FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
A regulator states that its objectives are to maintain fair, efficient and transparent markets, protect investors, and reduce systemic risk. A risk manager at an investment firm maps internal controls to these objectives. Which control is most directly aligned with the investor protection objective rather than the systemic risk objective?
Mandatory disclosure of fees, conflicts and product risks before sale best serves investor protection, because it gives clients the information to make informed decisions. Stress tests, leverage limits and funding plans mainly support prudential and systemic stability objectives rather than protecting individual investors.
- AMandatory disclosure of fees, conflicts of interest and product risks to clients before saleCorrect
- BStress testing the firm's capital under severe market scenarios
- CLimits on the firm's aggregate leverage and interconnectedness with other institutions
- DContingency funding plans for wholesale market disruptions
Explanation
Pre-sale disclosure of fees, conflicts and risks lets clients make informed decisions, which is a core investor protection tool. The other three controls address firm solvency, leverage and liquidity, which serve prudential and systemic stability objectives.
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