Guidance for Standard V: Investment Analysis, Recommendations, and Actions: formula sheet

Key formulas

Core requirement

Diligence + Independence + Thoroughness → Reasonable and adequate basis

Applies to every analysis, recommendation or action. The basis must be supported by appropriate research and investigation.

Test of compliance

Compliant if the process supports the conclusion, whatever the outcome

Investment losses alone are not a violation. A lucky gain with no research can still be a violation.

Reliance on others

Use of third-party research or models → make reasonable efforts to check them

Greater checking is needed when the source is unfamiliar or the work is complex. Blind reliance fails the standard.

Group work

A member in a group who disagrees with the group's conclusion should dissociate from it where appropriate. A member who relies on the group's work without dissociating is not in violation if they reasonably believe the group's work has a reasonable and adequate basis.

Dissociation is the route for a member who disagrees. Reliance without dissociation is acceptable only where the member reasonably believes the group's work is sound.

Recommended procedures

Written policies + defined research standards + quantitative-model checks + selection of outside advisers or vendors with care

Firms should set minimum research requirements and review the reasoning behind recommendations.

Core rule of Standard V(A)

Reliance on secondary or third-party research is allowed only after due diligence on its quality

Using it is fine. Using it unchecked is the violation.

Due diligence checklist

Assumptions + Methods and rigor + Data quality + Independence + Conclusion supported by evidence

Use this list to judge any source in a case.

Ongoing duty

Select with care, then review the provider periodically

A one-time check at selection is not enough if quality may change.

Responsibility

Your recommendation is your responsibility, whatever the source

Citing the provider does not remove your duty.

Core rule

Group consensus + reasonable and adequate basis + member comfortable it is sound = member may remain associated

Disagreeing with the group's conclusion does not by itself breach Standard V(A).

Dissociation rule

No reasonable basis, or member cannot support the recommendation = member should ask that their name be removed

Dissociation means refusing to be associated with the recommendation. It is not a duty to publish a rival view.

Reasonable basis test

Diligence + independence + thoroughness, supported by research and investigation

This is the standard the group work must meet. The test applies to the work, not to whether it matches your opinion.

Process disclosure

Disclose the basic format and general principles of the investment process; update clients promptly when it changes materially

Detail needed is enough to understand the approach, not proprietary secrets.

Content rule

Use reasonable judgment to identify the important factors, explain their use, and include significant limitations and risks

Do not omit a factor that would change the client's view of the recommendation.

Fact vs opinion

Fact = verifiable; opinion = judgment or forecast; label them separately

Presenting a forecast as fact is a violation.

Scope

Applies to clients and prospective clients, in all communication formats

Includes written, oral and electronic communication.

Core duty

Develop and maintain appropriate records that support analyses, recommendations, actions and client communications

Applies to both firm-created and member-created records relating to investment work.

Recommended retention period

At least 7 years in the absence of a regulatory requirement (longer if local law requires)

The Handbook recommends this period. Where law requires a longer period, follow the law.

Record ownership

Records created as part of employment = property of the firm

A departing member does not take originals without the employer's permission.

Electronic communications

Business-related emails, texts and social posts = records to be retained

Use firm-approved channels and follow the firm's capture and storage policy.

Law link

Longer local law period: follow the law. Shorter local law period: keep at least 7 years as the stricter practice

Standard I(A) requires following the stricter of law and the Code and Standards. A shorter local period does not remove the seven-year recommendation.

V(A) Diligence and Reasonable Basis

Reasonable and adequate basis + appropriate research and investigation + independent checks of third-party or group work

Breached when work is thin, a model is used blindly, or someone else's output is accepted without checking. Applies to recommendations and actions.

V(B) Communication with Clients

Disclose process + separate fact from opinion + include important factors + state limitations and risks

Applies to clients and prospective clients. Disclose process changes promptly. Models and their limits must be explained where relevant.

V(C) Record Retention

Keep records that support analyses, recommendations, actions and client communications

Seven years is the recommended minimum unless local law or firm policy requires longer. Records belong to the firm. Electronic communications count.

Quick distinction V(A) vs V(B)

V(A) = quality of the work done; V(B) = quality of what is told to the client

If the problem is shallow research or blind model use, it is V(A). If the problem is what the client was or was not told, it is V(B).

Quick revision

• V(A): exercise diligence, independence and thoroughness, and have a reasonable and adequate basis for recommendations and actions.
• The basis must be supported by appropriate research and investigation.
• Diligence depends on the facts, the type of security and the context, so more risk or complexity means more work.
• Before relying on third-party research, make reasonable inquiry into its assumptions, methods and independence.
• Do not simply copy others' work without checking it.
• In a group, you may stay associated with the group view if you believe it has a reasonable basis, even if you disagree.
• If you think the group view lacks a reasonable basis, you should dissociate from it.
• V(B): disclose the basic format and general principles of your investment process, and promptly tell clients of material changes.
• Separate fact from opinion in reports, and include the factors that are important to your recommendations.
• Tell clients about the limitations and risks of your analysis and recommendations.
• V(C): develop and keep appropriate records supporting your analysis, recommendations, actions and client communications.
• Records belong to the firm, and they may be kept in any medium, written or electronic.
• Absent a regulatory requirement, CFA Institute recommends retaining records for at least seven years.

Common mistakes

• Deciding a violation because the investment lost money. Fix: Judge the research and process. A sound process with a loss is not a violation.
• Saying any use of third-party research is a violation. Fix: Reliance is allowed if you make reasonable efforts to check that the research is sound.
• Thinking any outside research is forbidden or must be redone. Fix: Using it is allowed. You only need a reasonable check of quality and assumptions.
• Assuming a big or well-known provider needs no review. Fix: A good name lowers the depth of review but does not remove it. Periodic checks still apply.
• Thinking any disagreement with the group forces dissociation. Fix: Disagreement on a judgement call is allowed when the basis is reasonable and the member is comfortable.
• Thinking the member must change their own opinion to match consensus. Fix: The Standard does not require agreement. It requires a reasonable basis and honest association.
• Thinking you must reveal the full model or proprietary details Fix: The Standard asks for basic format and general principles only. Detail needs to be enough for understanding.
• Ignoring limitations and risks because the recommendation looks strong Fix: Always check that significant limitations and risks are communicated, such as model or data weaknesses.
• Saying records need to be kept for exactly seven years. Fix: Say the Handbook recommends at least seven years, and longer if local law requires it.
• Thinking a departing member may take their research files. Fix: Records belong to the firm. Take copies only with employer permission and respect confidentiality.

Exam tips

• Look for the one fact that shows the work done: verified or unverified source, tested or untested model. That fact usually decides the answer.
• Never pick an option that judges the decision by profit or loss alone.
• In essays, name the standard, state violation or no violation, and give the deciding fact in one sentence. Extra text earns no extra points.
• When asked for corrective actions, give specific steps such as verifying the source, reviewing model assumptions, or following firm research policy.
• Expect V(A) to appear next to V(B) and the third-party research guidance. Read carefully to see whether the issue is the research or the communication.
• Look for the verb of checking: reviewed, tested, compared. Its absence usually signals a violation.
• Expect a trap where the provider is famous or long used. Reputation alone is not due diligence.
• In essay answers, name the Standard, then give the specific failed check, such as independence or stale assumptions.