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

An investment firm's compliance function reports directly to the head of the portfolio management business line, who sets its budget and annual review. Which governance weakness does this arrangement most directly create?

The main weakness is loss of independence. When compliance reports to and is evaluated by the business head it oversees, it may be pressured to soften or suppress findings, undermining effective second-line oversight of investor protection obligations.

  1. ACompliance lacks independence and may be pressured to soften findings that affect the business lineCorrect
  2. BCompliance cannot access the firm's trading records
  3. CThe firm cannot apply a three-lines-of-defence model at all
  4. DCompliance staff will be unable to give advice on regulation

Explanation

Independence of the compliance function requires that it not report to, or be funded and assessed by, the units it oversees. Reporting to the portfolio head creates a conflict of interest and risks diluted findings. The other options are not direct consequences of the reporting line.

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