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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 reviews its client onboarding. Which of the following is the best example of a control aimed specifically at protecting client assets rather than at ensuring fair treatment in sales practices?

Holding client securities in segregated accounts with a third-party custodian is the control that protects client assets. It keeps client property separate from firm assets, limiting loss from misuse or insolvency. Risk questionnaires, call recording and fee disclosures address conduct and transparency instead.

  1. AHolding client securities in segregated accounts with a third-party custodian, separate from firm assetsCorrect
  2. BRequiring a documented risk profile questionnaire before any recommendation
  3. CRecording and retaining all client telephone orders for dispute resolution
  4. DProviding clients with a standardised fee disclosure before account opening

Explanation

Segregation and independent custody protect assets from firm insolvency or misuse. The other options relate to suitability, record keeping and disclosure, which concern conduct and transparency in sales rather than asset safeguarding.

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