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

A firm's compliance function reviews 400 client sales of a high-risk product. It finds 60 sales where the client's risk profile was 'conservative', and in 24 of these no suitability assessment was documented. Of the remaining 340 sales, 17 lacked documentation. What is the overall documentation failure rate, and which interpretation is most appropriate?

The overall failure rate is 41 of 400, or 10.25%. Conservative clients show a 40% failure rate against 5% for others, so the weakness is concentrated in the most vulnerable segment and calls for targeted remediation rather than uniform treatment.

  1. A10.25%; a control weakness concentrated more heavily in conservative-client sales (40% vs 5%) warranting targeted remediationCorrect
  2. B6.0%; the failure rate is uniform and needs no targeted action
  3. C41/60 = 68.3%; every conservative-client sale failed
  4. D24%; since 24 sales failed in total

Explanation

Total failures = 24 + 17 = 41 out of 400 = 10.25%. Among conservative clients the rate is 24/60 = 40%, versus 17/340 = 5% for the others. The much higher rate in the most vulnerable segment signals a concentrated control failure needing targeted remediation. The other options use wrong numerators or denominators.

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