FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
A wealth manager's relationship team recommends a leveraged structured note to a retired client whose stated objective is capital preservation and whose risk questionnaire shows low risk tolerance. The product is permitted under the firm's product list. Which compliance risk is most directly created by this recommendation?
The recommendation creates mis-selling risk. A leveraged structured note conflicts with a retired client's capital-preservation objective and low risk tolerance, so it is unsuitable. Being on the firm's approved product list does not cure a failure to match the product to the client's profile.
- AMis-selling risk arising from an unsuitable recommendationCorrect
- BSettlement risk arising from delayed delivery of the note
- CModel risk arising from the note's valuation methodology
- DConcentration risk arising from the firm's own inventory
Explanation
Suitability requires that a recommendation match the client's objectives, risk tolerance and circumstances. Recommending a leveraged product to a capital-preservation client breaches this even if the product is approved internally, so the exposure is mis-selling. The other risks are not what the facts describe.
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