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

Correct: The requirement for Singapore incorporation and MainBoard listing is correct because the CPFIS criteria for corporate bonds specify that the issuing company must be incorporated locally and the security must be listed on the primary exchange board to ensure sufficient oversight and liquidity for CPF members.

Incorrect: The statement regarding institutional and accredited investors is wrong because CPFIS-eligible bonds must be available to the general public and not restricted to sophisticated investors only. The statement about credit ratings is wrong because the minimum rating required is higher, specifically A2 for Moody’s or A for S&P and Fitch. The statement about the Catalist board is wrong because eligibility is strictly limited to bonds listed on the SGX MainBoard.

Takeaway: Corporate bonds must meet stringent listing, incorporation, and credit rating standards to be eligible for investment using CPF Ordinary Account funds.

Correct: Statement I is correct because companies in the mining, oil, and gas (MOG) sector that have not yet reached the production stage are required to meet a higher market capitalization threshold of at least S$300 million for a Mainboard listing. Statement II is correct because all MOG listing aspirants must demonstrate they have identified a minimum level of resources, which for mineral companies is defined as at least ‘Indicated Resources’. Statement IV is correct because every company listing on the Mainboard must appoint at least two independent directors who are resident in Singapore.

Incorrect: Statement III is incorrect because the moratorium rules for promoters are not a total 12-month ban on all share sales. Promoters are prohibited from selling any of their shareholdings for the first 6 months after the IPO, but they are permitted to sell up to 50% of their original holdings during the subsequent 6-month period.

Takeaway: Companies seeking a Mainboard listing must navigate specific quantitative thresholds based on their industry and stage of production, while adhering to mandatory governance standards regarding director residency and promoter share lock-up periods. Therefore, statements I, II and IV are correct.

Correct: A member who is an undischarged bankrupt must still satisfy the CPF Minimum Sum and Medisave Minimum Sum requirements upon reaching age 55 before any CPFIS investments or cash balances can be withdrawn. This ensures that the primary purpose of the CPF—providing for retirement—is maintained even in the event of insolvency.

Incorrect: The suggestion that investments are immediately available for debt settlement is wrong because the standard withdrawal criteria regarding minimum sums still apply regardless of bankruptcy status. The idea that a bankrupt can make new investments is incorrect as they are specifically prohibited from using CPF funds for new investment transactions once they are declared bankrupt. The claim that the Official Assignee can seize funds within the account is wrong because these assets are legally protected from creditors and the Official Assignee as long as they remain within the investment scheme.

Takeaway: While CPFIS assets are protected from creditors during bankruptcy, the member must still meet the prevailing minimum sum requirements to qualify for withdrawal at age 55.

Correct: Promoters holding less than 50% of the post-invitation share capital are restricted from selling any shares during the initial offering. They must also observe a total lock-up period for the first six months following the listing.

Incorrect: The suggestion that promoters can sell half their holdings at the IPO is incorrect because the ability to sell at the IPO only applies if their post-invitation holding remains above 50%. The option mentioning a 25% threshold is wrong as the regulatory benchmark for maintaining control post-IPO is 50%. The claim that a full lock-up lasts twelve months is inaccurate because the rules allow for the sale of up to 50% of the holding after the first six months have passed.

Takeaway: Promoters with less than a 50% stake at IPO face a strict six-month total moratorium and are barred from selling shares during the initial public offering.

Correct: Statement III is correct because the three stages of money laundering—placement, layering, and integration—do not need to take place in a sequential or linear order. They can occur simultaneously or in any sequence depending on the complexity of the laundering scheme.

Incorrect: Statement I is incorrect because it is a true statement; the placement stage involves the physical entry of illicit funds into the financial system, often through banks. Statement II is incorrect because it is a true statement; capital markets are highly attractive for the layering stage because liquid assets can be easily converted to disguise the audit trail. Statement IV is incorrect because it is a true statement; a beneficial owner is defined as the natural person who ultimately owns or controls the customer or exercises ultimate effective control.

Takeaway: Money laundering involves three stages—placement, layering, and integration—which can occur in any order, and identifying the ultimate natural person in control is essential for determining beneficial ownership. Therefore, statement III is correct.

