per investor, may be exempt from SFC authorisation, but the manager still needs a Type 9 licence if it manages securities or futures.

The Professional Investors regime (Securities and Futures (Professional Investor) Rules) allows offers to institutional investors and to individuals with a portfolio of at least HK$8 million; marketing to retail investors requires authorisation or an exemption.

The SFC's Guidelines on Disclosure of Inside Information require listed corporations to disclose inside information as soon as reasonably practicable; fund managers must have policies to prevent misuse of inside information.

The Manager-In-Charge regime requires Type 9 managers to designate individuals responsible for core functions (overall management, risk management, compliance, fund management) and to notify the SFC of their appointment.

The SFC Code of Conduct has 12 general principles, including honesty and fairness, diligence, capability, information about clients, client assets, conflicts of interest, and compliance with the law.

Client identity and suitability: a licensed person must establish the client's financial situation, investment experience and objectives, and ensure a recommendation is suitable; a risk profile must be documented and updated.

Know-your-client and anti-money-laundering obligations derive from the AMLO and the SFC's Guideline on Anti-Money Laundering and Counter-Terrorist Financing; customer due diligence must be performed before establishing a business relationship.

Client assets must be segregated and held in a designated client account; client securities must be registered in the client's name or in a nominee company approved by the SFC, and client money must be kept in a trust account.

Conflicts of interest must be avoided or managed; a licensed person must disclose actual or potential conflicts and must not put its own interests ahead of the client's.

Order handling rules require fair and timely execution, no front-running, no trading ahead of client orders, and allocation of trades on a fair and transparent basis.

Market misconduct under the SFO includes insider dealing, false trading, price rigging, disclosure of false or misleading information inducing transactions, and stock market manipulation; the MMT can impose civil sanctions.

Record-keeping: licensed corporations must keep records of client orders, transactions, and communications for at least seven years, and must maintain an audit trail for client orders and instructions.

Complaints must be handled fairly and promptly, with a written complaints policy, and the SFC must be notified of material breaches, misconduct, and disciplinary actions against staff.

The SFC's licensing handbook sets out the fit and proper criteria, the competence requirements (academic, professional, and industry experience), and the continuing professional training requirement of at least 10 hours per year for licensed representatives and ROs.

An application for a licence must be made in the prescribed form with the required fees and supporting documents; the SFC may refuse an application if the applicant fails to satisfy the fit and proper or competence tests.

A licensed corporation must appoint at least two responsible officers, at least one of whom must be an executive director, and must have at least one RO available at all times to supervise each regulated activity.

The Securities and Futures (Financial Resources) Rules prescribe minimum capital, liquid capital and the computation of adjusted liabilities; a licensed corporation must notify the SFC if it fails to maintain the required financial resources.

The SFC may impose conditions on a licence, and a licensed corporation must notify the SFC of changes in its business address, shareholding, and other prescribed particulars within the specified period.

Under the SFO, a person who carries on a regulated activity without a licence commits an offence and is liable to a fine and imprisonment; the SFC may also take action against unlicensed persons.

The Investor Compensation Fund compensates investors for losses caused by the default of a licensed intermediary; the compensation limit is HK$500,000 per investor per default.

The SFC's Guidelines on Competence require licensed persons to have a recognised degree or professional qualification plus relevant industry experience, or alternative qualifications accepted by the SFC.

The Takeovers Code is administered by the SFC's Executive Director of Corporate Finance; the Takeovers Panel and the Takeovers Appeal Committee hear disputes; the Code is not law but breach can lead to SFC sanctions.

A person who acquires 30% or more of the voting rights of a company must make a mandatory general offer; a person holding between 30% and 50% who acquires more than 2% in 12 months must also make an offer.

A whitewash waiver may be granted by the Executive Director where the issue of new shares would otherwise trigger a mandatory offer, subject to independent shareholders' approval.

The Listing Rules require a sponsor to be appointed at least two months before the listing application and to conduct due diligence; the sponsor must be independent of the listing applicant.

A connected transaction requires independent shareholders' approval if the transaction exceeds the de minimis thresholds (0.1% of market capitalisation or HK$1 million for de minimis, and 5% for major transactions requiring shareholders' approval).

The SFC's Corporate Finance Division investigates breaches of the Takeovers Code and the Listing Rules and may refer cases to the Takeovers Panel or the MMT.

An independent financial adviser must be independent of the issuer and connected persons and must be licensed or registered for Type 6; the IFA's opinion must be included in the circular to shareholders.

Insider dealing under the SFO includes dealing in securities while in possession of inside information, counselling or procuring another to deal, and disclosure of inside information; the MMT can impose fines and disqualification.

The SFC's Fund Manager Code of Conduct requires Type 9 managers to have adequate risk management, segregation of client assets, and fair allocation of investment opportunities; it applies to managers of collective investment schemes.

The SFC's Code on Unit Trusts and Mutual Funds sets out the authorisation requirements for retail funds, including investment restrictions, borrowing limits, and disclosure requirements.

A Type 9 licensed corporation managing a fund must have at least two responsible officers, adequate compliance and risk management staff, and a written compliance manual.

The Professional Investor Rules define professional investors as institutional investors (banks, insurers, brokers, etc.) and individuals with a portfolio of at least HK$8 million; offers to professional investors may be exempt from authorisation.

The SFC's Guidelines on Disclosure of Inside Information require listed corporations to disclose inside information as soon as reasonably practicable; fund managers must have policies to prevent misuse of inside information.

The Manager-In-Charge regime requires Type 9 managers to designate individuals responsible for core functions, including overall management, risk management, compliance, and fund management, and to notify the SFC.

A private fund with fewer than 50 investors, or with a minimum investment of HK$1 million per investor, may be exempt from SFC authorisation, but the manager still needs a Type 9 licence if it manages securities or futures.

The SFC's Code of Conduct applies to Type 9 managers, including the requirement to act in the best interests of clients, manage conflicts of interest, and ensure fair treatment of clients.

The SFC Code of Conduct's 12 general principles include honesty and fairness, diligence, capability, information about clients, client assets, conflicts of interest, and compliance with the law.

Client identity and suitability: a licensed person must establish the client's financial situation, investment experience and objectives, and ensure a recommendation is suitable; a risk profile must be documented and updated.

Know-your-client and anti-money-laundering obligations derive from the AMLO and the SFC's Guideline on Anti-Money Laundering and Counter-Terrorist Financing; customer due diligence must be performed before establishing a business relationship.

Client assets must be segregated and held in a designated client account; client securities must be registered in the client's name or in a nominee company approved by the SFC, and client money must be kept in a trust account.

Conflicts of interest must be avoided or managed; a licensed person must disclose actual or potential conflicts and must not put its own interests ahead of the client's.

Order handling rules require fair and timely execution, no front-running, no trading ahead of client orders, and allocation of trades on a fair and transparent basis.

Market misconduct under the SFO includes insider dealing, false trading, price rigging, disclosure of false or misleading information inducing transactions, and stock market manipulation; the MMT can impose civil sanctions.

Record-keeping: licensed corporations must keep records of client orders, transactions, and communications for at least seven years, and must maintain an audit trail for client orders and instructions.

Complaints must be handled fairly and promptly, with a written complaints policy, and the SFC must be notified of material breaches, misconduct, and disciplinary actions against staff.