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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

A fund's chief risk officer (CRO) reports to the chief investment officer (CIO), who also determines the CRO's bonus based on fund performance. Which governance concern is most direct?

The main concern is loss of CRO independence. Because the CIO controls the CRO's reporting line and bonus, the CRO may be reluctant to escalate limit breaches or challenge positions. Best practice has the CRO report independently, for example to the CEO or the board's risk committee.

  1. AThe CRO's independence is compromised, so risk limit breaches may be underreported or toleratedCorrect
  2. BThe fund will face higher administrative costs from the reporting line
  3. CThe CIO will be unable to access risk reports in a timely way
  4. DRisk measurement models will necessarily be less accurate

Explanation

A CRO whose pay and reporting depend on the person taking the risk faces a conflict of interest. This undermines independent challenge and escalation of breaches. The issue is independence, not model accuracy or cost.

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