Yes, referencing the system character set is incorrect. However, there
is an implicit conversion from the document character set to the
system character set (if they are not the same), and this conversion
is *not* defined (or at least, I cannot remember anything for defining
it). Given this, it seems that almost anything is allowed, but certain
things are obviously undesirable (like assuming numeric character
references *will* be mapped using the system character set).
Page 452 of Goldfarb has a few notes regarding this.