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

A fund distributor's marketing brochure highlights a fund's 3-year annualized return of 12% but omits the fund's maximum drawdown of 35%, its fee structure and its lock-up terms. Which deficiency is most relevant from a disclosure standpoint?

The brochure is not fair, clear and balanced. Presenting only attractive returns while leaving out the large drawdown, fees and lock-up terms hides material risks and costs, so investors cannot make an informed decision, which is a core disclosure failing.

  1. AThe information is not fair, clear and balanced because material risks and costs are omittedCorrect
  2. BThe brochure uses annualized rather than cumulative returns, which is prohibited
  3. CThe brochure should have been written only for professional clients
  4. DThe brochure fails because it does not include a VaR figure

Explanation

Disclosure standards require communications to be fair, clear and not misleading, giving balanced prominence to risks and costs alongside benefits. Omitting drawdown, fees and liquidity restrictions biases the picture. Annualized returns are not prohibited, and VaR is not a required item.

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