RES 3 – Rules, Ethics and Skills for Fund Management

Correct: The decision to sell was made by a person other than Sarah, and Zenith had robust arrangements to prevent Sarah from communicating the information is the right answer because a corporation is generally presumed to possess any information held by its officers. To successfully use the Chinese Wall defense, the firm must prove that the person making the investment decision was not the person who held the inside information, and that the firm had pre-existing, effective arrangements in place to ensure no communication or advice regarding the transaction occurred between those parties.

Incorrect: The statement regarding the intention to protect client interests is wrong because the lack of a profit-seeking motive or the presence of a ‘good’ intention does not provide a defense against the attribution of knowledge rules. The option about Sarah issuing a formal written warning is wrong because ad hoc or inconsistent arrangements, such as a one-time warning, are insufficient to meet the legal standard for a Chinese Wall defense, which requires established operations and procedures. The option regarding public rumors is wrong because the possession of non-public, material information by an officer still triggers corporate liability regardless of whether vague rumors exist in the market.

Takeaway: To avoid liability for insider trading through the attribution of knowledge, a corporation must maintain strict, pre-existing internal barriers that ensure information is not shared with those making investment decisions.

Correct: Investing up to 10% of the NAV after demonstrating to the trustee that the internal rating methodology is comparable to major agencies is the right answer because while unrated corporate debt is generally capped at a 5% limit, the manager can use the standard 10% limit if they satisfy the trustee that their internal rating process is equivalent to those of major international rating agencies.

Incorrect: The option suggesting immediate investment based on internal credit team approval is wrong because the manager cannot unilaterally decide to use an internal rating; they must first satisfy the trustee that the methodology is comparable to established agencies. The option limiting the investment to 5% regardless of internal ratings is wrong because the regulations specifically provide a pathway to use internal ratings to avoid the lower cap. The option regarding the parent company being a government agency is wrong because, while parent guarantees are relevant, the specific rule for unrated corporate debt allows internal ratings as a distinct path provided the trustee is satisfied with the methodology.

Takeaway: For unrated corporate debt, the standard 10% single entity limit is reduced to 5% unless the manager can prove to the trustee that their internal rating system is comparable to established international rating agencies.

Correct: Sarah is classified as a tippee because she is a non-connected person who has come into possession of non-public, price-sensitive information. Under the regulations, a tippee is prohibited from trading if they have actual knowledge that the information is not generally available and that it would likely have a material effect on the price or value of the securities.

Incorrect: The claim that information must come from a specific officer like a director is incorrect because a tippee can receive information from any source, including third-party consultants or other intermediaries. The statement regarding the need for a formal arrangement is wrong because the law specifically removes the requirement for a tippee to have an association or arrangement with an insider. The assertion that knowledge is automatically presumed is incorrect because the shift in the burden of proof applies only to connected insiders; for non-connected tippees, actual knowledge must be proven.

Takeaway: Liability for insider trading for a non-connected person (tippee) depends on their actual knowledge of the information’s confidential and price-sensitive nature, regardless of the source.

Correct: The manager must not invest in the underlying fund because there is a specific restriction preventing retail schemes from investing in hedge funds or fund-of-hedge funds. This rule applies even if the underlying fund is an authorized or recognized scheme that otherwise meets regulatory requirements.

Incorrect: The idea that the investment is permitted if it stays within the 10% single entity limit is wrong because quantitative limits do not authorize investments that are fundamentally prohibited by their nature. The belief that a reputable manager or acceptable supervision is sufficient is incorrect because the specific ban on hedge funds takes precedence over the general quality of the manager. The requirement for listing on an exchange is a condition for different categories of underlying investments and does not remove the prohibition on hedge funds.

Takeaway: Retail schemes are strictly prohibited from investing in hedge funds or fund-of-hedge funds, regardless of whether the underlying fund is authorized or complies with standard investment guidelines.

Correct: The receipt of soft dollar commissions is permissible only when the goods or services provided, such as investment research or analytical software, directly assist the manager in the investment decision-making process for the client. Additionally, the manager must ensure that the broker provides best execution and that the soft dollar arrangement is fully disclosed to the client.

Incorrect: Using soft dollars to cover a firm’s operating expenses, such as office rent, furniture, or administrative staff salaries, is prohibited because these are the manager’s own business costs and do not provide a direct investment benefit to the client. Retaining cash rebates from brokers is also forbidden; any cash commissions returned must be credited back to the client’s account to prevent the manager from profiting at the client’s expense. Providing personal benefits, such as travel or entertainment for the investment team, is a breach of ethical conduct as it creates a significant conflict of interest.