Correct: Providing at least 14 days for ordinary resolutions and 21 days for special resolutions is required because the rules distinguish between the complexity of the business being discussed. Ordinary resolutions require less lead time, whereas special resolutions require a longer period to allow shareholders to properly evaluate the proposed changes.

Incorrect: Providing only 14 days for all resolutions is incorrect because it fails to account for the longer notice period specifically mandated for special resolutions. Requiring 21 days for all resolutions whenever a special resolution is present is wrong because the 14-day rule remains the minimum standard for ordinary resolutions. A 28-day notice period is incorrect as it overstates the actual minimum legal requirement of 21 days for special resolutions.

Takeaway: Minimum notice periods for shareholder meetings are differentiated by the type of resolution, requiring 14 days for ordinary resolutions and 21 days for special resolutions.

Correct: Refusing the client relationship is the right answer because bearer share companies do not maintain a register of shareholders, making it nearly impossible for an institution to verify the identity of the ultimate beneficial owner with certainty.

Incorrect: The suggestion to accept the client if certificates are deposited is insufficient because a holder could still claim the shares are lost to obtain replacements, maintaining the risk of hidden ownership. The option regarding call-backs is a measure used to prevent fraud and verify trade instructions, but it does not address the fundamental issue of identifying who actually owns the company. Requiring a legal indemnity is not a standard regulatory solution for the transparency issues presented by bearer shares and does not fulfill the institution’s duty to identify the beneficial owner.

Takeaway: Due to the high risk of money laundering and the difficulty in identifying beneficial owners, the most robust policy for financial institutions is to avoid establishing relationships with companies that use bearer shares.

Correct: Statement I is correct because financial institutions are required to perform due diligence to identify the ultimate beneficial owners of a structure to prevent being used as a vehicle for money laundering. Statement III is correct because sanctions are defined as partial embargoes that target specific types of products, services, or technologies rather than imposing a total ban on all financial dealings with a country.

Incorrect: Statement II is incorrect because terrorism financing can involve funds from both illegitimate sources, like robbery, and legitimate sources, such as business profits or charitable donations. Statement IV is incorrect because the initial entry of cash into the financial system is known as the placement stage, while the integration stage is the final phase where funds are returned to the client as seemingly legitimate wealth.

Takeaway: Robust due diligence must extend to identifying beneficial owners and recognizing that terrorism financing can originate from entirely legal sources of income. Therefore, statements I and III are correct.

Correct: Maintaining a minimum base capital of $500,000 is required because the firm is acting as an introducing broker. In this role, the firm accepts customer money for settlement but does not carry customer positions or margins on its own books, necessitating this specific capital threshold to ensure financial resilience.

Incorrect: The requirement of $5,000,000 is incorrect as it applies only to clearing members of an approved clearing house who face higher systemic risks. The $1,000,000 requirement is incorrect because it is for standard non-clearing members or non-members who do not qualify for the specific introducing or restricted broker categories. The $250,000 requirement is incorrect because it applies to restricted brokers who deal only with accredited investors and are strictly prohibited from accepting customer money or assets.

Takeaway: Base capital requirements are tiered based on the risk and scope of the firm’s activities, with specific thresholds for introducing brokers who handle customer funds without carrying positions.

Correct: Assisting another to retain benefits of criminal conduct by arrangement is the right answer because the consultant entered into a specific setup that facilitated the client’s ability to keep or manage money derived from illegal acts. The law prohibits professionals from being involved in any scheme that helps a third party keep control of, or invest, their criminal proceeds.

Incorrect: The option about acquiring property for inadequate consideration is wrong because this offence occurs when a person takes possession of criminal property for themselves without paying a fair market value. The option regarding laundering own benefits is wrong because it only applies when the individual is trying to hide the proceeds of their own personal crimes. The option about disclosing information to prejudice an investigation is wrong because that refers to tipping-off, which involves warning a person about a potential or ongoing regulatory inquiry.

Takeaway: Facilitating the flow or retention of a client’s criminal funds through professional arrangements is a serious offence, regardless of whether the professional personally benefits from the assets.

Correct: Submitting a report to the designated officer while maintaining confidentiality regarding the report is the right action. When a professional has reasonable grounds to suspect criminal proceeds, they have a legal duty to disclose this information to the authorities. This disclosure is protected by law and does not constitute a breach of professional secrecy, contract, or rules of conduct.

