Skip to content

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

An investment firm reclassifies a mid-sized corporate client from 'retail' to 'professional' so it can offer higher-risk leveraged products with lighter disclosure. The client has not been asked and has not consented. Which assessment is most appropriate?

The reclassification is improper. Moving a client to a category with less protection needs an objective assessment of expertise and experience plus the client's informed consent. Doing it unilaterally to sell riskier products undermines investor protection, and the breach exists regardless of whether losses later occur.

  1. AAcceptable, because firms may reclassify clients unilaterally to match their product range
  2. BAcceptable, provided the firm discloses the change in the next annual report
  3. CUnacceptable, because moving a client to a lower protection category requires objective assessment and informed client consentCorrect
  4. DUnacceptable only if the client subsequently incurs losses on the products

Explanation

Client classification determines the level of protection. Opting a client down to a lower-protection category requires an assessment of expertise and experience and the client's clear, informed agreement. The breach exists at the moment of reclassification, not only once losses arise.

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.

Practise Case Study: Investor Protection and Compliance Risks in Investment ActivitiesFree diagnostic mock

More Case Study: Investor Protection and Compliance Risks in Investment Activities questions