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

After a fraud at an investment manager, a review finds that the custodian, administrator and manager were all closely connected, no independent party verified client assets, and client complaints were handled internally by the manager's own staff. Which remedy most directly strengthens the investor protection framework against recurrence?

Independent third-party custody and verification of client assets, plus escalation of complaints to an independent function, is the best remedy. It restores separation of duties and external checks that were missing, while self-certification, fewer examinations or higher fees would not close the control gaps.

  1. AIncreasing the manager's performance fee to improve incentives
  2. BRequiring independent third-party custody and verification of client assets, with complaints escalated to an independent functionCorrect
  3. CAllowing the manager to self-certify asset holdings annually
  4. DReducing the frequency of regulatory examinations to lower costs

Explanation

The failures are lack of independence in custody, verification and complaint handling. Independent custody and escalation create checks and separation of duties. Self-certification and fewer exams weaken oversight, and higher fees do nothing to address control gaps.

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