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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 shows low risk tolerance and a need for capital preservation. The note carries a higher commission for the adviser than comparable simple products. Which pair of compliance issues is most clearly present?

The scenario shows a suitability breach and an unmanaged conflict of interest. The product contradicts the client's low risk tolerance and capital preservation need, while the higher adviser commission creates an incentive to favor it. Nothing indicates insider trading, money laundering or reporting failures.

  1. AInsider trading and market manipulation
  2. BSuitability breach and an unmanaged conflict of interestCorrect
  3. CMoney laundering and sanctions evasion
  4. DLate regulatory reporting and data privacy failure

Explanation

Recommending a product inconsistent with the client's documented risk profile is a suitability failure. The higher commission creates an incentive conflict that should be managed or disclosed. No material non-public information, illicit funds or reporting delays are described.

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