Takeaway: Soft dollar arrangements are only acceptable if they provide demonstrable benefits to the client’s investment process, maintain best execution standards, and are transparently disclosed.

Correct: The transaction is permissible because of the principle of parity of information. When both the buyer and the seller have access to the same material, non-public information, they are considered to be on equal footing. In such cases, entering into a transaction with one another does not constitute insider trading because neither party has an unfair advantage over the other.

Incorrect: The claim that possession of information creates an absolute prohibition is incorrect because the law provides specific exceptions and defences, such as parity of information. The suggestion that the trade must be executed on a public exchange is wrong, as the defence applies to the relationship between the parties rather than the venue. The idea that the defence requires the information to be public knowledge is a misconception; if the information were public, it would no longer be inside information, and the defence would be unnecessary.

Takeaway: Under the parity of information principle, if both parties to a trade have the same material information, they are on equal footing and the transaction is not considered insider trading.

Correct: The statement regarding long/short strategies is the right answer because it describes a practice that is not permitted under the regulatory framework. To qualify as a hedging arrangement for global exposure calculations, a strategy must offset both the general market risks and the specific risks associated with the underlying investment. Strategies that aim to offset market risk (beta) while intentionally retaining the specific risk (alpha), such as market neutral or long/short strategies, do not meet the criteria for risk reduction and cannot be used to lower the calculated global exposure.

Incorrect: The statement about the 100% limit is wrong as an answer because it is a correct rule; the total global exposure to derivatives must never exceed the scheme’s net asset value. The statement regarding cash collateral is wrong as an answer because it is a correct requirement; if reinvested cash earns a return higher than high-quality 3-month government bonds, that amount must be included in the exposure calculation. The statement about netting is wrong as an answer because it is a correct provision; netting is allowed between derivatives and underlying assets if those assets are transferable securities.

Takeaway: A valid hedging arrangement must result in a verifiable reduction of risk and offset both general and specific risks; strategies designed to isolate and keep alpha do not qualify for exposure reduction.

Correct: Statement I is correct because representatives are strictly prohibited from using a customer’s account to execute their own personal trades, ensuring a clear separation between firm/personal interests and client assets. Statement II is correct because the rules allow a representative to trade against a customer’s order on the futures exchange provided they first enter the customer’s order into the trading system and wait for a minimum of 10 seconds to ensure market exposure.

Incorrect: Statement III is incorrect because the requirement to give priority to customer orders does not apply if the representative has no access to the information regarding the customer’s order flow. Statement IV is incorrect because breaches of the priority of customer orders rules are specifically classified as non-compoundable offences and are subject to mandatory minimum penalties, rather than being easily settled through a simple fine.

Takeaway: Market participants must ensure customer orders are given priority and properly exposed to the competitive market environment before any personal or connected trades are executed in the same security or contract. Therefore, statements I and II are correct.

Correct: Statement II is correct because fund managers are expected to implement effective internal procedures to ensure that no orders are processed after the valuation point of the fund has been established. Statement III is correct because allowing investors to trade on a stale price after significant news has been released grants them an inequitable opportunity for profit at the expense of other investors. Statement IV is correct because regulatory rules mandate that failing to report prohibited trading practices to the Exchange is a serious breach that is not eligible for compounding and carries a mandatory minimum penalty.

Incorrect: Statement I is incorrect because, although late trading is a violation of industry best practices and can lead to regulatory scrutiny, it is specifically noted in the rules as not being a formal market misconduct offence or a criminal act.

Takeaway: Fund managers must enforce strict order cut-off times to prevent late trading and must adhere to mandatory reporting obligations for any prohibited trading activities they encounter. Therefore, statements II, III and IV are correct.

Correct: Statement I is correct because for financial derivatives that are cash-settled, the scheme is required to hold liquid assets to cover the exposure, and the amount of these assets must be calculated after applying risk-reduction measures such as haircuts. Statement II is correct because a security is considered to have an embedded derivative if it includes a component that significantly alters the risk profile and the pricing of the host instrument. Statement III is correct because the rules allow managers to use alternative liquid assets as cover for physical delivery obligations, provided the underlying asset is sufficiently liquid and the alternative assets can be easily converted when needed.

