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SFC
Objectives
To advise the relevant laws and regulations relating to the investment businesses. To go through the Securities Services Compliance Manual (SSCM) (Jan 2007)
(Intranet: Compliance/AML Documentation -> Compliance Manual -> Chap 6 -> Chap 6.3)
To let associates and supervisors understand their obligations on compliance and how to discharge the obligations take ownership
Outline
Securities Compliance Private Placement of Structured Noted
Compliance
What Does It Mean? Compliance is acting in accordance with proper and sound market standards and legal and regulatory requirements. Who is the Compliance Function?
They are a control and advisory function to help ensure that the business is conducted in accordance with laws, rules and regulations. - 2nd line of defense
Why? To protect our Bank against legal/regulatory/financial (fines, penalties) and reputation risk.
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Compliance Duties
The Compliance Department of the Bank is charged with the following responsibilities: (Pls. see SSCM-1) Advising associates on relevant laws and regulations applicable to their activities; Establishing and maintaining compliance and ethical standards; Initiating and providing compliance training; and Attending to all applicable regulatory issues and relationship.
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Associate Obligation
It is the responsibility of each and every employee of the Bank to ensure that all businesses and activities of the Bank are conducted in full compliance with all applicable laws and regulations. Also, the business line managers assume the supervisory responsibility in this regard. Further, they should read and understand Securities Services Compliance Manual and relevant Operations Manuals (OP-13 Investment Products and Services (available in intranet) which will be updated from time to time, and are in full compliance with the manuals.
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Key Authorities
Hong Kong Monetary Authority
Securities and Futures Commission
Licence
The Bank is a Registered Institution under the SFO to carry on: Type 1: Dealing in Securities Type 4: Advising on Securities
Bank approved as registered institution to carry on Type 1 & 4 regulated activities on March 7, 2005.
Registration
Please see SSCM-1 and SSCM-14 HKMA Register - Relevant Individuals (i.e. Securities Dealing Staff) Appointment of Executive Officers, Complaints Officer and Emergency Contact Officer Events need to be reported to the HKMA within 7 business days (internal 2 business days)
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HKMA Circular Controls to ensure compliance with S114(3) of the SFO and S20(4) of the Banking Ordinance (June 13, 2007) - MC 07-85 (Sep 7, 2007) - prohibition of unregistered dealing e.g. not take part in receiving orders - no engaged in regulated activity before proper registration - notify changes of information of SDS within 7 business day
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HKMA Circulars: Retail Wealth Management Business (March 3, 2006) customer profiling, product suitability assessment, risk disclosure, management oversight Q & A on Suitability Obligations (May 8, 2007) - know your clients, know the investment products, provide suitable advice, sound business practices (include document rationale of investment advice)
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HKMA Circular
SFCs Report on Findings of 2nd Round of Thematic Inspection of Licensed Investment Advisers (Jun 1, 2007)
HKMA Circular
SFCs Report on Findings of 2nd Round of Thematic Inspection of Licensed Investment Advisers (Jun 1, 2007) Lack of justification to illustrate suitability of advice
Poor Documentation
-Reason for recommendation
Management Supervision
-Sign off exception without query
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Investment Profile
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Coverage
Securities-related products - Securities Cash/Margin Trading Account (shares account) - Structured Products - Bonds - Mutual Funds - Structured ELI Products Investment Linked Insurance Products Apply to Personal Customers at initial stage
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Risk Profiling
Customer Risk Profiling
New customers are required to complete an Investment Profile Questionnaire (IPQ) before opening an account for all securities-related products or applying for investment linked insurance products. IPQ is designed to help customers to consider their attitude toward investment risk. (check WMP or ICBS any IPQ completed or over 1 year) Client Appropriateness Checklist is also required to be completed before opening an account for all securities-related products Customers are classified into six risk profiling categories 1 Capital Preservation (15-32) 2 Current Income (33-40) 3 Conservative Growth & Income (41-48) 4 Growth & Income (49 56) 5 Growth (57-64) 6 Aggressive Growth (65-83)
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Risk Profiling
Product Risk Categories Same 6 categories of classification as Customer Risk Profiling Each product is scored and categorized. The Product Risk Category is reviewed by Product Risk Group and update in the intranet and investment systems - Shares Cash Account Level 3 - Shares Margin Trading Account Level 5 - Structured Products Level 1 to 5 - Bonds Level 1 to 4 - Mutual Funds Level 1 to 6 - Structured ELI Products Level 3 to 6 - Investment Linked Insurance Products Level 1 to 6
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Risk Profiling
Matching of Customer Risk Profiling with Product Risk Category for client suitability
Account Opening for all securities-related products or applying for investment linked insurance products (applies to new customers effective from Oct 31, 2007) Customer Risk should equal to or greater than the lowest level of Product Risk Category e.g. Customer opening shares cash account should have Level 3 or above otherwise exception approval mechanism Customer opening mutual funds account has no risk matching requirement since the lowest product risk category of mutual fund is Level 1. Transactions (applies to existing customers) - conduct subscription/purchase/placement/switching for securities-related products (except shares account) and investment linked insurance products
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Section II
All questions must be completed Time horizon weighting manual check if product has tenor
No investment account is opened if customer refuse to complete the Questionnaire/ more than 3 questions are unanswered
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Is Section II uncompleted?
