RES 12B – Rules, Ethics and Skills for Securities and Derivatives Dealers of Non-Exchange Members

Correct: Statement I is correct because the MAS requirements specify that a Customer Account Review (CAR) must be conducted for retail clients wishing to trade listed SIPs. Statement III is correct because the “four eyes principle” is a recommended internal control where a second person reviews the assessment to reduce subjectivity and ensure compliance with firm policies.

Incorrect: Statement II is incorrect because the text explicitly states that completing the SGX Online Education module does not automatically qualify an investor; the representative must still perform an independent assessment. Statement IV is incorrect because representatives are expected to advise against increasing a risk rating if the data suggests otherwise, and such exceptions must be documented in writing.

Takeaway: Effective client onboarding requires specific regulatory assessments for complex products and the application of internal controls to ensure risk profiles are determined objectively and documented properly. Therefore, statements I and III are correct.

Correct: Statement I is correct because OTC derivatives are traded via decentralized networks (dealers) rather than central exchanges, and pricing is often not public. Statement III is correct because a CCP interposes itself between parties to manage credit risk through margins and default funds. Statement IV is correct because, unlike exchange-traded securities, OTC derivative contracts often involve multi-year obligations between the intermediary and the counterparty.

Incorrect: Statement II is incorrect because a Non-Deliverable Interest Rate Swap (NDIRS) specifically does not involve the physical exchange of currency flows, which distinguishes it from ordinary currency swaps.

Takeaway: OTC derivatives are characterized by bilateral counterparty risks and long-term relationships, which are managed through central clearing houses and regulatory reporting to trade repositories. Therefore, statements I, III and IV are correct.

Correct: Statement II is correct because the regulatory framework requires Enhanced Customer Due Diligence (EDD) for high-risk individuals, specifically including international organization Politically Exposed Persons (PEPs). Statement III is correct because Simplified Customer Due Diligence (CDD) is only permitted when the CMS license holder has conducted a risk analysis and is satisfied that the money laundering and terrorism financing risks are low.

Incorrect: Statement I is incorrect because the KYC process is specifically defined as having two purposes: assessing AML/CFT risks and determining investment suitability, rather than just establishing credit limits. Statement IV is incorrect because the assessment of investment objectives and risk appetite is one of the two core purposes of KYC and functions alongside, not instead of, AML/CFT risk assessments.

Takeaway: The KYC process is a mandatory dual-purpose framework used to mitigate financial crime risks and ensure investment suitability through varying levels of due diligence based on client risk. Therefore, statements II and III are correct.

Correct: A Capital Markets Services (CMS) license holder is the right answer because the Securities and Futures Act (SFA) and the SFR(RDC) explicitly define “specified persons” to include banks, bank subsidiaries, merchant banks, finance companies, insurers, and CMS license holders who must report prescribed information to a trade repository.

Incorrect: A non-financial corporate entity using swaps for hedging is wrong because the reporting mandate specifically targets financial intermediaries and institutions defined as specified persons, and general corporates are not on that list. A retail investor trading through a local brokerage firm is wrong because the reporting obligation falls on the intermediary (the specified person) rather than the individual retail client. A representative of a licensed foreign trade repository is wrong because the repository is the entity that receives the reports, and an individual representative is not classified as a specified person under the reporting regime.

Takeaway: Under the SFA reporting regime, only entities classified as “specified persons,” such as CMS license holders and banks, are required to report specified derivatives contracts to a licensed trade repository.

Correct: Statement I is correct because the SFA defines an individual AI as having net personal assets over S$2 million, with a S$1 million cap on the primary residence value. Statement III is correct because corporations with net assets over S$10 million or those owned entirely by AIs meet the definition. Statement IV is correct because the regulations require a CMS license holder to provide a risk warning and obtain consent (opt-in) before treating a client as an AI.

Incorrect: Statement II is incorrect because meeting the financial threshold does not lead to automatic AI status; the investor must proactively opt-in to be treated as an AI under the current Singapore regulatory framework.

