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

An asset manager's compliance function discovers that a portfolio manager has repeatedly allocated profitable trades to a personal-related account and unprofitable trades to client accounts after trade execution. Which compliance concern does this best describe?

This is cherry-picking: assigning trades to accounts after execution so that profitable trades go to a favored account and losing trades go to clients. It breaches the duty to allocate fairly. Front-running and churning involve different conduct, namely trading ahead of orders and excessive trading for commissions.

  1. ACherry-picking through unfair trade allocationCorrect
  2. BBest execution failure due to high commissions
  3. CFront-running of a client order
  4. DChurning of client accounts

Explanation

Allocating trades after the outcome is known, giving winners to a favored account and losers to clients, is cherry-picking. Front-running involves trading ahead of a client order on the basis of its knowledge, which is not described. Churning concerns excessive trading to generate commissions.

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