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

A wealth manager at a bank recommends a complex structured note with a capital-at-risk feature to a retired client whose stated objective is capital preservation and who has limited investment experience. The note is within the bank's approved product list. Which compliance concern is most directly raised?

The main concern is a suitability breach. A recommendation must fit the client's objectives, experience and risk tolerance. A capital-at-risk complex note for a retired, inexperienced client seeking capital preservation is mismatched, even though the product is on the bank's approved list.

  1. ABreach of the suitability obligation because the recommendation does not match the client's objectives, knowledge and risk toleranceCorrect
  2. BBreach of market abuse rules because the product is on an approved list
  3. CFailure of the bank's liquidity coverage requirement
  4. DBreach of trade reporting obligations for the note

Explanation

Suitability requires that recommendations fit the client's objectives, financial situation, knowledge and risk tolerance. Approval of a product for sale does not make it suitable for every client. A capital-preservation client with limited experience is a poor match for a capital-at-risk complex note.

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