Incorrect: Statement IV is incorrect because when a currency derivative involves two legs that are both different from the scheme’s base currency, the commitment approach requires that the exposure to both legs be accounted for, rather than selecting only the leg with the highest value.

Takeaway: Fund managers must ensure all derivative positions are backed by appropriate liquid assets or underlying holdings and must recognize embedded derivatives when a component significantly changes the risk and pricing of a security. Therefore, statements I, II and III are correct.

Correct: The CMS license holder is borrowing the securities from an accredited investor is the right answer because the regulations specifically state that the mandatory collateral arrangement does not apply when a CMS license holder borrows securities from an individual or entity classified as an accredited investor.

Incorrect: The option regarding lending proprietary securities to a retail client is wrong because collateral must always be obtained when lending securities to ensure the firm is protected, regardless of whether the securities belong to the firm or its customers. The option regarding a market value threshold is wrong because the collateral requirement applies to the total market value of the securities regardless of the transaction size; there is no minimum value for this rule to trigger. The option regarding written documentation and title transfer is wrong because these are standard mandatory requirements for all securities borrowing and lending agreements and do not provide an exemption from collateral obligations.

Takeaway: While collateral of at least 100% (or 105% under exchange rules) is generally required for securities borrowing and lending, an exemption exists when a CMS license holder borrows from an accredited investor.

Correct: Statement I is correct because plain vanilla derivatives such as standard equity options and index futures are permitted to use the standard conversion method for calculating a scheme’s global exposure. Statement II is correct because complex derivatives, including digital options and barrier options, are specifically excluded from using the standard conversion method due to their non-linear risks or highly volatile deltas.

Incorrect: Statement III is incorrect because the exposure to an OTC counterparty must be measured based on the maximum potential loss (the sum of the replacement cost and an add-on factor) rather than the notional value of the contract. Statement IV is incorrect because the fixed 10% add-on factor applies only to total return swaps and credit default swaps, whereas other swap types like interest rate or currency swaps use variable percentages based on their residual maturity.

Takeaway: Fund managers must distinguish between standard and complex derivatives for exposure calculations and correctly apply specific add-on factors based on the instrument type and maturity when assessing counterparty risk. Therefore, statements I and II are correct.

Correct: Statement II is correct because a series of orders designed to move the price to a specific level for a subsequent transaction is a classic indicator of market manipulation. Statement III is correct because entering and then cancelling orders before they are filled can be a tactic to mislead other traders about the true supply or demand.

Incorrect: Statement I is incorrect because matching buy and sell orders at similar parameters is generally viewed as pre-arranged trading, which creates a false impression of market activity. Statement IV is incorrect because large trades are permitted as long as they serve a legitimate business purpose and are not intended to artificially control or stabilize the security’s price.

Takeaway: Market participants must monitor for patterns like pre-arranged trades, non-genuine orders, and price-moving sequences that undermine the integrity of a fair and transparent market. Therefore, statements II and III are correct.

Correct: A financial derivative transacted on an exchange where a clearing house acts as a central counterparty and trades are subject to daily margining is the right answer because these instruments are cleared through a central entity that mitigates individual default risk. Due to the daily mark-to-market valuation and margining requirements, these specific exchange-traded products are exempt from the standard counterparty exposure limits that apply to other investment types.

Incorrect: The option regarding over-the-counter derivatives is wrong because netting arrangements only allow for the calculation of a net exposure sum rather than a total exemption from limits, and they require specific legal opinions to be valid. The option concerning margins is wrong because margin exposure must be included in counterparty limits unless the funds are specifically protected against insolvency by being held in trust accounts. The option regarding securities lending is wrong because the counterparty must maintain a minimum long-term credit rating of ‘A’ or be indemnified by an ‘A’ rated entity; a BBB rating is insufficient to meet regulatory safety standards.

Takeaway: Financial derivatives that are exchange-traded, centrally cleared, and subject to daily margining are exempt from counterparty limits, unlike OTC derivatives or unprotected margins which must be accounted for.

Correct: Querying the client on their trading strategy to satisfy himself that the transaction is a genuine commercial trade is the right answer because representatives must not accept unusual instructions at face value. When a client prefers to trade at the close despite better prices being available earlier, the representative must be satisfied that the intent is not to create a false or misleading appearance in the security’s price.

