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CFA Level II Exam · Guidance for Standard V: Investment Analysis, Recommendations, and Actions

Applying Standard V: Cases and Compliance Procedures

Updated 7 October 2026 · Fact-checked

Standard V covers Diligence and Reasonable Basis, Communication with Clients and Prospects, and Record Retention. To solve a case, find who produced or communicated the analysis, check whether the basis was reasonable and documented, check what was disclosed to clients, then name the Standard breached and the corrective action.

Understand Applying Standard V: Cases and Compliance Procedures

Standard V has three parts. V(A) Diligence and Reasonable Basis requires you to exercise diligence, independence and thoroughness, and to have a reasonable and adequate basis, supported by research and investigation, for any recommendation or action. V(B) Communication with Clients and Prospects requires you to disclose the basic format and general principles of your investment process, to disclose significant limitations and risks, to use reasonable judgment in choosing what is significant, and to separate fact from opinion. V(C) Record Retention requires you to develop and maintain records that support your analysis, recommendations, actions and communications with clients.

In an item set you rarely get a plain definition question. You get a vignette about an analyst, a team, a model or a research report, and you must decide whether conduct was a violation. The test is process, not outcome. A recommendation that loses money is not a violation if the basis was reasonable and documented. A recommendation that makes money can still be a violation if there was no reasonable basis.

The Handbook also recommends compliance procedures. For V(A), firms should have a policy requiring a reasonable basis, a rating system with clear, consistent definitions, and written guidelines for reviewing third-party research and for using quantitative models. For V(B), firms should keep a record of the process, disclose it, and label fact and opinion. For V(C), firms should keep records in a form that can be retrieved, and the Handbook recommends a retention period of at least seven years, unless regulation requires longer. Records belong to the firm, not the individual.

A useful habit is to ask what a prudent colleague would have done. Did they check the source, test the assumptions, understand the limits of the model and tell the client what mattered? If a step is missing, a Standard is likely engaged. Many cases also touch other Standards, such as I(C) Misrepresentation or III(C) Suitability, so pick the Standard the question actually targets.

Key formulas to remember

Standard V(A) core duty
Recommendation or action requires: diligence + independence + thoroughness + reasonable and adequate basis supported by research
Judge the process used, not whether the investment made or lost money.
Standard V(B) core duty
Disclose process + significant limitations and risks + separate fact from opinion
Applies to all communications, including reports, calls and presentations. Include factors that are significant to the recommendation.
Standard V(C) core duty
Maintain records supporting analysis, recommendations, actions and client communications
Handbook recommends at least seven years unless local rules require longer. Records are the firm's property.
Third-party research rule
Relying on outside research requires prior due diligence on its assumptions and methods
A well-known source does not remove the duty to assess the basis.
Group research rule
A member may rely on group work if there is no reason to believe it lacks a reasonable basis
A dissenting member should ask that their name be removed if the report lacks a reasonable basis and they disagree.

How to solve Applying Standard V: Cases and Compliance Procedures questions

Use the same sequence for every Standard V item. It keeps you inside the vignette and avoids guessing from the headline.

  1. 1Read the question stem first so you know whether it asks for a violation, the correct action, or a recommended procedure.
  2. 2Identify the person and the activity in the vignette: researching, using a model, relying on others, communicating, or keeping records.
  3. 3Map the activity to a part: reasonable basis points to V(A), what the client was told points to V(B), and documentation points to V(C).
  4. 4Check the process facts in the vignette: was the source checked, were limits of the model understood, was fact separated from opinion, were records kept.
  5. 5Ignore outcomes. Profit or loss is rarely the test.
  6. 6Check whether another Standard is the better fit, such as I(C) or III(C), and choose the one the stem targets.
  7. 7Pick the option that names the right Standard and the proper corrective step, such as more research, added disclosure or record creation.
  8. 8Confirm that the option does not overstate the rule, for example by requiring a specific format when the Standard asks only for a reasonable basis.

Quickest way: Three-question Standard V screen

When to use it: Use when time is short and the vignette is long. It takes about a minute per question.

  1. Ask: was there a reasonable basis? If not, V(A).
  2. Ask: did the client get the process, the risks and a clear line between fact and opinion? If not, V(B).
  3. Ask: is there a record that supports the work? If not, V(C).
  4. Eliminate options that judge by results or that demand more than the Standard asks.
  5. Choose the option that fixes the process gap.

Common mistakes in Applying Standard V: Cases and Compliance Procedures

  • Judging a violation by whether the recommendation lost money.

