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

A regulator states that its objectives include maintaining market integrity, ensuring investors receive adequate disclosure, and reducing information asymmetry between firms and retail clients. Which of the following regulatory requirements most directly addresses information asymmetry?

Mandatory plain-language disclosure of risks, costs and conflicts of interest most directly addresses information asymmetry, because it gives clients the information firms already hold. Capital requirements, position limits and central clearing target solvency, market concentration and counterparty risk rather than the information gap.

  1. AMandatory plain-language disclosure of product risks, costs and conflicts of interestCorrect
  2. BMinimum regulatory capital for investment firms
  3. CPosition limits on commodity derivatives
  4. DMandatory central clearing of standardised derivatives

Explanation

Information asymmetry arises because firms know more about products than clients do. Required disclosure of risks, costs and conflicts directly narrows that gap. Capital rules, position limits and clearing address solvency, market concentration and counterparty risk.

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