FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
An asset manager's sales team has been recommending a complex structured note to retail clients whose stated objective is capital preservation. A compliance review finds that no documented assessment was made of whether the product matched each client's profile. Which compliance obligation has most clearly been breached?
The suitability obligation has been breached. Firms must assess and document whether a product fits each client's objectives, risk tolerance and knowledge before recommending it. Selling a complex note to capital-preservation clients with no assessment fails this duty, whereas best execution concerns trade quality.
- ASuitability obligationCorrect
- BBest execution obligation
- CMarket abuse reporting obligation
- DClient money segregation obligation
Explanation
Suitability requires that recommended products fit the client's objectives, risk tolerance and knowledge, and that this assessment is documented. Recommending a complex note to capital-preservation clients without any assessment breaches it. Best execution concerns trade quality, not product fit.
Did you get it right without looking?
One question tells you little. A timed set on Case Study: Investor Protection and Compliance Risks in Investment Activities shows your real accuracy, how long you take and where you lose marks.
More Case Study: Investor Protection and Compliance Risks in Investment Activities questions
- An investment firm's internal audit finds that front-office staff routinely overrode pre-trade mandate-compliance alerts, with no second-lin…
- A firm's three lines of defense model is being reviewed after a mis-selling event in its wealth unit. Which arrangement is most consistent w…
- A wealth manager recommends a complex structured note to a retired client whose documented profile shows low risk tolerance and a need for c…
- An investment firm reclassifies a client from retail to professional status to widen the range of complex products it can offer. The client …
- A wealth manager recommends a complex structured note to a retired client whose stated objective is capital preservation and who has little …
- An investment firm reclassifies a retail client as a professional client at the client's own request, after the client states they trade fre…