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

A firm was fined after its front-office staff overrode compliance alerts on suspicious client trades because sales targets drove bonuses. Which remediation best addresses the underlying cause rather than the symptom?

Revising incentives to reward conduct and compliance outcomes, while giving compliance independent escalation authority, best addresses the cause. The failure arose from sales-driven bonuses and overridable controls. Adding alerts or signed ethics statements leaves the incentive conflict intact, so staff would continue to override or ignore controls.

  1. ARevise incentive structures to include compliance and conduct outcomes, and give the compliance function independent escalation authorityCorrect
  2. BAdd more alert rules to the surveillance system only
  3. CIncrease the number of front-office staff handling client trades
  4. DAsk staff to sign an annual statement of ethics without other changes

Explanation

The root cause is misaligned incentives combined with weak independence of control functions. Fixing pay structures and giving compliance escalation authority addresses both. More alerts would simply be overridden, and attestations alone leave incentives unchanged.

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