Takeaway: AI status requires both meeting specific financial thresholds and a formal opt-in process involving risk disclosures and client consent. Therefore, statements I, III and IV are correct.

Correct: The pension fund is an institutional investor, and the representative is exempt from certain requirements regarding the sale of investment products is the right answer because pension funds are explicitly listed as institutional investors under the Securities and Futures Act, which grants exemptions from certain disclosure and suitability requirements such as those governing Specified Investment Products (SIPs).

Incorrect: The classification as an expert investor is wrong because that category is specifically for entities whose business involves the acquisition and disposal of capital market products, not pension funds. The statement regarding the fund being an accredited investor is incorrect because the source text explicitly lists pension funds under the institutional investor category. The retail investor classification is incorrect because retail status only applies to investors who do not meet the specific criteria for institutional, expert, or accredited status.

Takeaway: Correct client categorization is essential because institutional investors are presumed to have the expertise to manage risks, allowing for exemptions from specific retail-level protections and disclosures.

Correct: Closing the product at the next available price and settling the difference is the required procedure when a broker cannot substantiate a quote. This ensures the principal is not financially disadvantaged by the broker’s inability to honor the initial quotation.

Incorrect: Canceling the trade without settlement is wrong because the broker is responsible for the quoted price. Waiting for the market to return to the quoted price is incorrect as it introduces further market risk and delay. Requesting the principal to accept the current market price without compensation is wrong because the broker must settle the difference if they cannot substantiate their quote.

Takeaway: Brokers in the OTC derivatives market must settle any financial differences with the principal if they are unable to substantiate a provided quotation.

Correct: Statement I is correct because it accurately reflects the CFA Institute’s definition of ethics as a set of moral principles or rules of conduct that provide guidance for behavior when it affects others. Statement IV is correct because the text states that ethical conduct supports well-functioning markets, allowing capital to flow efficiently to attractive investment prospects by matching borrowers with investors.

Incorrect: Statement II is incorrect because the text explicitly notes that financial markets are interconnected, and unethical practices can lead to market contagion that spreads globally rather than being contained domestically. Statement III is incorrect because the text emphasizes that ethics goes beyond regulations and the law, involving doing the right thing even when no one is looking.

Takeaway: Professional ethics in derivatives trading involves moral principles that transcend legal compliance to maintain investor confidence and ensure the efficient global flow of capital. Therefore, statements I and IV are correct.

Correct: Statement I is correct because the ethical framework requires representatives to advise clients to reconsider their strategy if a transaction has a negative impact on the market. Statement II is correct because the framework emphasizes that charges, commissions, and expenses must be fair, transparent, and clearly communicated to clients. Statement IV is correct because seeking guidance from compliance and legal departments is a designated step for resolving ethical dilemmas and ensuring transactions remain within regulatory rules.

Incorrect: Statement III is incorrect because the ethical framework mandates putting the client’s interests first and ensuring that recommendations are suitable for the client’s risk appetite, rather than prioritizing personal commission targets or firm stability.

Takeaway: Professional ethics in derivatives dealing require representatives to prioritize client interests, maintain transparency in costs, and seek internal guidance to resolve ethical dilemmas and protect market integrity. Therefore, statements I, II and IV are correct.

Correct: Statement I is correct because the MAS guidelines allow for potential conflicts of interest to be disclosed to clients either in writing or through oral communication. Statement III is correct because a representative is not required to repeat a disclosure for every recommendation if the initial disclosure remains up-to-date, comprehensive, and the client is reasonably expected to be aware of it. Statement IV is correct because the representative must consider whether a long time lapse between recommendations might lead a client to assume the previous disclosure is no longer applicable.

Incorrect: Statement II is incorrect because there is a specific exemption from repeating disclosures for every transaction or recommendation, provided that the previous disclosure is still accurate and the client remains aware of the conflict.

Takeaway: While initial disclosure of conflicts is mandatory, subsequent disclosures are only necessary if the previous information is no longer accurate or if a significant time lapse has occurred. Therefore, statements I, III and IV are correct.

