FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
A portfolio manager at a fund firm learns, through a friend at a listed company, that a takeover bid will be announced next week. He buys shares in the target for the fund and for his own account. Which compliance risk is most directly realized?
Insider trading, a form of market abuse, is realized. The manager traded on material non-public information about a pending takeover, obtained from a company contact. Churning involves excessive trading for commissions, and liquidity or capital reporting issues are not implicated by these facts.
- AInsider trading, a form of market abuseCorrect
- BChurning of client accounts
- CBreach of fund liquidity limits
- DLate regulatory capital reporting
Explanation
Trading on material non-public information about a takeover is insider trading. Churning means excessive trading to generate commissions, which is not the motive here. Liquidity limits and capital reporting are unrelated to the facts.
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