Investment firms whose clients include a high proportion of agents, such as pension managers investing on behalf of employees, are significantly more likely to commit fraud. This is primarily because agents, unlike principals, do not bear the full cost of a fraud. Therefore, they can be easily swayed through gifts or kickbacks to overlook fraudulent activities. This creates an environment conducive to fraud, as the risk of detection and punishment is significantly reduced.

Choice B is incorrect. Firms where a majority of the investors are large with sophisticated portfolios are less likely to commit fraud. This is because these types of investors typically have more knowledge and resources to monitor their investments closely, making it harder for fraudulent activities to go unnoticed.

Choice C is incorrect. Firms trading assets through an external broker as opposed to an affiliate brokerage are not necessarily more susceptible to committing fraud. While using an affiliate brokerage could potentially create conflicts of interest, it does not inherently increase the likelihood of fraudulent activities. In fact, external brokers might provide additional oversight that can help prevent fraud.

Choice D is incorrect. Although firms that have custody of the client’s cash and securities do have more opportunities for misappropriation, this does not automatically make them more susceptible to committing fraud. Many firms with custody arrangements have stringent controls in place specifically designed to prevent fraudulent activities.