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LE Paper 6 · Topic 4
Paper 6 tests market misconduct from the fund manager's desk: a portfolio manager wall-crossed before a placing, a quarter-end order that lifts a fund's NAV, a cross between two funds on the Exchange, a misleading factsheet. Expect to name the form of misconduct, pick the forum (Market Misconduct Tribunal or criminal court) and what it can order, and say who can sue. The topic then turns to the conduct rules that bite on fund managers in particular: unsolicited calls, front running, late trading, market timing, window dressing, cross trades, soft dollars and cash rebates, and why the SFC takes disciplinary action.
17 min read9 sections
Checked against the Securities and Futures Ordinance (Cap. 571) on eLegislation (s.4, s.174, s.175, s.193, s.194, s.213, s.245, s.247, s.251-s.253, s.257-s.259, s.266, s.270-s.283, s.298, s.303, s.305, s.307, s.388, s.391 and Schedule 1, current versions, including the amendments by Ordinance No. 31 of 2025 in operation from 24 August 2025); the Securities and Futures (Unsolicited Calls - Exclusion) Rules (Cap. 571A) r.3; Criminal Procedure Ordinance (Cap. 221) Sch. 8; the SFC Fund Manager Code of Conduct (fifth edition, October 2024); the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (fifth edition, October 2024); the Code of Conduct for Persons Licensed by or Registered with the SFC (January 2026 edition) paras 9 and 13; and the SFC Disciplinary Fining Guidelines; as at October 2026. Independent prep, not endorsed by HKSI Institute or the SFC.
Part XIII of the Securities and Futures Ordinance (SFO, Cap. 571) defines six forms of market misconduct (s.245(1)), heard by the Market Misconduct Tribunal on the civil standard. Part XIV makes each one a criminal offence (s.291-s.299). Market misconduct also includes attempting, assisting, counselling or procuring another person to engage in it (s.245(1)). The Fund Manager Code of Conduct (FMCC, fifth edition, October 2024) para 3.3 requires a fund manager to keep policies and procedures that prohibit and prevent market misconduct and to make sure its staff know the restrictions.
| Form | Civil / criminal | How it shows up in fund management |
|---|---|---|
| Insider dealing | s.270 / s.291 | A wall-crossed portfolio manager has the fund sell before a discounted placing is announced |
| False trading | s.274 / s.295 | Buying a fund's thinly traded holdings at the close on the last day of a quarter to lift its NAV; matched orders between two funds on the Exchange |
| Price rigging | s.275 / s.296 | A wash sale between two accounts of the same fund that moves the price |
| Disclosure of information about prohibited transactions | s.276 / s.297 | A newsletter saying a stock will keep rising because the manager's group is supporting it with wash sales |
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| Disclosure of false or misleading information inducing transactions |
| s.277 / s.298 |
| A factsheet that overstates a fund's past returns and is likely to induce subscriptions in Hong Kong |
| Stock market manipulation | s.278 / s.299 | Two or more purchases that push up a small-cap holding, intended to lure other buyers so the fund can exit |
Units and shares in a fund are 'securities' under the SFO (Schedule 1, para (d) of the definition: interests in any collective investment scheme), so a misleading factsheet for an unlisted fund can fall within s.277 when it is likely to induce people to subscribe in Hong Kong. Negligence is enough before the Tribunal (s.277(1)(ii)); the s.298 offence needs knowledge or recklessness.
Trap: thinking a manager is safe because the profit went to the fund, not to him. Procuring a fund to deal on inside information is insider dealing, and s.271(3) only helps where avoiding a loss or making a profit 'for himself or another' was not a purpose.
Takeaway: Fund trades are still trades: insider dealing, false trading and price rigging catch the manager who places them.
Inside information is specific, not generally known to people who deal in the listed securities, and likely to move the price materially if it were (s.245(2)). Insider dealing needs a person connected with the corporation (s.247), a take-over offeror (s.270(1)(b)), or a tippee who knows his source is connected and has reasonable cause to believe the source holds the information because of that connection (s.270(1)(e)). Dealing includes counselling or procuring another person, such as a fund, to deal.
Trap: assuming a tip from a broker, rather than from the company itself, is safe. The placing agent's salesperson is connected through the engagement, so the portfolio manager who knows this is a tippee.
Takeaway: Wall-crossed means frozen: neither you nor your funds deal until the information is public.