Incorrect: Notifying the client that they are being investigated is wrong because it is a criminal offence to disclose information that is likely to prejudice an investigation, often referred to as tipping off. Waiting for client consent is incorrect because the law provides comprehensive statutory protection to those making reports, overriding any secrecy laws or contractual obligations. Only keeping records for five years is a separate regulatory requirement and does not fulfill the mandatory obligation to report suspicious transactions as soon as they are identified.

Takeaway: Financial professionals must report suspicious activities to the authorities and must never tip off the client, as the duty to report overrides confidentiality and protects the integrity of investigations.

Correct: Statement I is correct because provisional representatives are granted a three-month grace period to fulfill their examination requirements while they are already active in the industry, provided they meet specific overseas experience criteria. Statement II is correct because the regulatory framework limits temporary appointments to short-term durations, specifically three months per stint and a total of six months over any twenty-four-month period.

Incorrect: Statement III is incorrect because the default rule restricts a representative to a single principal to ensure clear supervision and accountability; acting for multiple principals is only permitted for related corporations or with specific regulatory approval, not simply through firm consent. Statement IV is incorrect because while an individual faces a $50,000 fine for unregistered activity, a financial institution that permits such activity is subject to a significantly higher maximum fine of $150,000.

Takeaway: The regulatory framework maintains strict registration categories and a one-principal rule to ensure that representatives are properly supervised and that accountability for their actions is clearly defined. Therefore, statements I and II are correct.

Correct: Statement I is correct because licensed firms are required to notify the regulator within 14 days of any change to their principal place of business to ensure public records remain accurate. Statement II is correct because the board of directors must have a minimum of two members, and at least one of these members must be a resident of Singapore to ensure local accountability. Statement III is correct because the appointment of a Chief Executive Officer or a resident director requires the regulator’s approval before the appointment can take effect.

Incorrect: Statement IV is incorrect because the regulation requires a licensed corporation to employ at least two full-time individuals for each regulated activity it is licensed to conduct, rather than just one. This ensures there is sufficient professional capacity and oversight for the firm’s operations.

Takeaway: Licensed firms must maintain specific board and staffing minimums and are required to obtain prior regulatory approval for key leadership appointments while reporting administrative changes within a strict 14-day window. Therefore, statements I, II and III are correct.

Correct: Immediately freezing funds and notifying the regulator is the required action because regulatory requirements mandate that financial institutions take swift action against designated individuals or entities identified by the UN Security Council to prevent the movement of assets that could threaten international security.

Incorrect: Waiting for a court-issued Restraint Order is wrong because sanctions require immediate action without waiting for specific judicial orders related to local criminal investigations. Conducting enhanced due diligence is wrong because while it is used for high-risk jurisdictions, it does not replace the mandatory requirement to freeze assets of specifically designated persons. Transferring funds to an escrow account within two days is wrong because the primary legal obligation is to freeze the assets in place and notify the authorities immediately rather than performing a transfer.

Takeaway: Financial institutions must immediately freeze the assets of UN-designated individuals and entities and report the findings to the regulator to comply with international sanctions.

Correct: Statement I is correct because representatives are required to notify their principal firm of any changes to their personal particulars, including a change in residential address, within 7 days of the change. Statement II is correct because the principal firm is then obligated to notify the regulator of these updated particulars within 14 days of the change occurring. Statement III is correct because the status of an appointed representative automatically ceases if the individual stops performing regulated activities for a continuous period of one month without a formal cessation notice being filed.

Incorrect: Statement IV is incorrect because the public register is intended to provide professional transparency, not personal details. It displays the representative’s name, their authorized activities, their employment history for the past three years, and any regulatory actions taken against them, but it specifically excludes private information such as a residential address.

Takeaway: Representatives and firms must strictly observe the 7-day and 14-day notification windows for personal updates, and be aware that a one-month period of inactivity will lead to the cessation of representative status. Therefore, statements I, II and III are correct.

Correct: The statement regarding the primary market is incorrect. The primary market is specifically for capital-raising activities where businesses issue new securities like shares or bonds to investors for the first time. Selling existing holdings to realize a profit or to remove poorly performing instruments from a portfolio are activities that occur in the secondary market, which facilitates the trading of previously issued securities.

