FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
An investment firm reclassifies a client from retail to professional status to widen the range of complex products it can offer. The client has not been asked to confirm the change and has limited investment experience. Which is the primary compliance concern?
The main concern is that the firm removed protections the client was entitled to without a valid qualification test or informed consent. Professional status reduces suitability and disclosure safeguards, so reclassifying an inexperienced client to sell complex products is a client-classification breach and a mis-selling risk.
- AThe firm has lowered the level of protection the client receives without a valid basis or informed consentCorrect
- BThe firm has increased its regulatory capital requirement for the client's positions
- CThe firm has breached its obligation to hold client assets in segregated accounts
- DThe firm has violated best-execution rules by routing orders to a single venue
Explanation
Professional clients receive fewer conduct protections such as suitability and disclosure requirements. Moving a client to that category requires the client to meet qualifying criteria and to understand and consent to the loss of protection. Doing it for commercial convenience exposes the firm to mis-classification and mis-selling findings.
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