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

A wealth manager discovers that several client portfolios were repeatedly allocated the worst-priced trades from block orders, while a proprietary account received the best-priced fills. Which control would be most effective at preventing this practice going forward?

Pre-trade documented pro-rata allocation combined with post-trade surveillance of fill prices by account is best. It removes trader discretion after execution and detects systematic favoritism toward proprietary accounts, directly addressing the cherry-picking risk.

  1. ARequiring pre-trade allocation of block orders on a documented pro-rata basis, with post-trade surveillance of fill-price dispersion by accountCorrect
  2. BIncreasing the frequency of client newsletters
  3. CRaising the annual bonus pool for traders
  4. DRequiring traders to sign a yearly code-of-ethics acknowledgement only

Explanation

Cherry-picking is prevented by fixing allocation before execution and monitoring outcomes for systematic favoritism. An annual attestation alone is a weak, non-preventive control, and the others do not address allocation.

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