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 stated objective is capital preservation and who has little investment experience. The recommendation is not consistent with the client's profile. Which investor protection concept has most clearly been breached?
The suitability obligation has been breached. A firm must recommend only products that fit the client's objectives, experience and risk tolerance. Selling a complex structured note to an inexperienced retiree who wants capital preservation is a mismatch, unlike best execution, market abuse or custody issues.
- ASuitability obligationCorrect
- BBest execution obligation
- CMarket abuse prohibition
- DCustody segregation requirement
Explanation
Suitability requires that products recommended match the client's objectives, risk tolerance, knowledge and financial situation. Best execution concerns the quality of trade execution, market abuse concerns manipulation or insider dealing, and custody segregation concerns safekeeping of client assets. None of those is the issue here.
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