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

A regulator wants to strengthen investor protection while limiting the cost to firms. Which measure best addresses the information asymmetry between a firm and its retail clients at the point of sale?

Standardised plain-language disclosure of risks, costs and conflicts before purchase best addresses information asymmetry. It lets retail clients understand what they are buying at the point of sale, whereas capital, liquidity and clearing requirements address prudential or systemic concerns rather than client conduct.

  1. ARequiring standardised, plain-language disclosure of product risks, costs and conflicts before purchaseCorrect
  2. BRaising the firm's minimum regulatory capital
  3. CIntroducing intraday liquidity buffers
  4. DMandating central clearing of all client trades

Explanation

Information asymmetry is directly reduced by clear pre-sale disclosure of risks, costs and conflicts. Capital, liquidity and clearing measures target prudential or systemic risk, not client understanding at point of sale.

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