In question 8, do the answer unmatch with the the years of experience in the table
Yes
Ask the customer to consider any changes to the answer required / complete the IP
Yes
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Exception Approval
For Mismatch of Risk, please check customer whether update of IPQ is required Customer Risk Profiling < Product Risk Level Product tenor does not meet his/her expected time horizon Customers net worth < the requirement set out in the Policy and Procedures (e.g. HK$400,000 for Structured ELI account) No prior investment experience (e.g. Structured Products account) Lack of understanding on the product feature
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Exception Approval Form (F1376) attached to account opening form/instruction form, forward a copy to Compliance
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No
Yes (i) complete the Exception Approval Form (ii) confirm customer suitability (iii) document the Rationales of Investment Advice
(1) investment tenor >2 years and (2) age + tenor > 70 and amount > HK$100,000
Others
Yes
No
Yes No Yes Approved by Division Manager Approved by Branch/Unit Manager Are there more than 3 exceptions noted?
No
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Yes
Suitability Confirmation
Account Opening/Transaction The product may be considered to be inappropriate for the customer
Product Risk Score > Customer Risk Profiling Score Product tenor not match with customer expected time horizon (as stated in section II)
I/we fully understand the associated risks and return of the Account(s), which I/we intend to apply for. I/We confirm that I/we wish to proceed with my/our application for the Account(s) despite the risk level of the product(s) under the Account(s) may be higher than my/our risk profile suggests. (Please if applicable)
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Referred by Branch - IPQ must be completed already - any exception (if yes suitability confirmation by BBPC and Exception Approval by Branch to BBPC) :- any risk mismatch - Product Level 6 and customer Risk Level <= 2 refer to branch - Tenor > 2 years or not any elderly restrictions Rationale of investment by Branch to BBPC
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Shares Transactions
IPQ
only completed upon account opening or re-assessment Every 6 months, top 30 transaction volume customers are required to complete IPQ if not yet done so (report sent by Compliance) Other products by account basis e.g. CFX, FXLD, gold trading,
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Re-assessment
Customer with IPQ completed for more than 1 year Customer with securities account only has transaction in past 6 months and with IPQ completed more than 1 year . Letter will be sent and no reply will signify no change and letter date will be the last IPQ update date. Phone Order verbal confirmation if no change for Product Risk Score is 5 or below, update the last IPQ update date.
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Others
Company customer adopt Form 1045 Joint Account - new account opening each required to complete the IPQ - transaction risk profile of account holder giving instruction is considered Online Banking - mutual fund require completion of IPQ and confirmation of Level 6 products. Update IPQ where necessary, paper form available input into WMP
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Others
Transaction Any IPQ or over 1 year Product risk category vs customer risk profile and any mismatch customer suitability confirmation and exception form Any elderly restrictions exception form Any product tenor issue customer suitability confirmation and exception form Rationale of investment OP 13-12/MC-07-103
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Account Opening
SSCM - 5
Dealing
Fair Dealing No Short Selling (criminal offence) Information for clients e.g. selling Collective Investment Schemes Prior approval from Compliance is needed for the distribution of unauthorized Collective Investment Schemes and unseasoned Securities, like New Issues of bonds (i.e. less than 6 months from the date of new issue) offering documents requirements. 48
Dealing
Mutual Fund Trading Policy Market Timing purchased & sold repeatedly to exploit short term differentials in prices of fund & underlying assets Late trading not accept order after trading dates closing price
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Prohibited Activities
See SSCM - 4 No discretionary arrangement is allowed without prior approval from Compliance.
