RES 1B – Rules, Ethics and Skills for Securities Dealers of Non-Exchange Members

Correct: Statement II is correct because the Securities and Futures (Licensing and Conduct of Business) Regulations require that money received on account of a customer must be deposited into a trust account or an account directed by the customer no later than the next business day. Statement III is correct because the definition of a “customer” for the purpose of these regulations specifically excludes an officer, an employee, or a representative of the CMS license holder.

Incorrect: Statement I is incorrect because money received to defray the holder’s brokerage and other proper charges is explicitly excluded from the definition of “money received on account of a customer.” Statement IV is incorrect because the regulations strictly prohibit using a customer’s money to secure any transaction of, or to extend credit to, any person other than that specific customer.

Takeaway: CMS license holders must ensure customer funds are deposited into trust accounts by the next business day and must never use one customer’s assets to benefit another party. Therefore, statements II and III are correct.

Correct: Suspecting money laundering or terrorist financing is the right answer because the regulations explicitly state that simplified customer due diligence (SCDD) should never be performed if the financial institution suspects that money laundering or terrorist financing is involved, even if the client is a low-risk entity.

Incorrect: The point about listing on a stock exchange is wrong because Singapore government entities qualify for SCDD based on their status, regardless of whether they are listed on an exchange. The point about FATF confirmation is wrong because that specific requirement applies to reliance on foreign regulated intermediaries, not to Singapore government entities. The point about geographic risk is wrong because conducting business within Singapore is generally considered lower risk and would not, by itself, disqualify a government entity from simplified due diligence.

Takeaway: Simplified customer due diligence is prohibited whenever there is a suspicion of money laundering or terrorist financing, regardless of the customer’s profile or status.

Correct: Statement I is correct because auditors are required to immediately report any matter that materially affects the financial position of a CMS license holder to MAS. Statement III is correct because under SFA 111, altering books with the intent to obstruct an audit is an offence punishable by a fine up to $100,000, imprisonment up to 2 years, or both.

Incorrect: Statement II is incorrect because the Securities and Futures Act requires CMS license holders to lodge their audited accounts within 5 months of the financial year end, not 4 months. Statement IV is incorrect because MAS may only extend the lodgment period for annual accounts by a maximum of 4 months, rather than 6 months, provided there is a special reason.

Takeaway: CMS license holders must comply with strict financial reporting timelines and ensure the integrity of their records to avoid significant penalties and facilitate effective regulatory oversight. Therefore, statements I and III are correct.

Correct: Filing the Suspicious Transaction Report (STR) with the Commercial Affairs Department (CAD) and providing a copy to the MAS within 15 days is the correct procedure. According to the regulations, if a customer decides to withdraw a pending transaction or is reluctant to provide information, it may warrant an STR, which must be filed with the CAD (with a copy to MAS) within 15 days of the suspicion arising.

Incorrect: The option suggesting the MAS as the primary recipient within 15 days is incorrect because the report must be lodged with the CAD’s Suspicious Transaction Reporting Office first. The option suggesting filing with the CAD within 30 days is incorrect because the regulatory deadline is strictly 15 days. The option suggesting filing with the MAS as the primary recipient within 30 days is incorrect regarding both the primary recipient and the timeframe.

Takeaway: Suspicious Transaction Reports must be filed with the CAD, with a copy to the MAS, within 15 days of the suspicion being identified.

Correct: Statement II is correct because SFR(LCB) 22 mandates that interest earned from the maintenance of trust accounts and returns from authorized investments must accrue to the customer. Statement III is correct because SFR(LCB) 23 permits a CMS license holder to advance its own funds into a customer’s trust account specifically to ensure the continued maintenance of that account or to prevent it from being under-funded.

Incorrect: Statement I is incorrect because SFR(LCB) 20 restricts the investment of customer moneys to Government securities, specific sovereign debt instruments, or other instruments determined by MAS, rather than general corporate bonds. Statement IV is incorrect because while a licensee can retain interest on funds it has personally advanced, the interest on the customer’s own funds must be held for the benefit of the customer.

Takeaway: CMS license holders must ensure that trust account interest benefits the customer and that investments are limited to highly secure, government-linked instruments unless otherwise approved by MAS. Therefore, statements II and III are correct.