Correct: Statement II is correct because the text explicitly identifies client pressure as an external factor that can lead to unethical behavior due to the fear of losing future business opportunities. Statement III is correct because the ‘Understanding & Comprehension’ component of the ethical framework requires representatives to assess product suitability based on the client’s investment profile and risk tolerance. Statement IV is correct because ‘Safeguarding Reputation’ requires representatives to perform their work objectively to prevent undermining the integrity of the industry.

Incorrect: Statement I is incorrect because, while the framework mentions efficient execution, it also mandates that risks must be covered in detail and highlighted to the client; the representative cannot bypass risk analysis simply to satisfy a client’s demand for speed.

Takeaway: The ethical framework requires derivatives professionals to balance efficient execution with thorough risk disclosure and suitability, while resisting external pressures that might compromise regulatory compliance. Therefore, statements II, III and IV are correct.

Correct: Prohibiting the receipt of Payment for Order Flow (PFOF) is the right answer because MAS guidelines state that CMS license holders should not receive such payments as they introduce conflicts of interest that may incentivize firms to prioritize their own financial gain over the client’s best execution.

Incorrect: The suggestion that disclosure alone permits the receipt of these payments is wrong because the MAS Notice explicitly states firms should not receive PFOF due to the inherent conflict of interest. The claim that price parity justifies receiving rebates is incorrect as the incentive itself compromises the integrity of the order routing process. The option regarding institutional client waivers is false because the restriction on PFOF applies to the firm’s conduct in placing and executing customer orders generally to protect the market’s integrity.

Takeaway: CMS license holders are prohibited from receiving Payment for Order Flow to ensure that order routing decisions are based on obtaining the best possible terms for the client rather than the firm’s own commission interests.

Correct: A cross trade between client accounts is permitted only when the CMS license holder has a formal policy in place and the transaction is in the best interest of both clients and relevant to their investment objectives. This ensures that the intermediary acts as a neutral facilitator rather than favoring one client over another.

Incorrect: The suggestion that staff personal accounts can cross trade with clients is wrong because such activities are strictly prohibited to prevent conflicts of interest. The idea that a house account controlled by a representative can be used for cross trades with a client is also incorrect as this is specifically forbidden under the guidelines. The option regarding trades after the deadline describes late trading, which is prohibited to prevent the dilution of collective investment scheme values.

Takeaway: Cross-trading is only permissible between client accounts when it serves the best interests of both parties and adheres to established firm policies and investment objectives.

Correct: Statement II is correct because according to section 5.4.1.5, a CMS licence holder should always execute a client’s order according to specific instructions given, even if those instructions do not align with standard best execution principles. Statement III is correct because section 5.4.1.7 requires firms to establish monitoring systems to check compliance with best execution policies on a periodic basis, commensurate with the scale of the business. Statement IV is correct because section 5.4.1.8 stipulates that information on best execution policies must be provided to customers in writing (including electronic means) prior to the placement and execution of orders.

Incorrect: Statement I is incorrect because while price is generally a high priority, section 5.4.1.8 clarifies that price is not the only factor and may not always be the primary consideration; factors like speed and likelihood of execution may be prioritized for large orders or illiquid shares.

Takeaway: Best execution requires a holistic consideration of various factors and periodic monitoring, but specific client instructions always take precedence over the firm’s standard execution policies. Therefore, statements II, III and IV are correct.

Correct: Statement I is correct because the ‘Knowledge of the Law’ standard explicitly requires representatives to comply with the stricter law, rule, or regulation in the event of a conflict between different governing authorities. Statement IV is correct because ‘Self-Review’ is defined as a lack of objectivity in analyzing one’s own professional actions or recommendations due to an inherent bias toward work done by oneself.

Incorrect: Statement II is incorrect because professional standards require representatives to place the interest of clients above their own personal interests or firm targets, particularly during order execution. Statement III is incorrect because representatives are prohibited from accepting gifts or benefits that could reasonably be expected to compromise their independence and objectivity, regardless of whether a specific trade recommendation has been altered yet.

