FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
An investment firm was fined after a star portfolio manager repeatedly breached client mandate limits. Surveillance alerts were generated but the compliance team closed them because the manager generated 30% of firm revenue. A post-incident review should conclude that the PRIMARY root cause is:
The primary root cause is compliance lacking independence and authority against a revenue-critical manager, a risk culture failure. Detection worked because alerts fired, but they were dismissed for commercial reasons, so adding alerts or mandates would not fix the problem.
- AInsufficient number of surveillance alerts produced by the monitoring system
- BLack of independence and authority of the compliance function relative to the revenue-generating business, reflecting a weak risk cultureCorrect
- CPoor investment performance of the manager's portfolio
- DAbsence of a written mandate for the affected clients
Explanation
Alerts were generated, so detection worked; the failure was in escalation and challenge because compliance deferred to revenue importance. This points to compromised independence and weak tone from the top. More alerts would not help if they are still dismissed, and the mandates existed since breaches were identified.
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