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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

Following a valuation scandal at a fund, investors ask which governance arrangement best mitigates the risk of overstated valuations of illiquid positions. Which is most effective?

Independent valuation by an administrator or separate function under a board-approved policy, with audit committee review of exceptions, best mitigates overstated valuations. It separates marking from those whose pay depends on performance, whereas manager-controlled or affiliated valuation leaves the conflict of interest in place.

  1. AValuation performed by an independent function or administrator under a board-approved policy, with the audit committee reviewing exceptionsCorrect
  2. BValuation by the portfolio manager who holds the position, since they know it best
  3. CValuation based solely on the broker quotes the manager selects
  4. DAnnual valuation by the founder's affiliated accounting firm

Explanation

Separating valuation from the front office under a board-approved policy removes the incentive to inflate marks, and committee review of exceptions provides oversight. The other options leave valuation under manager influence.

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