Takeaway: Derivatives representatives must adhere to the strictest applicable regulations and maintain independence by prioritizing client interests over personal or firm-wide financial incentives. Therefore, statements I and IV are correct.

Correct: Providing at least 14 days’ notice for ordinary resolutions and 21 days for special resolutions, with all resolutions voted by poll, is the right answer because it directly reflects the requirements for listed issuers under SGX-ST rules to ensure shareholders have sufficient time to consider resolutions and that voting is conducted transparently.

Incorrect: The requirement for 21 days for ordinary resolutions and 28 days for special resolutions is wrong because these periods exceed the minimum notice requirements specified in the regulations. The options suggesting that voting can be conducted by a show of hands are incorrect because the rules explicitly state that all resolutions at general meetings must be voted by poll. The notice period of 10 days for ordinary and 14 days for special resolutions is wrong as it is shorter than the mandatory minimum notice periods required by the exchange.

Takeaway: Listed issuers must adhere to specific notice periods of 14 or 21 days based on the resolution type and are required to conduct all general meeting voting by poll.

Correct: Statement I is correct because representatives have a fiduciary-like duty of loyalty to place their clients’ interests before their employer’s or their own interest. Statement II is correct because the standards require that all known facts and information be provided to the client so they can make informed investment decisions.

Incorrect: Statement III is incorrect because representatives are strictly required to carry out clients’ investment transactions prior to their own, and there is no exception based on the size of the trade. Statement IV is incorrect because representatives must prioritize the client’s specific needs and objectives over any internal firm targets or personal performance metrics.

Takeaway: The duty of loyalty, prudence, and care requires representatives to act for the benefit of their clients, provide full disclosure, and prioritize client transactions over their own. Therefore, statements I and II are correct.

Correct: Marcus is engaging in misrepresentation by failing to disclose a conflict of interest that could mislead investors. This is the right answer because the standards of professional conduct state that non-disclosure of a relationship with a company being recommended is tantamount to misrepresentation. Even if the opinions are genuine, the failure to highlight the conflict of interest can mislead potential investors.

Incorrect: The suggestion that Marcus lacks professional competence is wrong because the scenario describes a failure of integrity and disclosure, not a lack of knowledge or skill. The claim that he is committing market misconduct by inflating volume is incorrect as there is no evidence of wash trades or artificial volume creation in the scenario. The option regarding material non-public information is wrong because the scenario focuses on a conflict of interest (a consulting agreement) rather than the possession of price-sensitive, non-public data.

Takeaway: Representatives must avoid misrepresentation by disclosing all contractual relationships and conflicts of interest that could influence their professional recommendations or analysis.

Correct: Statement I is correct because the regulations require strict access control to sensitive areas like dealing rooms and computer rooms to minimize the risk of unauthorized transactions and fraud. Statement II is correct because internal control principles mandate that reconciliation and verification must be performed by staff independent of the trade execution function to ensure accuracy and integrity.

Incorrect: Statement III is incorrect because prices, interest rates, and volatility factors used for revaluation must be obtained from independent sources or be independently verified, rather than being decided by the CMS license holder or its representatives. Statement IV is incorrect because if a client insists on a transaction against advice, the representative must document their analysis and risk disclosure, and the matter should be escalated to management for a decision.

Takeaway: CMS license holders must maintain robust internal controls, including the segregation of duties between trade execution and reconciliation, and ensure that asset valuations are derived from independent sources. Therefore, statements I and II are correct.

Correct: Statement I is correct because Personal Investment Holding Company accounts are primarily utilized to minimize estate duties and bypass the standard probate process. Statement II is correct because trust structures protect assets from litigation against individual beneficiaries since the assets are not legally owned by any single individual.

Incorrect: Statement III is incorrect because representatives must provide clients with adequate notice of the intention to sell securities to cover margin breaches, as specified in the margin account terms. Statement IV is incorrect because there is no legal minimum age threshold for opening an account, although firms often avoid doing so due to the risk of irrecoverable losses.

Takeaway: Different account structures, such as trusts and holding companies, carry unique legal protections and operational requirements that representatives must verify through official mandates and deeds. Therefore, statements I and II are correct.