Correct: The assessment must be reviewed at least once every two years or upon material trigger events, with results documented and approved by senior management. This is the correct requirement as specified in the guidelines to ensure that the institution’s understanding of its ML/TF exposure across all business units and product lines remains current and is overseen at the highest level.

Incorrect: The suggestion of an annual review or documenting only when changes occur is wrong because the mandatory cycle is two years and documentation is required even if no changes are made. The option proposing a three-year cycle or submission to the regulator is incorrect because the timeframe is specifically two years and the approval must come from internal senior management. The claim that a review is triggered by a new compliance officer or kept for banking secrecy is incorrect as triggers are business-related (like new products) and results must be formally approved by senior management.

Takeaway: Financial institutions must update their enterprise-wide risk assessments at least every two years or when material business changes occur, with formal senior management approval.

Correct: Statement I is correct because according to SFR(LCB) 26, a CMS license holder must deposit customer assets into a custody account no later than the business day immediately following the day of receipt or notification. Statement III is correct because SFR(LCB) 28 requires the holder to obtain a written acknowledgment from the custodian confirming the account is designated as a trust or customer account before any assets are deposited.

Incorrect: Statement II is incorrect because while customer assets may be commingled with those of other customers, they must never be commingled with the CMS license holder’s own assets. Statement IV is incorrect because SFR(LCB) 29 mandates that due diligence on a custodian’s suitability must be conducted and recorded before the custody account is opened, not after.

Takeaway: CMS license holders must ensure strict segregation of customer assets from firm property and perform mandatory due diligence on custodians prior to account opening. Therefore, statements I and III are correct.

Correct: Within 15 days of the case being referred by the relevant staff is the right answer because the regulatory framework for financial institutions in Singapore requires that once a decision is made to file a Suspicious Transaction Report (STR), the filing must occur within this specific 15-day window.

Incorrect: The option regarding 30 days is wrong because it provides a timeframe that is double the legally mandated period for reporting to the Commercial Affairs Department. The option suggesting 10 days is wrong as it is shorter than the 15-day period allowed under the current guidelines. The option mentioning 45 days is wrong because it represents an unacceptable delay in the reporting of potential money laundering or terrorist financing activities.

Takeaway: Financial institutions are required to file an STR within 15 days of a case referral and must retain all supporting documentation for at least 5 years.

Correct: Statement I is correct because SFR(LCB) 28 (Notification and acknowledgement from custodians) is explicitly listed as an offence punishable by a fine not exceeding $50,000 upon conviction. Statement II is correct because SFA Section 196 establishes that market misconduct rules apply to acts in Singapore even if the securities are listed or quoted outside Singapore.

Incorrect: Statement III is incorrect because the maximum fine for contravening SFR(LCB) 34 regarding the mortgage of customer assets is $50,000, which is the standard penalty for the listed SFR(LCB) contraventions. Statement IV is incorrect because the SFA rules also apply to acts occurring outside Singapore if they involve securities listed or quoted on a securities market in Singapore.

Takeaway: Intermediaries must adhere to customer asset handling rules to avoid $50,000 fines, and they must recognize that market misconduct rules apply to both domestic and foreign-listed securities. Therefore, statements I and II are correct.

Correct: Statement I is correct because Wholesale Banks are permitted to accept Singapore Dollar deposits from customers as long as the amount is at least S$250,000. Statement III is correct because Merchant Banks are approved under the Monetary Authority of Singapore Act (rather than the Banking Act) and are prohibited from accepting deposits from the general public.

Incorrect: Statement II is incorrect because Offshore Banks are allowed to accept Singapore Dollar deposits from non-residents, provided the deposit meets the minimum threshold of S$250,000. Statement IV is incorrect because Full Banks and Qualifying Full Banks have no such restrictions; they are explicitly permitted to serve mass retail clients and offer a full range of banking services.

Takeaway: Banking licenses in Singapore are categorized by their scope of activities and restrictions on Singapore Dollar deposits, with Full Banks having the broadest permissions and Merchant Banks being restricted from public deposit-taking. Therefore, statements I and III are correct.

