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FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds

During operational due diligence on a fund, the reviewer finds that the same person at the manager acts as chief operating officer, chief compliance officer, and the contact who approves cash wires and valuations of illiquid positions. Which control weakness is most directly indicated?

The facts indicate a lack of segregation of duties. One individual controls compliance, cash movements, and valuation of illiquid positions, so no independent check exists, which raises the risk of error, misappropriation, and mismarking. This is an operational control failing rather than a portfolio, leverage, or liquidity issue.

  1. AInsufficient diversification of the portfolio
  2. BLack of segregation of dutiesCorrect
  3. CExcessive use of leverage
  4. DPoor liquidity terms for investors

Explanation

Concentrating wire approval, valuation, and compliance in one person removes checks and balances, which is lack of segregation of duties. The other items concern portfolio, leverage, or terms and are not shown by the facts.

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