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

A firm's board wants a governance structure that supports the investor protection objective. Which arrangement is most consistent with that aim?

An independent compliance function with direct access to the board or its risk committee best supports investor protection. Independence lets it challenge sales practices without commercial pressure, whereas reporting to sales, front-office self-review or suspending monitoring undermines objectivity and controls.

  1. ACompliance function reports to the head of sales to align with business goals
  2. BCompliance function operates independently with direct access to the board or its risk committeeCorrect
  3. CCompliance reviews are performed only by the front-office staff who sold the products
  4. DCompliance monitoring is suspended during periods of high sales volume

Explanation

Independence and direct board access let compliance challenge sales practices without conflict. Reporting to sales or relying on front-office self-review compromises objectivity, and suspending monitoring removes controls when risk is elevated.

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