Correct: Statement I is correct because the Securities and Futures (Licensing and Business Conduct) Regulations require the holder to explain risks and obtain written consent before lending customer securities. Statement III is correct because a custodian is permitted to claim a lien for charges specifically agreed upon for the administration or custody of the assets. Statement IV is correct because Regulation 35 explicitly lists making a deposit in accordance with Regulation 30 as an authorized reason for withdrawal.

Incorrect: Statement II is incorrect because if an excess occurs in the mortgage of customer assets due to a reduction in the amount owed, the CMS license holder must rectify the excess as promptly as practicable and no later than the next business day, not three business days.

Takeaway: CMS license holders must maintain strict control over customer assets, ensuring that any lending, mortgaging, or withdrawal is performed only under specific regulatory conditions and timelines. Therefore, statements I, III and IV are correct.

Correct: Engaging in any act, practice, or course of business which operates as a fraud or deception is a violation of SFA Section 201. This section prohibits any person from employing devices, schemes, or practices that defraud or deceive others in connection with securities transactions.

Incorrect: The option excluding omissions is wrong because Section 201 specifically includes omitting material facts as an offence. The option regarding electronic means and certainty is wrong because liability exists if the person does not care if the statement is true or false, and it applies to various dissemination methods. The option mentioning a $500,000 fine is wrong because the SFA Part XII Division 1 prescribes a maximum fine of $250,000 and 7 years imprisonment.

Takeaway: SFA Section 201 broadly prohibits the use of any manipulative or deceptive devices, including fraudulent practices and material omissions, in securities dealings.

Correct: The statement regarding liquidation without consent and recovery difficulties is correct because transactions on overseas exchanges rely on foreign brokers. If these counterparties fail or become insolvent, the customer’s positions may be closed out unilaterally, and the legal complexities of foreign jurisdictions can hinder the recovery of monies and assets.

Incorrect: The claim that MAS can compel foreign authorities is wrong because MAS lacks the jurisdiction to enforce rules or recovery in other countries. The idea that Singapore brokers must guarantee against foreign defaults is incorrect as the risk statement explicitly warns that performance depends on the counterparties. The suggestion that Singapore’s compensation schemes apply equally to overseas products is false, as investor protection and redress mechanisms vary significantly across different jurisdictions.

Takeaway: Investors in overseas-listed products face counterparty risks where the insolvency of a foreign correspondent broker can lead to unauthorized liquidation and asset recovery challenges.

Correct: The client having completed six transactions in investment-linked life insurance policies within three years is the right answer because Appendix B of the SFA04-N12 Notice states that transactions in either CIS or ILPs at least 6 times in the preceding three years satisfy the CKA for unlisted collective investment schemes.

Incorrect: The scenario involving two years of work experience is wrong because the regulation requires a minimum of 3 consecutive years of relevant work experience in the past 10 years. The scenario involving a mechanical engineering diploma is wrong because only specific fields like accountancy, business, or finance are recognized for CKA satisfaction. The scenario involving four transactions is wrong because the minimum threshold for investment experience is 6 transactions, not 4.

Takeaway: To satisfy the CKA for unlisted CIS through investment experience, a customer must have completed at least 6 transactions in CIS or ILPs within the preceding three years.

Correct: Statement I is correct because SFA Section 197(5) defines a lack of change in beneficial ownership as a situation where the person who had an interest before the trade continues to have an interest after the trade. Statement II is correct because matching orders involve the synchronized entry of buy and sell orders by known parties to create a false impression of market activity. Statement III is correct because SFA Section 198 specifically prohibits the execution of two or more transactions that have the effect of raising, maintaining, or stabilizing a security’s price.

Incorrect: Statement IV is incorrect because the prohibition on false trading is based on the intent to create a misleading appearance of active trading or price movement, regardless of whether a specific financial loss to other investors is actually realized.

Takeaway: Market conduct rules under the SFA strictly prohibit any artificial interference with natural market forces, such as wash sales or matching orders, to maintain market integrity. Therefore, statements I, II and III are correct.

Correct: Statement I is correct because a sudden shift from penny stocks to blue chips that cannot be reconciled with usual activities is a transaction that lacks economic sense. Statement II is correct because requests for investment management where the source of funds is inconsistent with the customer’s apparent standing is a recognized red flag. Statement IV is correct because providing minimal information that is difficult or expensive for the institution to verify is a characteristic of a suspicious customer.

