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

A firm sells a product to a retail client after the adviser verifies the client's income, objectives and experience, but the client later claims the product's downside risks were never explained. Which gap in the investor protection process is most clearly indicated?

The gap is inadequate disclosure of risks. The firm completed client profiling by verifying income, objectives and experience, so know-your-client was done. The complaint is that downside risks were not explained, which is a disclosure shortfall, and has nothing to do with client money segregation or settlement timing.

  1. AInadequate disclosure of risks to the clientCorrect
  2. BFailure to perform know-your-client profiling
  3. CFailure to segregate client money
  4. DDelayed trade settlement

Explanation

The adviser did verify the client's profile, so know-your-client was performed. The claim concerns the client not being told about downside risks, which is a disclosure failure. Segregation and settlement are unrelated to the facts.

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