FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
A wealth management firm sells a complex structured note to a retired client whose stated objective is capital preservation and who has little investment experience. The note carries significant principal-at-risk features. Which investor protection concept is most directly breached by this sale?
Suitability is breached. Suitability requires that a recommended product match the client's experience, objectives and risk tolerance, and a principal-at-risk complex note sold to an inexperienced retiree seeking capital preservation clearly does not match that profile.
- ASuitability, because the product does not match the client's profile and objectivesCorrect
- BBest execution, because the note was not priced at the lowest available cost
- CMarket transparency, because the note is not exchange-traded
- DSegregation of client assets, because the note is held in the firm's custody
Explanation
Suitability requires that recommendations fit the client's knowledge, objectives and risk tolerance. A principal-at-risk complex product sold to an inexperienced capital-preservation client fails this test. The other concepts concern execution quality, venue transparency and asset safekeeping, none of which is the core issue here.
Did you get it right without looking?
One question tells you little. A timed set on Case Study: Investor Protection and Compliance Risks in Investment Activities shows your real accuracy, how long you take and where you lose marks.
More Case Study: Investor Protection and Compliance Risks in Investment Activities questions
- After a compliance failure, a fund manager's review finds that the policy was well written, staff were trained, and a monitoring tool existe…
- After a regulator fines an asset manager for misleading fee disclosures, the board commissions a remediation program. Which sequence of acti…
- An asset manager's sales team has been recommending a complex structured note to retail clients whose stated objective is capital preservati…
- A fund distributor's marketing material for a high-yield bond fund highlights the past three years of strong returns but omits that the fund…
- A wealth manager's relationship team recommends a leveraged structured note to a retired client whose stated objective is capital preservati…
- An asset manager's compliance function discovers that a portfolio manager has repeatedly allocated profitable trades to a personal-related a…