Incorrect: Statement III is incorrect because the provision of bank guarantees or indemnities as collateral for loans between third parties is considered a suspicious transaction only when they are not in conformity with market conditions; if they are in conformity, they do not necessarily trigger this specific red flag.

Takeaway: Financial institutions must scrutinize transactions that lack a clear economic purpose or involve customers who are reluctant to provide verifiable information as these are key indicators of potential money laundering. Therefore, statements I, II and IV are correct.

Correct: Statement I is correct because the SFA Part XII Division 1 specifies that any person who contravenes the prohibited conduct provisions is liable on conviction to a fine not exceeding $250,000, imprisonment for a term not exceeding 7 years, or both. Statement II is correct because the definition of information being “generally available” includes deductions, conclusions, or inferences drawn from matter that has been made known to the investing public. Statement III is correct because for a connected person, the SFA establishes a statutory presumption that the person knew the information was not generally available and that it would have a material effect on the price of the security.

Incorrect: Statement IV is incorrect because the SFA explicitly states that it is irrelevant whether the person had an intention to use the inside information; the offence is based on the possession of the information and the subsequent trading or communication of it.

Takeaway: Market conduct regulations under the SFA impose strict penalties and legal presumptions for connected persons to ensure market integrity and prevent the misuse of non-public, material information. Therefore, statements I, II and III are correct.

Correct: Statement I is correct because, unlike connected insiders who are presumed to have knowledge, a non-connected person (tippee) is only liable if it is proven they had actual knowledge that the information was price-sensitive and not generally available. Statement III is correct because SFA Section 231 provides a specific defense known as ‘Parity of Information,’ which allows a transaction if both parties possess the same information and are thus on equal footing.

Incorrect: Statement II is incorrect because the current SFA provisions explicitly state that a tippee does not need to have an arrangement or association with an insider, nor do they need to receive the information directly from one. Statement IV is incorrect because the broker-dealer exemption under SFA Section 230 is strictly conditional on the instruction being unsolicited; if the representative solicited the trade, the exemption does not apply.

Takeaway: Insider trading liability for non-connected persons requires proof of actual knowledge of the information’s nature, though specific defenses like parity of information or unsolicited broker execution may apply. Therefore, statements I and III are correct.

Correct: A listed unit in a collective investment scheme that is a trust and invests primarily in real estate is classified as an Excluded Investment Product (EIP). According to the regulatory criteria, such a scheme must be a trust, invest primarily in real estate and real estate-related assets as specified by the Authority, and have its units listed for quotation on a securities exchange.

Incorrect: Asset-backed securities and structured notes are specifically excluded from the definition of debentures that qualify as EIPs, meaning they are treated as more complex products. A unit in a collective investment scheme is only considered an EIP if the manager is bound by the scheme’s documents not to engage in securities lending or repurchase transactions.

Takeaway: The EIP classification is reserved for straightforward investment products, specifically excluding complex structures like asset-backed securities, structured notes, or funds that utilize securities lending.

Correct: Statement I is correct because the MAS guidelines specifically identify individuals aged 17-26 performing rapid fund movements as a potential indicator of terrorism financing. Statement II is correct as frequent, unexplained changes to account details like addresses or signatories are recognized red flags for suspicious activity. Statement IV is correct because merchant refunds issued without an underlying commercial transaction are a known method for laundering funds through credit systems.

Incorrect: Statement III is incorrect because, while margin financing is a common service, the specific pattern of receiving large funds and immediately using them as collateral is flagged in Appendix E as a suspicious transaction pattern that requires further investigation, rather than being treated as a standard, non-suspicious practice.

Takeaway: Financial institutions must monitor for specific behavioral patterns, such as rapid fund movements by young persons or unexplained administrative changes, which serve as indicators of potential money laundering or terrorism financing. Therefore, statements I, II and IV are correct.

