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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 wants a control that most effectively detects front-running by traders who have access to large pending client orders. Which control is most effective?

Surveillance that compares personal and proprietary trades with timestamps of client order receipt is most effective. Front-running means trading ahead of known client orders, so matching trade timing to order flow reveals it directly. Training, brochure reviews and fee audits do not detect this specific behavior.

  1. ASurveillance comparing personal and proprietary trades with timestamps of client order receiptCorrect
  2. BAnnual ethics training for all staff
  3. CQuarterly review of marketing brochures
  4. DAnnual external audit of the fee schedule

Explanation

Front-running involves trading ahead of client orders, so it is detected by matching timestamps of order receipt against personal and proprietary trades. Training is preventive but does not detect; brochure and fee reviews address unrelated risks.

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