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Question
Which of the following is an existing client under S174 of SFO (re unsolicited call)?
a. b. c. d. saving account holder securities account holder ex-securities account holder CFX account holder
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Question
Which of the following is an unsolicited call to induce someone to invest in securities?
a. Visit a person using information obtained from public directories b. Call a person who has left a name card after attending a seminar c. Distribute promotional materials on securities to a person visiting the banking center and take the initiative to explain the contents of materials before the person asks d. Send direct mailing promotional materials on securities 53 to general public
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Avoidance of Misrepresentation
All representation must be true, fair and correct and based on facts. Sufficient due diligence should be done to ascertain the correctness of the information supplied by third parties.
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Market Malpractice
It may be a Market Misconduct and a criminal offence under Part XIII and Part XIV of the SFO for performing or facilitating market manipulation, false trading, price rigging and insider dealing.
Penalty: Criminal Conviction and Disciplinary Action. Avoidance of contravention: Know your clients Report any suspicious trading to Compliance
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Misconduct
Meaning of misconduct contravention of applicable SFO provisions contravention of conditions attached to the HKMAs consent act or omission relating to RIs carrying on of a regulated activity which is likely to be prejudicial to the interests of the investing public.
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Disciplinary Action
Revocation Suspension
Private reprimand
Public reprimand
Fines
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Enforcement Actions
Joint SFC/HKMA Enforcement Action Ban a Hang Seng Staff from re-enter industry for 5 months - mishandling of investment orders forms that were signed by clients which were blank. - engaged in joint securities dealing activities without disclosing trading to employer. Ban for Life - misappropriate client assets - sold client securities without clients instructions or authorization, conceal trades were entry errors - operate secret accounts
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Enforcement Actions
Suspended Jail Term for Market Manipulation - sentenced to 4 months imprisonment, suspended for 18 months and fined HK$200,000 - create a false or misleading appearance of active trading - sold and bought the same or a similar number of shares back at the same or a higher price, serving no true economic purpose.
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Public Offer
Min net worth requirement - HK$400,000 Private Placement Min net worth requirement - US$500,000
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CASE STUDIES
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Case Study
Case Study
Selling
Practices
Barber Asia Limited v. Susan Field (July 2005) Code of Conduct assure that client understands the nature and risks of the product and sufficient net worth to assume the risks and bear potential losses requirements of diligence and suitability apply even execution only client Suspended from 6 months to 1 month after SFAT
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Case Study
Failed to advise clients when it became clear that the funds had problems
Without admission of liability, Towry law agreed to make ex-gratia payments of approximately US37.7 million to 1,216 affected clients. Settle disciplinary proceedings by severely reprimanding Towry Law70
Case Study
Forged Signature of Documents disciplinary action and criminal offence Unlicensed dealing and aiding abetting Bank executive in DBS (SFC Enforcement Report - September 2006) accepted clients telephone orders to trade in securities and relayed those orders to the banks dealing room for execution. Fined HK$1,000 Wing Lung Futures Limited (Joint SFC/HKMA Enforcement Action - Apr 27, 2006) Securities Department of Wing Lung Bank accept instructions from some clients to trade in Hang Seng Index Futures and relayed the instructions to Wing Lung Futures dealing room for execution and confirmed the execution of trades with clients. Fined HK$900,000/prohibited from acting as EO or RI for 6/8 months/reprimand
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Case studies
1. Market Manipulation 2. Insider dealing
3. Inducement
4. AML KYC, hold-mail, contract notes rules 5. Customer suitability, sufficient net worth to assume risks and bear potential losses
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Structured Notes
e.g. Equity-linked/Index-linked/currency-linked
Debenture - Companies Ordinance Securities - Securities and Futures Ordinance
Offering documents authorized by SFC (IPO approved by HKEX) and filed with Companies Registry -> permissible for public distribution
Unauthorized ones -> Criminal Offence/Disciplinary Action by Regulators and Civil Liabilities for public distribution unless exempted 74
Private Placement
Internal guidelines for Private Placement:
1. approaching not more than qualified 50 persons/potential investors (i.e. NOT successful buyers) by qualified Notes Salespersons. (i.e. internally approved Securities Dealing Staff of the Bank).
