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

A firm reviews 400 advised sales of a leveraged product. Its suitability file test finds 60 files lacking a documented risk-tolerance assessment; of these, 45 were to clients later found to have objectives inconsistent with the product. Of the 340 files with documentation, 17 had inconsistent objectives. If the firm estimates average remediation cost of 20,000 per unsuitable sale, what is the estimated total remediation cost across the sample, and what does the pattern show?

Total estimated remediation is 1,240,000, from 62 unsuitable sales at 20,000 each. Undocumented files show a 75% unsuitability rate against 5% for documented files, indicating that missing risk-tolerance documentation is strongly associated with unsuitable sales.

  1. A1,240,000; undocumented files show a much higher unsuitability rate (75% versus 5%)Correct
  2. B1,240,000; documented and undocumented files show similar unsuitability rates
  3. C900,000; only undocumented files need remediation
  4. D340,000; documented files are the main source of unsuitability

Explanation

Unsuitable sales total 45 + 17 = 62; at 20,000 each that is 1,240,000. Rates are 45/60 = 75% for undocumented files and 17/340 = 5% for documented ones. Remediating only undocumented files gives 900,000, which ignores the 17 documented unsuitable sales.

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