Correct: Statement I is correct because the SFA defines securities hawking as making an offer of securities in an unsolicited meeting to prevent pressure selling or “boiler room” practices. Statement III is correct because the statutory penalty for a first-time conviction is a fine not exceeding $10,000, imprisonment for up to 6 months, or both. Statement IV is correct because the prohibition is not triggered if the representative obtains the customer’s consent or enquires about their interest before the approach.

Incorrect: Statement II is incorrect because the SFA explicitly states that the securities hawking prohibition does not apply to offers made to institutional investors or accredited investors, as these groups are considered sophisticated enough to not require this specific protection.

Takeaway: The securities hawking regime under the SFA protects retail investors from unsolicited pressure selling while providing exemptions for sophisticated investors and instances where prior consent is obtained. Therefore, statements I, III and IV are correct.

Correct: The CMS license holder must maintain collateral at 100% of the market value and explain the risks of the arrangement to the customer because SFR (LCB) 45 mandates that collateral must be at least 100% of the market value throughout the arrangement and requires the license holder to explain the risks and obtain the customer’s understanding in writing.

Incorrect: The option specifying a 150% collateral requirement is wrong because the regulation explicitly sets the threshold at 100% of the market value. The option stating that risk explanations are only for accredited investors is wrong because the requirement to explain risks applies to customers generally, while the accredited investor exemption specifically relates to the collateral requirement when the license holder borrows from them. The option mentioning 120% collateral and Singapore law is wrong because the statutory collateral level is 100%.

Takeaway: CMS license holders must ensure securities borrowing and lending arrangements are backed by 100% collateral and that all participants receive a formal explanation of the risks involved.

Correct: Statement I is correct because the use of night safe facilities or cash deposit machines to intentionally avoid direct contact with financial institution staff is a recognized indicator of suspicious activity. Statement II is correct because ‘structuring’ deposits—using numerous small credit slips to avoid triggering thresholds while reaching a substantial cumulative total—is a classic red flag for money laundering. Statement IV is correct because ‘U-turn’ transactions, where funds are received from a foreign jurisdiction and immediately remitted back to the same jurisdiction, often lack a legitimate commercial purpose.

Incorrect: Statement III is incorrect because the purchase of securities for safe custody is a legitimate financial service; it only becomes suspicious if the transaction is inappropriate given the customer’s specific financial standing or background, rather than being ‘always’ suspicious.

Takeaway: Compliance monitoring should focus on identifying behavioral patterns, such as avoiding face-to-face contact or structuring cash flows, that deviate from standard economic activities or the client’s known profile. Therefore, statements I, II and IV are correct.

Correct: The civil penalty proceedings must be stayed pending the outcome of the criminal proceedings is the right answer because Section 233 of the SFA explicitly states that ongoing civil penalty proceedings must be stayed if criminal proceedings are commenced against the defendant based on the same set of facts. This prioritization ensures that the criminal process is resolved before civil sanctions are finalized.

Incorrect: The suggestion that proceedings continue concurrently is wrong because the law mandates a stay to avoid parallel litigation on the same facts. The claim that proceedings are immediately terminated is incorrect because the civil action is only paused; it could potentially resume if the criminal charge is withdrawn. The idea that criminal proceedings must be stayed is wrong as the SFA prioritizes criminal prosecution over civil penalty actions.

Takeaway: Under the Securities and Futures Act, criminal proceedings take precedence over civil penalty proceedings, requiring the latter to be stayed if both are initiated for the same conduct.

Correct: A bank licensed under the Banking Act, a merchant bank approved under the MAS Act, or a finance company licensed under the Finance Companies Act is the right answer because these are the three specific types of institutions authorized to hold customer trust accounts under the Securities and Futures (Licensing and Conduct of Business) Regulations. This regulatory framework ensures that customer funds are only held in highly regulated, deposit-taking institutions to minimize the risk of loss.

Incorrect: The option excluding finance companies is wrong because the Finance Companies Act specifically qualifies these institutions to hold trust moneys alongside banks and merchant banks. The option regarding ACRA registration is wrong because ACRA is a corporate registry and does not grant the specific regulatory status required for trust account maintenance under the SFA. The option requiring SGX-ST membership for the bank is wrong because no such membership requirement exists for an institution to act as a depository for a trust account.