Correct: Evaluating the client’s repayment capacity and financial position is the right answer because representatives are required to assess financial capacity, repayment ability, and credit records to prevent overextension or forced sales.

Incorrect: The requirement to confirm CPF Special Account balances is wrong because these funds are not used as standard collateral for private margin trading accounts in the manner described. The suggestion to guarantee collateral value is wrong because representatives cannot guarantee market performance or price stability in a volatile market. Establishing firm-wide risk tolerance and credit strategies is wrong because these are management-level functions rather than the duty of a representative during a specific client assessment.

Takeaway: Before extending credit, representatives must conduct a thorough assessment of a client’s financial position and repayment ability to manage credit risk effectively and prevent overextension.

Correct: Statement I is correct because the source text states that enhanced due diligence is expected for entities in offshore low-tax jurisdictions as the risk of money laundering is higher and funds are harder to trace. Statement III is correct because an exemption exists where tracing to the ultimate beneficiary is not required if the SPV is established by a company listed on a FATF member country exchange for the purpose of holding assets in a syndicated loan.

Incorrect: Statement II is incorrect because the regulations explicitly state that merely obtaining a declaration of beneficial ownership is not adequate; ownership must be traced to the individual who is the ultimate beneficial owner. Statement IV is incorrect because relationship management aims to create a continuous engagement and build loyalty rather than being merely transactional.

Takeaway: Intermediaries must perform enhanced due diligence on offshore SPVs and trace ultimate beneficial ownership unless a specific exemption, such as the FATF-listed company exemption, applies. Therefore, statements I and III are correct.

Correct: Statement I is correct because suitability must be judged in the context of the client’s total portfolio to ensure the overall risk and strategy remain aligned with the client’s needs. Statement III is correct because for investment management agreements, representatives are specifically required to establish the client’s identity, the identities of beneficiaries, and the source of funds.

Incorrect: Statement II is incorrect because if a representative is unsure whether an issue will cloud their objectivity, they must highlight the concern to superiors and make adequate disclosure to the client immediately, rather than delaying disclosure. Statement IV is incorrect because while firms must set a reasonable time period to resolve complaints, the regulations do not specify a 48-hour deadline nor do they mandate personal compensation by the representative as a standard resolution procedure.

Takeaway: Professional conduct in derivatives dealing requires a holistic approach to suitability and proactive disclosure of any factors that may compromise a representative’s objectivity. Therefore, statements I and III are correct.

Correct: The disclosure is required by law or the information concerns illegal activities on the part of the client is the right answer because these are two of the three specific regulatory exceptions to the duty of confidentiality. Representatives are permitted to breach confidentiality only under these conditions or when the client has given explicit permission.

Incorrect: The option regarding reputational risk is wrong because a firm’s internal desire to protect its reputation does not override the legal obligation to maintain client confidentiality. The option regarding a spouse’s tax filing is wrong because family relationships do not grant access to private financial data without the client’s specific consent or a legal mandate. The option regarding supervisor authorization is wrong because internal verbal permission from a supervisor is not a valid legal or regulatory ground for disclosing sensitive client information to third parties.

Takeaway: Representatives must maintain strict confidentiality of client information unless the information involves illegal activities, disclosure is required by law, or the client has permitted the disclosure.

Correct: Statement I is correct because the regulations specify that a CPF Investment Account with one of the three local agent banks is mandatory for CPFIS-OA transactions. Statement III is correct because the eligibility criteria require a member to have more than $40,000 in their Special Account to invest through the CPFIS-SA.

Incorrect: Statement II is incorrect because corporate bonds and gold products are permitted under CPFIS-OA (subject to limits), but they are not listed as allowable investments for CPFIS-SA. Statement IV is incorrect because the rules explicitly state that each CPF member is restricted to maintaining only one CPF Investment Account at any given time.

Takeaway: CPFIS-OA and CPFIS-SA have different minimum balance requirements and permitted investment instruments, with OA requiring a specialized bank account that SA does not. Therefore, statements I and III are correct.

