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

An investment adviser earns higher commissions on proprietary funds than on third-party funds and recommends proprietary funds to most clients, with comparable alternatives available at lower cost. Which response best fits a sound investor protection framework?

The firm should identify and disclose the conflict, manage it through policies and incentive design, and document why each recommendation serves the client. Investor protection requires putting client interests first; silence, passive reliance on client questions or insurance do not address the conduct problem.

  1. AIdentify and disclose the conflict, manage it through policies and incentive design, and document why each recommendation is in the client's interestCorrect
  2. BStop all disclosure to avoid confusing clients, since the recommendations are legal
  3. CRely on clients to ask about commissions if they are concerned
  4. DTransfer the conflict risk by taking out insurance against client complaints

Explanation

Conflicts of interest must be identified, disclosed and managed, with the client's interest placed first and the rationale documented. Silence, reliance on client questions or insurance do not remove the duty to the client or address the underlying conduct risk.

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