Incorrect: The statement about the secondary market is true because it allows for risk transfer and management through the trading of instruments like futures and options. The statement about regulated exchanges is true because they serve as centralized markets that allow for efficient price and quantity discovery. The statement about over-the-counter markets is true as they are known as ‘call around’ markets where participants interact directly to determine trading interest.

Takeaway: The primary market is for the initial issuance of securities to raise capital, while the secondary market is for the subsequent trading and risk management of those securities.

Correct: Statement I is correct because an applicant who has at least two GCE ‘O’ Level credit passes can meet the education requirement if they have three continuous years of relevant working experience over the last five years. Statement II is correct because the financial soundness pillar of the fit and proper criteria specifically disqualifies individuals who are undischarged bankrupts, whether the bankruptcy occurred in Singapore or in another jurisdiction. Statement III is correct because firms are explicitly expected to conduct independent due diligence, which includes verifying the representative’s identity and searching the MAS Public Register of Representatives.

Incorrect: Statement IV is incorrect because the onus is on the CMS licence holder to conduct rigorous and independent checks, such as reference checks with previous employers; a candidate’s self-declaration does not exempt the firm from its duty to verify past performance and conduct.

Takeaway: To be registered as a representative, an individual must meet specific age, education, and exam requirements while the hiring firm must perform independent due diligence to confirm their fitness and propriety. Therefore, statements I, II and III are correct.

Correct: Statement I is correct because financial institutions are required to apply the full suite of anti-money laundering and countering the financing of terrorism measures, including rigorous customer due diligence and transaction monitoring, to prevent the laundering of proceeds from tax crimes. Statement II is correct because under the governing Act, a financial institution that is in breach of MAS Regulations is guilty of an offence and liable on conviction to a fine not exceeding $1 million.

Incorrect: Statement III is incorrect because the designation of tax evasion and serious fraudulent tax evasion as money laundering predicate offences does not depend on a specific monetary threshold according to the regulations. Statement IV is incorrect because the board of directors and senior management are ultimately responsible and accountable for ensuring compliance with financial crime laws, rather than the responsibility resting solely with the compliance department.

Takeaway: Financial institutions must treat serious tax crimes as money laundering predicate offences, and the ultimate accountability for the firm’s AML/CFT framework rests with its board and senior management. Therefore, statements I and II are correct.

Correct: The statement regarding the 24-month look-back period is the right answer because it is false. Under the regulations, if an advertisement refers to past recommendations, it must list all recommendations (both profitable and unprofitable) made in at least the 12 months immediately preceding the date of the advertisement, not 24 months.

Incorrect: The statement about disclosing limitations for investment strategies is true, as firms must prominently explain the difficulties and risks associated with any chart or formula used to determine trade timing. The statement regarding the prohibition of claiming regulatory approval is true, as firms are strictly forbidden from representing that their abilities or qualifications have been endorsed by the Authority. The statement about free services is also true, as any report or analysis advertised as free must be provided in its complete form without any hidden conditions or obligations.

Takeaway: When advertising past performance, firms must provide a complete and balanced 12-month history of all recommendations and include a prominent warning that past results do not guarantee future performance.

Correct: Statement I is correct because the validity of a Customer Account Review (CAR) for listed products can be extended for another three years if the customer has transacted in those products more than once during the preceding three-year period. Statement II is correct because the Customer Knowledge Assessment (CKA) for unlisted products has a much shorter validity period of only one year, requiring a new assessment once that time has elapsed.

Incorrect: Statement III is incorrect because the senior management member responsible for approving the account must be independent; they cannot be a connected person of the customer and must not be involved in the actual account opening process. Statement IV is incorrect because even if a customer is assessed to have the necessary knowledge for unlisted products, the firm is still required to offer to provide advice; if the customer chooses to proceed without it, that decision must be documented.

Takeaway: Assessments for listed and unlisted investment products have different expiration timelines (three years versus one year) and require independent management oversight to ensure the account opening process remains objective. Therefore, statements I and II are correct.

Correct: Classifying the ETF as a Specified Investment Product is the required action because the firm has not implemented a system to identify and determine if the overseas-listed product qualifies as an Excluded Investment Product. When a product is not identified as an Excluded Investment Product, it must be treated as a Specified Investment Product, which triggers the requirement to conduct a Customer Account Review. Additionally, for any first-time transaction in an overseas-listed investment product, the firm must provide a risk warning statement and obtain the customer’s acknowledgement.

