HKSI LE Paper 3 cheat sheet

The SFC is a statutory body established under the Securities and Futures Ordinance (SFO), Cap. 571; it is not a government department and reports to the Financial Secretary.

SFO Part I sets out the SFC's regulatory objectives, including maintaining and promoting the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry.

The SFC has seven key divisions, including the Corporate Finance Division, Intermediaries Division, Enforcement Division and Investment Products Division.

The SFC's powers include licensing, supervision, investigation, market intervention and disciplinary sanction; it may also intervene in listed corporations under the Securities and Futures (Stock Market Listing) Rules.

The Financial Reporting Council, the Hong Kong Monetary Authority and the Insurance Authority each regulate separate sectors; the SFC coordinates with them through memoranda of understanding.

The Securities and Futures Appeals Tribunal hears appeals against specified SFC decisions; an appeal does not automatically suspend the decision unless the Tribunal so orders.

The SFO is supplemented by subsidiary legislation, including the Securities and Futures (Licensing and Registration) (Information) Rules and the Code of Conduct for Persons Licensed by or Registered with the SFC.

The SFC may issue codes and guidelines that are not subsidiary legislation; breach of a code is not itself an offence but may be considered in disciplinary proceedings.

Ten regulated activities (Types 1 to 10) are defined in SFO Schedule 5; a licence is required for each type of regulated activity carried on.

Corporate intermediaries are licensed as licensed corporations; individuals are licensed as responsible officers or licensed representatives.

A responsible officer must satisfy the SFC's fit and proper test, have at least three years of relevant industry experience in the preceding six years, and pass an approved industry examination.

A licensed corporation must have at least two responsible officers, at least one of whom is an executive director available at all times to supervise the regulated activity.

A licensed representative must be sponsored by a licensed corporation and may act only for that sponsoring corporation.

The fit and proper test considers financial status, education and qualifications, experience, criminal record, disciplinary history and past regulatory compliance.

Licence applications are subject to the SFC's vetting; the SFC may refuse, impose conditions or grant a licence subject to conditions.

Continuing obligations include notification of changes in particulars, annual returns and compliance with the Manager-In-Charge regime.

The Code of Conduct sets out nine general principles, including honesty and fairness, diligence, capability, information about clients, and client assets.

A licensed or registered person must assess a client's financial situation, investment experience and investment objectives before recommending a product, and must ensure suitability.

Client identity must be verified, and client agreements must be in writing and specify the services, fees and risks.

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

Conflicts of interest must be avoided, disclosed and managed; inducements must be disclosed and must not impair the intermediary's duty to act in the client's best interests.

Order handling rules require fair allocation, timely execution and no front-running; client orders must be executed on the best available terms.

Marketing materials must be accurate and not misleading; advertisements must not contain projections of returns unless clearly stated as estimates.

Record-keeping obligations require retention of client records and transaction records for at least seven years.

Market misconduct under SFO Part XIII includes insider dealing, false trading, price rigging, disclosure of false or misleading information, and stock market manipulation.

Insider dealing occurs when a person connected with a corporation uses inside information to deal, or counsels or procures another to deal, in the corporation's securities.

The Market Misconduct Tribunal (MMT) determines whether market misconduct has occurred and may impose civil sanctions, including disqualification, cold shoulder orders and cease and desist orders.

Criminal proceedings for market misconduct may be brought in the Court of First Instance; the maximum penalty includes imprisonment and fines.

The SFC may take disciplinary action against licensed persons, including reprimand, revocation or suspension of licence, and a fine of up to HK$10 million or three times the profit gained or loss avoided.

Section 213 of the SFO allows the SFC to seek court orders, including injunctions and disgorgement, against persons who have contravened the SFO.

The SFC may refer cases to the police or the Department of Justice; it may also pursue civil action independently of criminal proceedings.

A person who knowingly or recklessly provides false or misleading information to the SFC commits an offence under SFO section 384.

The Stock Exchange of Hong Kong Limited (SEHK) operates the securities market; the Hong Kong Futures Exchange Limited (HKFE) operates the futures market.

Hong Kong Exchanges and Clearing Limited (HKEX) owns the SEHK, the HKFE and the clearing houses; the SFC supervises HKEX and the exchanges.

Exchange participants must be licensed corporations or registered institutions and must comply with the exchange's rules and the SFC's requirements.

The Main Board and GEM are the two listing markets; GEM is designed for smaller growth companies with lower listing requirements.

Clearing and settlement are handled by the Hong Kong Securities Clearing Company Limited (HKSCC) and the SEHK Options Clearing House.

The Stock Connect and Bond Connect schemes link Hong Kong with mainland Chinese markets; eligible securities and quotas are set by the relevant authorities.

Short selling is permitted only for designated securities and must comply with the SFC's short position reporting and tick rule requirements.

Market participants include brokers, dealers, investment advisers, fund managers, custodians and transfer agents, each subject to the SFO and the Code of Conduct.

An offer of securities to the public in Hong Kong requires a prospectus authorised by the SFC under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O).

The prospectus must contain the information necessary for an investor to make an informed assessment, and must comply with the SFC's prospectus requirements.

Exemptions from prospectus authorisation include offers to professional investors, offers to not more than 50 persons, and offers with a minimum denomination of HK$500,000.

The SFO Part XV regulates offers of investments and provides for the authorisation of collective investment schemes; unauthorised schemes may not be marketed to the public.

The Takeovers Code and the Code on Share Buy-backs are administered by the SFC's Takeovers and Mergers Panel; they apply to public companies in Hong Kong.

The SFC may object to a listing application or take action against a listed corporation under the Securities and Futures (Stock Market Listing) Rules.

Directors of listed companies owe fiduciary duties and duties of care, skill and diligence; breach may lead to disqualification or civil liability.

The Listing Rules are issued by HKEX and set out admission requirements, continuing obligations and disclosure requirements for listed issuers.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO) establishes the licensing regime for money service operators and imposes customer due diligence (CDD) obligations on financial institutions.

Licensed corporations and registered institutions must comply with the AMLO, the SFC's AML/CFT Guideline and the FATF recommendations.

CDD measures include identifying the customer, verifying identity, identifying the beneficial owner, and understanding the purpose and intended nature of the business relationship.

Enhanced due diligence is required for politically exposed persons (PEPs), correspondent relationships and higher-risk jurisdictions.

A risk-based approach requires institutions to assess customer, product, delivery channel and geographic risk, and to apply proportionate measures.

Suspicious transaction reports (STRs) must be filed with the Joint Financial Intelligence Unit (JFIU); tipping-off the customer is an offence.

Record-keeping obligations require retention of CDD and transaction records for at least five years after the end of the business relationship.

Institutions must appoint a money laundering reporting officer (MLRO) and provide staff training on AML/CFT requirements.