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

A fund firm's compliance officer reviews its controls over material non-public information (MNPI). The firm's research analysts sometimes receive confidential details from corporate insiders during company visits, and portfolio managers sit on the same open-plan floor. Which control is most effective at reducing the risk of trading on MNPI?

The most effective control is a restricted list combined with enforced information barriers and trade pre-clearance. These measures stop MNPI flowing to portfolio managers and block trading in affected securities. Extra analysts, quarterly sector reports or less frequent valuation do nothing to prevent trading on confidential information.

  1. AIncreasing the number of analysts covering each company
  2. BPlacing the affected security on a restricted list and enforcing information barriers with pre-clearance of tradesCorrect
  3. CRequiring analysts to report their sector views quarterly
  4. DSwitching to monthly instead of daily portfolio valuation

Explanation

Restricted or watch lists, information barriers and pre-clearance directly limit the flow and use of MNPI. The other options do not address the leakage of confidential information or restrict trading on it.

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