Incorrect: Executing the order immediately is wrong because representatives are expected to exercise judgment and be vigilant against potential market manipulation, especially when orders are inconsistent with normal trading logic. Rejecting the order immediately is wrong because trading at the close is not prohibited per se; the representative must first determine if there is a genuine commercial reason for the trade before making such a decision. Processing the trade and filing a report within one working day is wrong because the standard timeline for reporting suspicious activities to the regulator is within five working days of discovery, and reporting should follow an initial assessment of the client’s intent.

Takeaway: Financial representatives must exercise professional judgment and query unusual client orders, particularly those timed to influence closing prices, to ensure they are not facilitating market manipulation.

Correct: Statement II is correct because any shortfall in collateral value must be rectified by the receipt of additional collateral by the close of the next business day. Statement IV is correct because the rules explicitly prohibit the reinvestment of any non-cash collateral received by the scheme.

Incorrect: Statement I is incorrect because while cash collateral can be reinvested, it is strictly prohibited to invest that cash into securities issued by or deposits held with the counterparty or its related entities. Statement III is incorrect because eligible bond collateral is restricted to those issued or guaranteed by a government, government agency, or supranational with a top-tier credit rating; corporate bonds are not permitted.

Takeaway: Fund managers must strictly adhere to collateral eligibility and reinvestment rules, ensuring high credit quality and independence from the counterparty to protect the scheme’s assets. Therefore, statements II and IV are correct.

Correct: Including the lowest, highest, and average utilization of the VaR limit during the period, along with the model and inputs used, is the right answer because periodic reports for schemes using the Value-at-Risk approach must provide specific data on how the risk limits were actually used over the reporting timeframe to ensure transparency for investors.

Incorrect: The option regarding the rationale for the VaR limit and the manager’s expertise is wrong because these are requirements for the prospectus, which sets out the framework before investment, rather than the periodic report which tracks actual performance. The option regarding the prominent statement and netting legal opinions is wrong because the prominent statement is a marketing material requirement, and the netting legal opinion disclosure belongs in the prospectus. The option regarding securities lending values and revenue sharing is wrong because these disclosures specifically relate to Efficient Portfolio Management (EPM) techniques rather than the calculation and utilization of derivative risk limits under the VaR approach.

Takeaway: When a scheme uses the VaR approach for derivatives, the semi-annual and annual reports must disclose the actual range of VaR limit utilization (lowest, highest, and average) to demonstrate how risk was managed during the period.

Correct: Statement I is correct because bucketing involves a representative taking the opposite side of a client’s order, which prevents the client from accessing competitive market bids. Statement III is correct because trading against a customer is only permissible if the representative has obtained the customer’s prior consent. Statement IV is correct because the law prescribes specific criminal penalties, including fines and imprisonment, for those found guilty of bucketing.

Incorrect: Statement II is incorrect because the fairness of the price does not excuse the act of bucketing. The core violation is the lack of exposure to competitive bids and the failure to disclose the conflict of interest to the client, regardless of the final execution price.

Takeaway: Bucketing is a serious market misconduct offense that occurs when a representative trades against a client without consent, regardless of whether the price provided was favorable. Therefore, statements I, III and IV are correct.

Correct: Requiring Trading Members to obtain margins from customers is one of the specific powers the exchange can exercise when a security is designated. This measure is intended to ensure that participants have sufficient collateral, thereby reducing the risks associated with excessive speculation or potential market manipulation.

Incorrect: Mandating cash settlement without physical delivery is a power used when the exchange declares a “corner,” which occurs when a party controls the supply of a security to dictate prices. Suspending trading for three market days is a general authority for market sensitivity or emergencies, but it is not a specific condition triggered by “designated security” status. Finally, the rules explicitly state that offences related to these conduct requirements are not compoundable, meaning they cannot be settled through a simple payment.

Takeaway: When a security is designated due to manipulation or speculation, the exchange can impose restrictive conditions like margin requirements or proof of possession to maintain market integrity.

Correct: Statement II is correct because cash collateral received from securities lending can be reinvested in high-quality money market instruments that meet the minimum credit rating requirements from recognized agencies. Statement IV is correct because any borrowing undertaken by a scheme to meet temporary liquidity needs must be short-term and cannot exceed a one-month duration.

Incorrect: Statement I is incorrect because the regulatory limit for aggregate borrowings is capped at 10% of the scheme’s net asset value at the time of borrowing, not 15%. Statement III is incorrect because securitised debt instruments are explicitly prohibited from being used as collateral in securities lending or repurchase transactions, even if they have high credit ratings.

