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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 officer discovers that portfolio managers can both place trades and amend the client suitability profiles that determine which products they may sell to a client. Which control principle is most directly breached?

Segregation of duties is breached, because the same staff can place trades and change the suitability profiles that limit those trades. This removes independent checking and allows unsuitable sales to be hidden or approved by the person who benefits from them.

  1. ASegregation of dutiesCorrect
  2. BBest execution
  3. CNetting of exposures
  4. DRisk-weighted asset floor

Explanation

Allowing the same person to originate trades and alter the suitability data that restricts those trades removes independent checking, which is the purpose of segregation of duties. Best execution concerns the quality of trade outcomes, while netting and RWA floors are capital and credit exposure concepts unrelated to this conflict.

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