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

Following a regulatory enforcement action against a peer, the board of an investment firm asks which element is most fundamental to an effective compliance risk framework. Which answer is best?

An independent compliance function with sufficient authority, resources and direct access to senior management and the board is most fundamental. Revenue-linked pay undermines objectivity, annual audits are too infrequent, and leaving compliance to portfolio managers removes the independent oversight that a second line of defence provides.

  1. AA compliance function independent of business lines, with authority and direct access to senior management and the boardCorrect
  2. BCompensating compliance staff based on the revenue of the business units they monitor
  3. CRelying exclusively on annual external audits to detect breaches
  4. DDelegating all compliance responsibility to individual portfolio managers

Explanation

Independence, adequate authority and resources, and direct reporting lines to the board are core to effective compliance. Tying pay to business revenue compromises objectivity, annual audits are not continuous monitoring, and delegating to front-line managers removes the second line of defence.

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