Takeaway: Fund managers must strictly observe the 10% borrowing limit and one-month duration while ensuring all collateral used in lending transactions meets specific eligibility and quality criteria. Therefore, statements II and IV are correct.

Correct: Reporting the findings to the board of directors and senior management immediately is the required action when back-testing exceptions relate to the basic integrity of the risk measurement model. This ensures that fundamental flaws in the risk management framework are addressed as soon as practicable by the highest level of management.

Incorrect: Documenting exceptions only in a quarterly report is wrong because, while standard results are reported quarterly, integrity-related failures require immediate escalation. Waiting for an annual independent verification is inappropriate for addressing urgent model failures that affect daily risk monitoring. Updating data frequency or shortening the observation period are technical adjustments for market volatility rather than a proper regulatory response to a fundamental model integrity issue.

Takeaway: While routine back-testing analysis is reported to senior management quarterly, any exceptions that call into question the basic integrity of the VaR model must be reported to the board and senior management immediately.

Correct: Statement I is correct because the manager is required to notify the Authority within three business days whenever any back-testing exceptions occur, regardless of the severity. Statement II is correct because 11 exceptions within a sample of 250 observations place the scheme in the Red Zone, which mandates an immediate halt on adding new positions. Statement IV is correct because the Authority reserves the right to require a scheme that enters the Red Zone to revert to the Commitment Approach for calculating risk.

Incorrect: Statement III is incorrect because it describes the regulatory response for the Yellow Zone (5 to 9 exceptions). In the Red Zone, the manager cannot simply propose remedial actions; they must actively stop adding new positions and wind down existing ones to reduce market risk.

Takeaway: Entering the Red Zone (10 or more exceptions) triggers mandatory risk reduction measures and allows the regulator to mandate a return to the Commitment Approach for risk measurement. Therefore, statements I, II and IV are correct.

Correct: The act is subject to Singapore law because it involves securities listed on a Singapore market and has a substantial and reasonably foreseeable effect within the country.

Incorrect: The statement about foreign exchange and insider trading is incorrect because the specific extraterritorial provisions for foreign exchange and futures markets do not extend to insider trading offences. The claim about a profit threshold is incorrect because jurisdiction is established by the impact on the local market and the instrument’s listing status, not by reaching a specific monetary gain. The mention of licensing and market hours is incorrect because the law focuses on the location of the security and the foreseeable effect of the act rather than the operational hours or the regulatory status of the foreign firm.

Takeaway: Market misconduct laws apply to offshore acts if they involve Singapore-listed securities and have a substantial and reasonably foreseeable effect on the Singapore market.

Correct: The firm is named in the fund’s marketing materials and has access to non-public portfolio holdings is the right answer because these factors indicate the firm exercises direct or indirect control over the investment portfolio. Under the regulatory framework, an advisor is deemed to be performing fund management if they are involved in portfolio construction or have access to non-public information about the fund’s assets.

Incorrect: Providing general research without knowledge of specific holdings is wrong because it lacks the element of control or specific portfolio involvement required for the definition of fund management. Managing physical real estate assets for a trust is wrong because the definition of fund management explicitly excludes real estate investment trust management. Providing corporate finance advice is wrong because this is a distinct regulated activity under the law and does not involve the management of a portfolio of securities or futures contracts.

Takeaway: A person is considered to be conducting fund management if they exercise control over an investment portfolio, which is often evidenced by their inclusion in offering documents or access to private portfolio data.

Correct: Statement II is correct because unrated instruments issued by Singapore entities, such as statutory boards, are permissible if the manager can demonstrate to the trustee that the credit quality is comparable to the required high-quality ratings. Statement III is correct because the standard group limit restricts the total exposure to a single group of entities to 10% of the fund’s net asset value, which includes non-deposit investments, deposits, and OTC derivative counterparty risks.

Incorrect: Statement I is incorrect because any debt security or money market instrument that contains an embedded financial derivative is explicitly excluded from being a permissible investment for a money market fund. Statement IV is incorrect because the regulations only require at least 90% of the fund’s net asset value to be invested in traded instruments or eligible deposits; up to 10% may be held in high-quality instruments that are not traded on an organized market.

Takeaway: Money market funds must prioritize liquidity and low risk by avoiding instruments with embedded derivatives and adhering to strict diversification limits across entity groups. Therefore, statements II and III are correct.

