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

Following an investor-protection failure, a firm's internal audit finds that the issue had been raised by a junior employee twice but never reached senior management. Which lesson from the case is most relevant?

The key lesson is to build effective escalation and whistleblowing channels, with protection for those who raise concerns. The problem was not a lack of detection but that a known issue never reached senior management. Budgeting for fines or relying on external auditors does not fix the broken communication path.

  1. AEstablish effective escalation and whistleblowing channels with protection for those who raise concernsCorrect
  2. BEliminate the junior role from the control framework
  3. CRely solely on external auditors to detect conduct issues
  4. DIncrease the regulatory fine provisioning in the budget

Explanation

The failure was that a known issue did not escalate. Strong escalation and whistleblowing mechanisms ensure concerns reach senior management. Provisioning for fines does not prevent recurrence, and relying only on external auditors or removing roles does not fix communication flow.

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