2. Non U.S. residents
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-Professional investors
-3 securities transactions within 3 years from date of the offer 77
Qualified Clients
Non-US Resident USD 500,000 (minimum net worth stated in the Client Investment Profile Questionnaire) Existing Securities Clients Professional Investors Corporate Clients
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Individual Clients
Qualified Clients
Existing Securities Clients With at least 3 securities transactions executed within 3 years
Qualified Clients
Professional Investors - Individual Clients With Investment Portfolio over HKD 8,000,000
Evidence
A latest custodian statement,latest monthly statement or valid Certificate of Deposit, auditor certificate (within 12 month from date of communicating the offer)
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Qualified Clients
Professional Investors - Corporate Clients With Investment Portfolio over HKD 8,000,000 Evidence Audited Financial Statement shows a Total Asset Value >= HKD 40,000,000
A latest custodian statement, latest monthly statement or valid Certificate of Deposit, auditor certificate (within 12 month from date of communicating the offer)
The most recent audited financial statement of corporation or partnership customers (not earlier than 16 months from the date of communicating the offer)
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Portfolio
Portfolio means:
Securities; Certificate of Deposit issued by a bank in HK or an overseas bank regulated by foreign laws; Money held by a custodian.
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Clients Suitability
The clients must have sufficient net worth to
The investment is fit for their investment objectives; and The clients should have relevant investment experience.
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Clients Suitability
Maintaining Balanced Portfolio (i.e. no overconcentration) and liquidity. Consideration:
Any investment exceeding 10% of clients net worth deserves a careful consideration. A strong justification should be made for anything exceeding 25%. A prior approval from SVP or above is required for investment in excess of 50% of a clients declared net worth.
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Distribution Flow
Principal Guaranteed Payoff Scenarios Evidence to substantiate eligibility of Qualified Clients Limited copies of offering documents controlled by IS - Control List maintained by IS - Do not make any copy without prior approval of IS Internal use copies: For Internal Use Only
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Distribution Flow
The Bank is acting as Principal in general /advising clients the Banks capacity Neither Investment advice nor recommendation can be given. buying the Notes from the Bank and no contractual relationship arise between the customer and the Issuer etc.at the time of application; (settlement risk) understand and accept that neither the Issuer etc. accepts any responsibility for the provision of bank services and custody services by the Bank; the Bank will not charge commission from the customer but may receive rebate from Issuer etc. on the subscription price; After the subscription, the Bank is the nominee for the customer in holding the Notes. 86
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and Futures Ordinance (SFO) - not securities - Leveraged Foreign Exchange Trading (LFET) - probably SB-2 of the HKMA SPM on Leveraged Foreign Exchange Trading Conduct of Unsolicited Calls
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Section
Product
Minimum
deposit amount of USD50,000 and a maximum tenor not exceeding one year. Special approval from responsible Division Manager for a single deposit amounting to USD5 million or above.
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Client Appropriateness
Potential Risk: High - Net worth over USD 100,000 Pre-clearance from Compliance if customer located outside Hong Kong Client Appropriateness Questionnaire (Form 47)
Sufficient net worth to bear the risks Fit for clients investment objectives Prior relevant investment experience
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Client Appropriateness
Associates Appropriateness
Associates
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Prohibited Activities
Role
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Account Opening
Language
of the Agreement Explain the Agreement in detail & advise the client to seek independent legal / professional advice if deemed necessary Provide the client with a copy of executed Customer Agreement and relevant account opening documentation.
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Account Opening
Brochure on FX-Linked Deposit Account Opening Forms Client Appropriateness Checklist (Form 47) Client Appropriateness Questionnaire (Form 47A) Client Agreement for FX Linked Deposit (Form 48) Emphasis on the Risk Disclosure Statement (Form 52) Account Opening Forms must be completed before enter into transaction
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Return limited to nominal interest payable and depend on movement of specified currency exchange rate. Fluctuation of currency exchange rate may lead to loss Risk of currency exchange rates Exchange controls Principal Protected Deposit High Yield Deposit Early withdrawal Term sheet Deposit Protection Scheme Statement not provided again including phone order
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Dealing
Term
Sheet (Form 49) Placement Order Form (From 49A) confirm details of the transactions Placement Order Confirmation (Form 49B) sent by back office
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Unsolicited Calls
Existing
Customers (with written agreement) With deposit in excess of HK$ 750,000 with the bank
Only associates who posses sufficient product knowledge about FX Linked Deposit and the policies / procedures of making unsolicited marketing calls are allowed to perform the calls Call Register Opt-out clause Incoming calls collection of personal data
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FX Linked Deposit
Complaints Handling
Customer Complaint Control Log
Marketing Materials
Accurate and no misleading Appropriate Risk Disclosure
Market Research
Avoid conflict of interest Reasonable ground and in good faith
Record Retention
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those associates who have attended the Banks CFX Internal Training are eligible to carry on CFX business at the front line.
