FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
A wealth management firm is fined after its advisers sold complex structured notes to retired clients whose stated objectives were capital preservation. Internal reviews show the firm's suitability checks were completed only as a paperwork step after the sale. Which weakness is most directly demonstrated?
The firm failed to make suitability assessment a genuine pre-sale control. Checks done after the sale cannot stop unsuitable products reaching capital-preservation clients, so the process only documents breaches instead of preventing them, which is a classic investor protection and compliance failure.
- AFailure to embed suitability assessment as a pre-sale control that matches product risk to client profileCorrect
- BExcessive diversification of the product shelf across asset classes
- COverly conservative capital buffers held against market risk
- DInadequate disclosure of the firm's own quarterly earnings to shareholders
Explanation
Suitability must be assessed before the recommendation, using the client's objectives and risk tolerance. Completing it after the sale makes it a documentation exercise rather than a control. The other options concern unrelated areas such as shelf diversification, capital and shareholder disclosure.
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