FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
A multi-strategy asset manager runs a flagship fund and a smaller fund with a higher performance fee, both able to invest in the same limited-capacity opportunities. Which governance measure most effectively addresses the conflict of favoring the higher-fee fund?
The most effective measure is a documented pro-rata allocation policy set before trading and monitored by compliance. It removes discretion to steer attractive trades to the higher-fee fund, treating clients fairly, whereas post-trade allocation, revenue priority or disclosure alone leave the conflict uncontrolled.
- AAllow the portfolio manager to allocate each trade at their discretion after execution
- BAllocate limited-capacity trades by a documented, pro-rata policy set in advance and monitored by complianceCorrect
- CGive the higher-fee fund priority because it generates more revenue
- DDisclose the conflict only in the annual report
Explanation
A pre-set, pro-rata allocation rule monitored independently removes discretion to steer profitable trades to the higher-fee vehicle. Post-trade discretion and revenue-based priority embed the conflict, and annual disclosure alone does not control behavior.
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