Incorrect: The option to classify the ETF as an Excluded Investment Product without a system is wrong because the default classification for overseas-listed products is a Specified Investment Product unless a specific identification system is in place. The option to delay the transaction for a foreign regulator’s classification is incorrect because the responsibility for implementing a classification system and ensuring accuracy lies with the local intermediary, not the foreign exchange. The option regarding verbal acknowledgement is wrong because the risk warning must be a formal statement, and the firm is required to maintain a record of the customer’s acknowledgement for at least five years.

Takeaway: If an intermediary lacks a system to classify overseas-listed products as Excluded Investment Products, they must treat them as Specified Investment Products and ensure all risk warning and assessment requirements are met.

Correct: The statement suggesting that financial institutions should maintain a static risk scoring system is incorrect. Regulatory guidance emphasizes that risk scoring must be dynamic, meaning the system should be capable of updating and accounting for changes in transaction volumes or other new, relevant information that could alter a client’s risk profile.

Incorrect: The statement regarding cash-intensive businesses is true because entities like restaurants and convenience stores are recognized as higher risk due to the ease with which illegitimate income can be mixed with genuine business proceeds. The statement about country risk is true as jurisdictions like Australia and the United Kingdom are categorized as low-risk based on factors such as governance and transparency. The statement about alternative remittance systems is true because these businesses, along with money service providers, are specifically identified as being exposed to higher money laundering and terrorist financing risks.

Takeaway: Effective risk management requires a dynamic scoring system that identifies and adapts to the higher risks associated with specific cash-heavy industries and high-risk jurisdictions.

Correct: A private investment vehicle managed by a boutique fund manager that is not supervised by a regulator in a FATF-compliant jurisdiction is the right answer because it does not fall under the specific categories that allow for an exemption from identifying ultimate beneficial owners. For an investment vehicle to be exempt from these inquiries, its managers must be supervised by the local regulator or a foreign regulator that adheres to international standards for anti-money laundering and countering the financing of terrorism.

Incorrect: The option regarding the SGX-listed company is wrong because entities listed on exchanges with adequate transparency and disclosure requirements are exempt from beneficial owner inquiries. The option regarding the MAS-supervised manager is wrong because investment vehicles managed by locally supervised financial institutions are specifically excluded from the requirement to identify ultimate beneficial owners. The option regarding the foreign financial institution is wrong because institutions supervised under standards consistent with international task force requirements are also exempt.

Takeaway: To streamline onboarding, firms are not required to identify ultimate beneficial owners for entities that are already subject to significant regulatory oversight or public disclosure requirements.

Correct: Issuing the note by the next business day after the detail becomes available is correct because the regulations allow for an extension to the standard reporting timeline specifically when necessary transaction information is not immediately accessible at the time of the trade.

Incorrect: The requirement to send the note by the next market day following the transaction is incorrect in this specific case because it fails to account for the permitted delay when transaction details are missing. The suggestion of a seven business day window is incorrect as it far exceeds the prompt notification period required for securities transactions. The instruction to issue the note immediately is incorrect because a contract note must contain specific, accurate data that was not yet available to the firm in this scenario.

Takeaway: While the standard deadline for contract notes is the next market day, firms are granted until the next business day after missing transaction details become available to ensure the document is complete and accurate.

Correct: Statement I is correct because firms are exempt from the monthly statement requirement for Accredited Investors who have agreed to access their account information via real-time electronic statements. Statement III is correct because the regulations specify that the status of all customer assets must be reported, including those held by third parties for collateral or lending.

Incorrect: Statement II is incorrect because the firm is not required to include financial charges in the monthly statement if those charges have already been disclosed in a contract note or tax invoice. Statement IV is incorrect because the law requires that all books and records, including customer statements, be kept for at least five years to ensure they are available for audit.

Takeaway: Licensed firms must ensure comprehensive reporting of asset positions and movements while adhering to a five-year record retention policy, though exemptions exist for sophisticated investors with digital access. Therefore, statements I and III are correct.

Correct: Obtaining senior management approval to continue a relationship with a Politically Exposed Person (PEP) is a mandatory Enhanced Due Diligence (EDD) measure. This requirement applies whether the client is a PEP at the start of the relationship or becomes one later. Furthermore, the institution must use reasonable means to establish the source of wealth and funds for any customer or beneficial owner identified as a PEP.

