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

A wealth manager recommends a complex structured note to a retired client whose documented profile states low risk tolerance and a need for capital preservation. The note carries a high commission for the firm. Which compliance risk is most directly created?

The most direct risk is mis-selling. A complex, high-commission product recommended to a low-risk-tolerance retiree breaches suitability obligations and reflects a conflict of interest. The scenario involves no inside information, laundering, or model issues, so market abuse, money laundering and model risk are not the primary concern.

  1. AMarket abuse through use of inside information
  2. BMis-selling arising from a suitability breach and conflict of interestCorrect
  3. CMoney laundering through layering of funds
  4. DModel risk from using an inaccurate pricing model

Explanation

Recommending a product inconsistent with the client's documented risk profile, motivated by commission, is a suitability failure combined with a conflict of interest, i.e. mis-selling risk. Nothing in the scenario involves inside information, illicit funds, or model errors.

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