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FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities

A broker-dealer receives an order from a client classified as an execution-only retail customer for a high-risk, complex derivative product. No advice was given. Under typical investor protection frameworks, what should the firm do?

The firm should perform an appropriateness check of the client's knowledge and experience and warn the client if the complex product appears inappropriate. Lack of advice removes the suitability duty but not the duty to protect retail clients from products they may not understand.

  1. AExecute immediately because no advice was given, so no assessment is needed
  2. BAssess whether the client has the knowledge and experience to understand the product's risks and warn the client if it appears inappropriateCorrect
  3. CRefuse all execution-only business for retail clients
  4. DReclassify the client as professional to avoid the assessment

Explanation

For non-advised sales of complex products, an appropriateness test applies: the firm checks knowledge and experience and issues a warning if the product seems inappropriate. Absence of advice does not remove all duties. Reclassifying to avoid the test would itself be a breach.

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