FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
An asset manager's compliance function reviews a portfolio manager who repeatedly allocates profitable block trades to a favored proprietary account after execution, and allocates unprofitable trades to client accounts. Which compliance risk does this behavior most directly represent?
This is unfair trade allocation, known as cherry-picking. Assigning winning trades to a favored account after execution and losing trades to clients breaches fiduciary duty and fair-treatment obligations, so it is a compliance and investor protection risk rather than a best execution or liquidity issue.
- AUnfair trade allocation (cherry-picking) that breaches duties to clientsCorrect
- BBest execution failure caused by high commissions
- CMarket timing of mutual fund shares
- DFailure to maintain adequate liquidity buffers
Explanation
Allocating trades after seeing performance, favoring one account at the expense of clients, is cherry-picking. It breaches fiduciary duty and fair-allocation requirements. Best execution concerns the quality of execution price and cost, not post-trade allocation.
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