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Associates Responsibility
Full
compliance with all applicable laws and regulations Read, understand and comply with the Compliance Guidelines for Collateralized Foreign Exchange and OP13-11 which will be updated from time to time
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Introduction
Securities
and Futures Ordinance SB-2 of the HKMA Supervisory Policy Manual: the Leveraged Foreign Exchange Trading Conduct of Unsolicited Calls Code of Banking Practice Other relevant Rules and Guidelines issued by the regulatory authorities e.g. Schedule 6 - SFC Code of Conduct, HKMA letters
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Account Opening
Inform the client that a Client Agreement either in English or in Chinese must be entered into. Explain in detail to the client the contents of the Agreement. Advise the client to seek independent legal/professional advice if deemed necessary.
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Account Opening
Complete the account opening procedures as described in OP13-11 of the Operations Manual including completion of Client Appropriateness Checklist (Form 019). Provide the client with a copy of Client Agreement and relevant account opening documentation. The Bank is Principal to Client. Thus, no advice or recommendation should be given.
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Client Appropriateness
Sufficient net worth to bear the risk (minimum declared net worth of HK$1,000,000) Fit for the clients investment objectives Relevant investment experience
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Risk Disclosure
Master
Client Identification
Ultimate
Beneficial Owner
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Unsolicited Call
Orders Handling
Recording
First
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Orders Monitoring Contract Notes and Statements of Account Complaints Handling Marketing Materials Proper Approval Risk Disclosure
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Research
Due Diligence Good Faith Fair and Objective Advice Conflict of Interest
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Q &A
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Question 1
When buying US securities at the instruction of customer who is non-US persons and not residing in the US, which of the following U.S. Inland Revenue Dept form should be filled in? a. Form W-9 b.Form W-8BEN c.Form W-8IMY
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Question 2 Question 4
Keep adequate records of clients transaction Dispatch contact notes within 2 days Know your clients re identity, financial situation, investment experience and investment objective Employee dealings and employers consent
a)
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Question 3 Question 4
Risk disclosure statement Know your customer re identity/AML Know your customer re identity, financial situation, investment experience and investment objective Employee dealings and employers consent Mismatch of customer risk & Product risk
d)
Question 4
Which of the following are the exceptions for section 175 of the SFO? a. 3 banking transactions executed within one year b. Individuals who have CD of not less than US$4 million c. 6 mutual fund transactions executed within 3 years
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Question 5
When there is a suspicious breach on the SFO and its subsidiary legislation e.g. contract Notes,Statements of Account and Receipts Rules, report should be made to Securities Compliance Department and Operations Manager within
a.2 business days b.1 business day c.4 hours
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Question 6
Which of the followings are requirements under the Associate Investment Policy for SDS:
a. Obtain prior approval on new investment account opened by spouse of SDS b. Provide duplicate daily confirmations and monthly SDS account statements on mutual fund transaction c. Prohibited from executing trades for own securities a./c d. Obtain prior approval for shares trading
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Question 7
Which of the followings are exemptions for acceptance of gifts/benefits:
a. Lavish meal from existing customer b. Gift of value HK$1,000 given on festive occasion under customary practice by prospective customer c. Lai-See of HK$100 from existing customer d. Personal benefit of HK$3,000 received from a close personal friend and such friendship is entirely unrelated to the business of the Bank.
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Question 4 Question 8
Structured ELI account Private placement on structured notes CFX account FX-linked deposit
a) b) c) d)
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Question 9
If a SDS committed dangerous driving in Canada, is it required to notify such events to Personnel and Compliance under the Securities and Futures (Licensing and Registration Information) Rules?
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Question 10
Which of the followings are exemptions or internal requirements for private placement:
a. b. c. d. Minimum net worth of HKD500,000 Not more than 50 persons Professional investors Existing customers with 1 securities transaction within 3 years e. Minimum subscription of HK$500,000
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Thank You
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