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

A compliance monitoring program flags 400 alerts per month from trade surveillance, of which 380 are false positives, and the team cannot review them all in time. Which response best improves control effectiveness?

The firm should tune and back-test alert thresholds and use risk-based prioritisation, documenting the rationale and maintaining coverage of key risks. This cuts false positives while preserving detection, unlike disabling the system or auto-closing alerts.

  1. ACalibrate and back-test alert thresholds and scenarios, using risk-based prioritisation, while documenting the rationale and keeping coverage of key risksCorrect
  2. BSwitch off the surveillance system to eliminate the backlog
  3. CClose alerts automatically after 30 days without review
  4. DHire no staff and accept the backlog as permanent

Explanation

With 95% false positives, tuning thresholds and prioritising by risk improves signal quality without losing coverage. Disabling or auto-closing alerts leaves real misconduct undetected and breaches control expectations.

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