Takeaway: CMS licensees must safeguard customer money by depositing it into trust accounts maintained with a licensed bank, an approved merchant bank, or a licensed finance company.

Correct: The requirement to only invest funds in excess of $40,000 from the Special Account is a fundamental rule for CPFIS-SA to ensure a minimum retirement sum is preserved within the account.

Incorrect: Opening a CPF Investment Account with an agent bank is a requirement exclusive to the CPFIS-OA and is not needed for Special Account transactions. The 35% investment limit for shares and property funds applies only to Ordinary Account savings, as these products are not listed as eligible for Special Account investments. Gold investments, including ETFs and physical products, are also restricted to the Ordinary Account and cannot be purchased using Special Account funds.

Takeaway: CPFIS-SA has more conservative investment options and higher minimum balance requirements than CPFIS-OA to safeguard long-term retirement savings.

Correct: Statement I is correct because the Securities and Futures Act (SFA) explicitly grants MAS the power to approve securities exchanges and review any amendments to their rules and regulations. Statement III is correct because MAS is the primary authority responsible for the administration of the SFA and its related regulations, such as those concerning licensing and business conduct. Statement IV is correct because managing the official foreign reserves of Singapore is one of the four core functions of MAS as defined in the MAS Act.

Incorrect: Statement II is incorrect because while finance companies may be granted an exception under Section 25(2) and are referred to as exempted institutions, the source text explicitly states they remain subject to MAS’ regulation, supervision, and inspections.

Takeaway: MAS serves as the integrated regulator for Singapore’s financial sector, wielding broad powers under the SFA to oversee market participants and maintain financial stability. Therefore, statements I, III and IV are correct.

Correct: The firm will be subject to lower capital requirements for its trade and default fund exposures under the Basel III framework is the right answer because SGX-DC is a Qualifying CCP. Under the Basel III framework, members of Qualifying CCPs benefit from reduced capital charges on their trade and default fund exposures, leading to lower overall capital costs.

Incorrect: The claim that a firm is exempt from all capital adequacy standards is wrong because membership only reduces the capital requirement for specific exposures rather than eliminating capital rules entirely. The suggestion that a firm receives a direct financial subsidy from the regulator is incorrect as the benefit is a reduction in regulatory capital charges, not a cash payment. The option regarding bypassing registration processes is wrong because SGX-DC members must still use the required industry registration systems to clear OTC financial derivatives.

Takeaway: Membership in a Qualifying CCP like SGX-DC allows financial institutions to benefit from lower capital requirements for trade and default fund exposures under the Basel III framework.

Correct: Statement I is correct because the CPFIS guidelines specifically state that for endowment insurance policies, the maturity date must not be later than the member’s 62nd birthday. Statement II is correct because corporate bonds must meet minimum credit rating requirements, which include being rated at least A2 by Moody’s or A by Standard and Poor’s.

Incorrect: Statement III is incorrect because the CPF Board mandates that the sales charge for Unit Trusts included under the scheme must not exceed 3%, rather than 5%. Statement IV is incorrect because only shares listed on the SGX MainBoard are eligible for investment under CPFIS-OA; shares listed on the Catalist board do not meet the inclusion criteria.

Takeaway: Products included under the CPFIS must strictly adhere to specific eligibility criteria regarding credit ratings, listing platforms, fee caps, and maturity timelines to ensure member protection. Therefore, statements I and II are correct.

Correct: Statement I is correct because locally incorporated banks offering CPFIS fixed deposits must maintain minimum capital funds of S$1.5 billion and a good credit rating. Statement III is correct because members can sell SGX-listed investments one trading day after the purchase date, provided the agent bank accepts it as a CPFIS-OA trade and the broker keyed the trade on the contract date.

Incorrect: Statement II is incorrect because Statutory Board Bonds are only included if they are NOT offered solely to institutional or accredited investors under Section 274 or 275 of the SFA; they must be available to the general public. Statement IV is incorrect because the regulations explicitly state that investments made under the CPFIS cannot be assigned, pledged, or used as collateral for any purpose.

Takeaway: CPFIS investments are subject to strict eligibility criteria regarding the financial strength of providers and the accessibility of products to retail investors, while prohibiting the use of these assets as loan security. Therefore, statements I and III are correct.