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

In the three lines of defense model at an investment manager, which activity belongs to the second line?

Independent compliance testing of suitability controls and challenge of business risk assessments is a second-line activity. The second line oversees and challenges the first line, which owns controls day to day, while internal audit as the third line provides separate independent assurance to the board.

  1. APortfolio managers confirming that their trades meet client mandates
  2. BIndependent compliance testing of suitability controls and challenge of business risk assessmentsCorrect
  3. CInternal audit's periodic assurance report to the audit committee
  4. DOperations staff reconciling positions daily as part of their normal duties

Explanation

The second line, risk and compliance, sets frameworks and independently monitors and challenges the first line. Portfolio managers and operations own and run controls (first line), while internal audit provides independent assurance as the third line.

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