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

An investment firm reclassifies a retail client as a professional client at the client's own request, after the client states they trade frequently. Which action best reflects sound compliance practice before the reclassification?

Reclassification to professional status should follow an assessment of the client's expertise, experience and knowledge, with a clear written warning about the protections being lost. A request alone or account size is insufficient, and the firm cannot ignore the assessment duty.

  1. AAccept the request and remove all retail protections immediately since the client asked
  2. BReclassify only if the firm assesses the client's expertise, experience and knowledge, and warns the client in writing of the protections that will be lostCorrect
  3. CReclassify automatically if the client's account balance exceeds the firm's average
  4. DReclassify and keep full suitability and disclosure duties unchanged to avoid any risk

Explanation

Opting up requires an adequate assessment of the client's expertise, experience and knowledge, plus a clear written warning about lost protections. A client's request or wealth alone is insufficient. Keeping protections unchanged would make the reclassification pointless, and automatic acceptance ignores the assessment duty.

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