Correct: Statement I is correct because a key criterion for a closed-end fund to be regulated as a collective investment scheme is that its investment policy must be for the purpose of giving participants the benefits of investment results, rather than for operating a business. Statement II is correct because the Code on Collective Investment Schemes is a non-statutory document that outlines best practices; while the regulatory authority may revoke a scheme’s status for breaches, the breach itself does not constitute a criminal offence.

Incorrect: Statement III is incorrect because the use of the term ‘capital protected’ and its derivatives is strictly prohibited in the name and description of a collective investment scheme, regardless of any explanations or disclosures provided. Statement IV is incorrect because the maximum fine for offering units in a scheme that is not authorised or recognised (where no exemption applies) is SGD 150,000, not SGD 50,000.

Takeaway: Fund managers must ensure that schemes meet specific investment purpose criteria and adhere to strict naming prohibitions and statutory authorisation requirements to avoid significant criminal penalties. Therefore, statements I and II are correct.

Correct: Statement I is correct because for liability to be attributed to a corporation under the SFA, the contravention must have been committed for the benefit of the corporation. Statement II is correct because the court evaluates whether a corporation was negligent by looking at whether it established adequate policies and procedures and whether those policies were consistently enforced.

Incorrect: Statement III is incorrect because consent or connivance does not require a formal written board resolution; it can be established if any agent with managerial authority acted recklessly or if the corporate culture encouraged non-compliance. Statement IV is incorrect because the absence of profit does not grant an exemption; the court may still impose a civil penalty between SGD 50,000 and SGD 2 million even if no profit was gained or loss avoided.

Takeaway: Corporate liability for market misconduct depends on whether the act benefited the firm and whether the firm failed to maintain and enforce effective internal controls. Therefore, statements I and II are correct.

Correct: Statement I is correct because the regulatory framework mandates a minimum entry level of SGD 100,000 for single hedge funds to ensure they are offered to investors with sufficient capital. Statement II is correct because the manager must demonstrate specific expertise, which includes having at least two key executives who each possess a minimum of five years of relevant hedge fund management experience.

Incorrect: Statement III is incorrect because single hedge funds are required to provide at least one regular dealing day every month; offering dealing only on a quarterly basis does not meet the minimum liquidity frequency required for these schemes. Statement IV is incorrect because while a single hedge fund can invest in another single hedge fund, it is explicitly prohibited from investing in one that is already a feeder scheme to prevent the creation of multiple layers of funds.

Takeaway: Managers of single hedge funds must adhere to strict requirements regarding minimum investment amounts, executive experience, and monthly dealing frequency to maintain regulatory compliance. Therefore, statements I and II are correct.

Correct: A credit rating downgrade is classified as a passive breach. For such breaches, including those caused by market fluctuations, redemptions, or capital changes in a company, the manager is not required to notify the regulator within three business days, provided the breach is rectified within three months.

Incorrect: The option regarding trade execution errors is wrong because operational or human errors are considered active breaches that require notification to the regulator within three business days of discovery. The option about market volatility and permanent waivers is incorrect because while volatility can cause a passive breach, it must still be rectified within the three-month period; the regulations do not provide for permanent waivers of investment limits. The option concerning new asset classes is wrong because the purchase of unauthorized assets is a deliberate investment decision and constitutes an active breach that must be reported immediately.

Takeaway: Passive breaches caused by external factors like credit downgrades or redemptions do not require immediate reporting to the regulator if they are corrected within a three-month timeframe.

Correct: Statement II is correct because short-term money market funds are required to maintain a conservative liquidity profile, which includes keeping the dollar-weighted average maturity of the entire portfolio at or below 120 calendar days. Statement IV is correct because regulations allow for the reinvestment of collateral from securities lending, but only if the returns are capped at the level of high-quality short-term government debt to prevent excessive risk-taking.

Incorrect: Statement I is incorrect because a short-term money market fund is restricted to individual investments with a remaining maturity of no more than 397 days; a 450-day instrument would only be permissible for a standard money market fund. Statement III is incorrect because derivatives in these funds are strictly reserved for hedging existing risks and must not be used as a strategy to increase the fund’s yield or overall returns.

Takeaway: Short-term money market funds are subject to tighter maturity limits and stricter derivative usage rules than standard funds to ensure higher liquidity and lower risk. Therefore, statements II and IV are correct.