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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 material for a high-yield bond fund highlights the past three years of strong returns but omits that the fund holds concentrated positions in illiquid bonds that may be hard to redeem in stress. Which risk is most directly created?

The key risk is misleading disclosure. Promotional material must be fair, clear and balanced, so omitting material liquidity and concentration risks while stressing past returns can lead to mis-selling claims, regulatory sanctions and reputational damage for the distributor.

  1. AMisleading disclosure risk, since material risks are omitted and the presentation is not balancedCorrect
  2. BInterest rate risk in the banking book
  3. CSettlement risk on delivery-versus-payment trades
  4. DModel risk in the fund's VaR engine

Explanation

Disclosure must be fair, clear and not misleading, giving balanced prominence to risks as well as returns. Omitting liquidity and concentration risks while promoting past performance creates mis-selling and regulatory exposure. The other risks are unrelated to the communication itself.

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