Incorrect: The suggestion to freeze the account and file a report within fifteen days is wrong because being a PEP is a risk factor that triggers enhanced monitoring, not an automatic suspicion of criminal activity requiring a report. The suggestion regarding the Personal Data Protection Commission is incorrect because while the PDPA governs data confidentiality, it does not require reporting PEP status to that specific commission for auditing. The suggestion to terminate the relationship and retain records for ten years is incorrect because the regulatory retention period for client information and transactions is five years, and being a PEP does not necessitate the termination of a business relationship.

Takeaway: Financial institutions must perform Enhanced Due Diligence on Politically Exposed Persons, which specifically requires senior management approval to maintain the relationship and verification of the source of wealth and funds.

Correct: David must not deposit any client funds into this specific account is the right answer because regulations require a firm to obtain a formal written acknowledgement from the financial institution before any deposits are made. This acknowledgement must explicitly state that the institution will not exercise any right of set-off against the funds for debts the firm might owe, ensuring the client’s money is protected.

Incorrect: The suggestion that labeling the account is sufficient is wrong because the rules require both the designation of the account and the specific waiver of set-off rights. The suggestion to proceed with internal indemnity is wrong because regulatory requirements for third-party bank acknowledgements cannot be substituted by internal firm guarantees. The option regarding monthly statements is wrong because, while statements are part of normal business, they do not satisfy the requirement to prevent the bank from seizing trust funds to cover the firm’s liabilities.

Takeaway: A firm cannot use a bank account for client moneys unless the bank has provided a written acknowledgement that it waives its right to set-off firm debts against those funds.

Correct: The auditor is required to immediately send a written report to the regulator if they discover any matter that could adversely affect the firm’s financial position or involves fraud. This ensures the regulator can take swift action to protect customer assets and maintain market integrity.

Incorrect: The suggestion to wait for an internal investigation is incorrect because the legal duty to report to the regulator is immediate and independent of the firm’s internal reviews. Limiting the disclosure to the final annual audit report is wrong because serious irregularities require urgent notification outside the standard five-month filing window. The idea that reporting depends on a specific percentage threshold is incorrect because any suspicion of fraud or dishonesty must be reported regardless of the numerical value.

Takeaway: Auditors must act as a critical line of defense by reporting material irregularities or fraud to the regulator immediately upon discovery.

Correct: Statement I is correct because immediate family members and close associates of individuals with prominent public functions are classified as Politically Exposed Persons (PEPs), requiring enhanced scrutiny. Statement III is correct because a client being evasive about their source of wealth is a specific red flag that must be immediately escalated to a supervisor or the compliance department. Statement IV is correct because while a financial institution is permitted to rely on certain third parties to perform due diligence, the ultimate responsibility for meeting regulatory obligations remains with the institution itself.

Incorrect: Statement II is incorrect because personal asset holding vehicles are specifically identified as high-risk entities that require Enhanced Due Diligence (EDD). Simplified Customer Due Diligence (SCDD) is only permitted for low-risk cases, such as Singapore government entities or companies listed on a stock exchange with transparent ownership disclosure.

Takeaway: Financial institutions must apply enhanced due diligence to high-risk profiles like PEP associates and personal asset vehicles, and they retain full regulatory accountability even when relying on third-party intermediaries. Therefore, statements I, III and IV are correct.

Correct: Statement I is correct because a CMS licensee is permitted to invest customer trust money in debt instruments issued by the government of the country where the relevant securities or futures market is located. Statement III is correct because the licensee is allowed to withdraw funds from a trust account to reimburse itself for its own money that was previously advanced to prevent the account from becoming under-funded, provided the withdrawal does not leave the account under-margined.

Incorrect: Statement II is incorrect because interest and returns earned from the investment of customer trust money must accrue to the customer, not the licensee. Statement IV is incorrect because the required transaction records must include specific details, including the place where the moneys and assets are kept, rather than just the date and amount.

Takeaway: While licensees have some flexibility to invest trust money and reimburse themselves for advances, they must ensure all investment returns benefit the customer and maintain detailed records of asset locations. Therefore, statements I and III are correct.