Conduct of Business and Client Dealings
This domain tests the Code of Conduct for Persons Licensed by or Registered with the SFC: how firms take on clients, advise them, handle and allocate orders, hold their assets, and manage conflicts.
The nine General Principles
Honesty and fairness; diligence; capability; information about clients; information for clients; conflicts of interest; compliance; client assets; and responsibility of senior management. Every specific Code paragraph is an application of these principles, and exam questions often expect you to name the principle breached rather than only the paragraph.
Onboarding and suitability
- Know your client: financial situation, investment experience, investment objectives and risk tolerance, plus knowledge of derivatives where derivatives are recommended.
- A written client agreement and risk disclosure statements are required.
- Professional investors include individuals with a portfolio of at least HK$8 million and corporations with a portfolio or total assets of at least HK$40 million; institutional investors are also PIs. PI status permits certain exemptions but does not remove the duty of fairness.
Dealing and order handling
- Client orders take priority over house orders; do not front-run; aggregate orders only under a disclosed allocation policy and allocate fairly afterwards.
- Best execution is about execution quality overall, not merely the lowest price.
- Issue contract notes and confirmations promptly and keep records; the Securities and Futures (Keeping of Records) Rules require records to be kept for at least 7 years.
Client assets and conflicts
- Client money is held in segregated trust accounts with licensed banks; no commingling with house money; client securities held in safe custody, with client consent for custody outside Hong Kong.
- Disclose and manage conflicts: principal trading, staff dealing, soft-dollar arrangements and inducements.
Worked example
An RM receives a large client order, buys the stock for the house account first, and allocates the best fills of the aggregated order to a favoured client. This breaches the General Principle of honesty and fairness and the order-handling rules: house trading ahead of a client order is front-running, and allocation must follow a pre-agreed, disclosed policy applied consistently, not favouritism.
Traps
- Assuming a PI's consent waives all conduct obligations.
- Equating best execution with best price only.
- Treating SFC authorisation of a product as a recommendation or endorsement.
- Forgetting the 7-year record retention rule.