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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 review finds that a fund's marketing material highlights a 5-year annualised return of 12% but omits that the fund's maximum drawdown was 35% and that fees are charged on committed rather than invested capital. Which statement best characterises the deficiency?

This is a disclosure failure. Marketing must be fair, clear and balanced, so presenting an attractive return while omitting a 35% drawdown and an unfavourable fee basis is misleading by omission, even though the quoted return figure itself may be factually accurate.

  1. AA disclosure failure because the material is not fair, clear and balanced about risks and costsCorrect
  2. BA suitability failure only, since disclosure rules apply solely to personal recommendations
  3. CAn acceptable practice, since past returns are factual and need no risk context
  4. DA valuation failure, since the 12% return should have been stated gross of fees

Explanation

Disclosure standards require communications to be fair, clear and not misleading, which means balancing return claims with material risks and costs. Omitting a large drawdown and an unfavourable fee base gives a misleading impression even if the return figure is accurate. Suitability is a separate duty tied to the individual client.

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