FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
An investment firm discovers that its advisers recommended a complex, high-fee product to retail clients with conservative risk profiles, and a regulator subsequently fines the firm. Which root cause is most directly indicated by this fact pattern?
The most direct root cause is a failure of suitability and know-your-customer controls. Advisers sold complex, high-fee products to conservative clients, so product recommendations were not matched to client risk profiles. This is a conduct and investor protection failure rather than a liquidity, market risk or valuation problem.
- AFailure to ensure product suitability and know-your-customer processes matched products to client risk profilesCorrect
- BInsufficient liquidity buffers at the firm level
- CWeak market risk limits on the trading desk
- DInaccurate valuation of the firm's proprietary securities
Explanation
Recommending complex, costly products to conservative clients is a suitability and client-profiling failure, which is a core investor protection and conduct risk. The other options relate to liquidity, market risk or valuation, none of which the facts describe.
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 tracks a key risk indicator for failed trade confirmations with thresholds: green below 2%, amber 2% to 4%, red above 4%.…
- A regulator states that its objectives include maintaining market integrity, ensuring investors receive adequate disclosure, and reducing in…
- A wealth management firm wants its board to receive early warning of mis-selling risk. Which reporting design best supports effective govern…
- A portfolio manager at a fund firm learns, through a friend at a listed company, that a takeover bid will be announced next week. He buys sh…
- A wealth management firm's compliance review finds that relationship managers sold a complex structured note to retail clients whose stated …
- A wealth manager's relationship team recommends a leveraged structured note to a retired client whose stated objective is capital preservati…