    Real-life thinking links bad outcomes to blame.

    Fix: Ask whether the basis was reasonable and documented. A good process with a bad result is compliant.

  • Assuming a respected third-party report can be used without checking.

    Candidates trust big brands.

    Fix: Under V(A), the member should have a process to assess the report's assumptions and methods, and should be able to explain them.

  • Thinking V(B) requires disclosing every detail of the process.

    The word disclose sounds absolute.

    Fix: The Standard requires the basic format and general principles, plus significant limitations and risks, using reasonable judgment.

  • Treating records as personal property when leaving a firm.

    Analysts feel they created the work.

    Fix: Under V(C), records generally belong to the firm. Keep them in line with firm policy and local rules.

  • Relying on a quantitative model without understanding its limits.

    Model output looks objective.

    Fix: Know the model's inputs, assumptions and what happens under stress, and tell clients about significant limitations under V(B).

  • Choosing V(A) when the issue is communication or the reverse.

    Cases combine research and client messaging.

    Fix: Separate the facts: the quality of the work is V(A), the content of what was said is V(B).

Worked examples

Example 1

Vignette: Meera, an analyst at a global asset manager, covers a mid-cap industrial firm. Her firm buys a third-party research report on the company. Under time pressure, she copies the report's target price and rating into the firm's recommendation without reviewing its assumptions. The report was written by a well-regarded provider. Her firm has no written policy for reviewing outside research. Q1: Which Standard is most likely violated? Q2: What is the best action for the firm? Choose between A) add a policy to review third-party research, B) stop buying all outside research, C) keep the practice because the provider is well regarded.

Show the solution
  1. Q1: The activity is relying on outside research with no check. That concerns reasonable basis, so Standard V(A) Diligence and Reasonable Basis.
  2. Reputation of the provider does not remove the duty to assess assumptions and methods.
  3. Q2: The Handbook recommends that firms have written guidelines for reviewing third-party research. Option A matches.
  4. Option B overreaches because outside research is allowed if properly assessed. Option C is the exact error the Standard warns against.

Answer: Q1: Standard V(A). Q2: Option A, adopt a policy to review third-party research assumptions and methods.

Example 2

Vignette: Arjun manages portfolios using a quantitative screening model. In a client presentation he says the model is proven and gives only the expected return. He does not mention that the model has not been tested in a high-volatility market. Years later a regulator asks for support for his past recommendations, and he has only the final stock lists. Q1: Which Standard applies to the presentation? Q2: Which Standard applies to the missing support? Q3: What should Arjun have done in the presentation?

Show the solution
  1. Q1: The issue is what the client was told. He omitted a significant limitation and implied certainty. That is Standard V(B) Communication with Clients and Prospects.
  2. Q2: Supporting records for analysis and recommendations are required by Standard V(C) Record Retention. Only the final lists are not enough.
  3. Q3: He should have explained the model's basic process, disclosed the significant limitation that it was untested in high-volatility markets, and stated that the return figure is an expectation, not a fact.
  4. Also, a model whose limits are not understood weakens the reasonable basis under V(A), but the stem asks about the presentation and the records.

Answer: Q1: V(B). Q2: V(C). Q3: Describe the process, disclose the untested-in-volatility limitation and present expected return as opinion with its risks.

Exam tips

  • Read the stem first. Many Standard V items ask for the recommended procedure, not only the violation.
  • Watch for outcome language such as the stock fell. It is usually a distractor.
  • Look for words like relied, copied, model, proven and no documentation. They signal V(A), V(B) or V(C).
  • Reject options that demand the impossible, such as verifying every input personally, when the Standard asks for a reasonable basis.
  • Remember that the firm owns the records and that the seven-year figure is a recommendation unless local rules require longer.

Applying Standard V: Cases and Compliance Procedures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Applying Standard V: Cases and Compliance Procedures: frequently asked questions

What are the three parts of Standard V?

They are V(A) Diligence and Reasonable Basis, V(B) Communication with Clients and Prospects, and V(C) Record Retention. Together they cover how you build, communicate and document investment advice.

Can I rely on research from another firm?

Yes, if you have a process to check that it has a reasonable basis. You should understand its assumptions and methods and not simply adopt its conclusions.

How long should records be kept under Standard V(C)?

The Handbook recommends at least seven years, unless regulation requires a longer period. Records generally belong to the firm.

Does a losing recommendation violate Standard V?

Not by itself. The Standard tests whether the basis was reasonable and documented and whether the client was properly informed. A poor outcome with a sound process is not a violation.