Correct: Revealing the identities when the broker is satisfied that both parties have a genuine motive to conduct the transaction is the right answer because the standards for derivatives dealing explicitly state that names should not be divulged prematurely and only when a sincere intent to trade is confirmed.

Incorrect: Disclosing identities immediately upon the first expression of interest is wrong because it constitutes premature disclosure, which can compromise the principals’ confidentiality and market position. Waiting until after the trade is cleared and settled is wrong because the standards allow for disclosure earlier in the process to facilitate the transaction once motive is established. Providing information to a competing firm for research is wrong because representatives must reject requests to divulge confidential information to unauthorized parties and report such incidents.

Takeaway: To protect client confidentiality, representatives must ensure that the identities of principals are only disclosed when there is a verified and genuine intent to transact.

Correct: Statement I is correct because since 1 October 2018, all new CPFIS investors must complete the Self-Awareness Questionnaire (SAQ) to assess their financial knowledge before they can begin investing. Statement III is correct because a member is required to provide their dealer with the specific account details for settlement purposes before any transaction using CPF funds can be executed. Statement IV is correct because the regulations allow for the sale of SGX-ST listed investments one trading day after the purchase date, provided the agent bank has accepted the trade as a CPFIS-OA transaction.

Incorrect: Statement II is incorrect because a member is strictly prohibited from maintaining more than one CPF Investment Account at any one time; they must choose a single agent bank from the approved list (DBS, OCBC, or UOB).

Takeaway: To participate in CPFIS-OA, investors must complete a mandatory self-assessment, maintain only one investment account, and ensure their dealer has settlement details prior to trading. Therefore, statements I, III and IV are correct.

Correct: Sarah’s actions constitute self-dealing because she is appropriating proprietary information and property that rightfully belongs to her employer for her personal advantage. The standards of professional conduct state that taking materials like client lists and algorithms is unethical and akin to stealing from the employer, even if the representative does not immediately solicit those clients.

Incorrect: The claim that her actions are permissible if she delays solicitation is wrong because the act of taking the records itself is a violation, regardless of when they are used. The argument that she owns the algorithms she developed is incorrect as documents and processes compiled during employment are the rightful property of the firm. The suggestion that her conduct is acceptable for market transparency is a misinterpretation of the whistleblowing exception, which applies to reporting misconduct rather than misappropriating assets for personal gain.

Takeaway: Representatives are prohibited from appropriating an employer’s property or information for their own interest, as this constitutes unethical self-dealing.

Correct: Statement I is correct because the code requires representatives to disclose any compensation, consideration, or benefit received for recommending products or services to their employer and clients. Statement II is correct because even if a client consents to a transaction after a conflict is disclosed, the representative maintains a duty to actively seek alternative solutions to avoid the conflict. Statement III is correct because representatives must maintain records of all communications, including personal meeting notes and the bases of recommendations, for audit trail purposes.

Incorrect: Statement IV is incorrect because investment transactions for clients must always have priority over transactions in which the representative is the beneficial owner; there is no exception for trades deemed immaterial in volume.

Takeaway: Representatives must prioritize client interests over personal trades, maintain detailed records of all recommendations, and continue to seek ways to avoid conflicts of interest even after disclosure has been made. Therefore, statements I, II and III are correct.

Correct: The policy’s maturity date must not be later than the member’s 62nd birthday is the right answer because CPFIS regulations require endowment policies to mature by this age to ensure funds are available for the member’s retirement needs.

Incorrect: The statement regarding regular premiums is wrong because new regular premium policies have been prohibited under CPFIS since 1 January 2001; only single or recurring single premiums are allowed. The mention of Qualifying Full Bank status is incorrect as this specific regulatory requirement applies to foreign banks offering fixed deposits, not to insurance providers. The suggestion that the policy be assigned as collateral is wrong because CPFIS rules explicitly state that no investment under the scheme may be assigned, pledged, or used as collateral.

Takeaway: Inclusion criteria for insurance products under CPFIS focus on ensuring the member is the life insured and that the policy structure supports retirement liquidity through specific maturity limits.