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

Standard V(A): Diligence and Reasonable Basis Explained

Updated 7 October 2026 · Fact-checked

Standard V(A) requires you to exercise diligence, independence and thoroughness when analyzing investments, making recommendations and taking investment actions. You must have a reasonable and adequate basis for each, supported by appropriate research and investigation. To solve a question, check whether the work behind the conclusion was sound, then name the breach.

Understand Standard V(A): Diligence and Reasonable Basis

Standard V(A) says that before you analyze a security, recommend it, or act on it, you must have done enough work to justify your view. The work must be thorough, and the judgment must be your own. Diligence is the effort. Reasonable basis is the result of that effort: facts and analysis that support the conclusion.

There is no fixed checklist for what is enough. The test is whether a careful, independent professional would find the research adequate for the purpose and the circumstances. A quick screen for a watch list needs less work than a recommendation to a client to buy a large position. The more serious the action, the deeper the research must be.

The Standard applies to your own research and to research you rely on from others, such as a third-party report, a colleague's model or a quantitative screen. You may rely on outside work only after you have made reasonable efforts to confirm it is sound. If you cannot understand how a model or report reaches its result, or you know its inputs are weak, you should not simply pass it on.

The Standard also covers group decisions. If you are part of a committee and the group's recommendation has no reasonable basis, you must not let your name stay attached to it. You can ask that it be removed, and if you believe the process is seriously flawed, you should dissociate from the recommendation. Following a majority is not a defense if you know the basis is inadequate.

In the exam, the vignette usually shows a shortcut: copying a report without checking, relying on a model whose limits are not understood, ignoring negative data, or skipping due diligence on an unfamiliar instrument. Your job is to spot what was missing and say whether the member violated V(A).

Key formulas to remember

Core requirement: Diligence + independence + thoroughness → reasonable and adequate basis, supported by research and investigation; Applies to investment analysis, recommendations and actions.
Adequacy test: Depth of research should match the type of action and the circumstances; No single level of work fits every case. Higher-stakes actions need deeper work.
Reliance on others' work: Rely on third-party or group research only after reasonable efforts to confirm it is sound; If it cannot be confirmed, do not rely on it or present it as your own conclusion.
Group research: If a group's recommendation lacks a reasonable basis, dissociate from it; Disagreeing member should have their name removed. Agreeing with a flawed group is not a defense.
Quantitative models: Understand inputs, assumptions and limits, including how the model behaves in stress or unusual conditions; Do not treat model output as sufficient without testing it.

How to solve Standard V(A): Diligence and Reasonable Basis questions

Use this method on any V(A) item. It keeps you focused on the process the member followed, not on whether the recommendation turned out right.

1Identify the action: analysis, recommendation, or investment action such as a trade or portfolio change.
2List what research or investigation the member actually did, and what the vignette says was skipped.
3Check independence: did the member form their own view, or copy a report, a colleague, or a majority without checking?
4Judge adequacy against the stakes. Ask if a careful professional would see this work as enough for this purpose.
5If outside research or a model was used, ask whether the member made reasonable efforts to confirm it and understood its limits.
6If a group decision is involved, check whether the member went along with something they knew lacked a basis.
7Decide: violation or not. Name Standard V(A) and state the missing step or the correct action.
8Pick the answer that matches your decision. Ignore options that judge the member by investment results alone.

Quickest way: Process, not outcome

When to use it: Use under time pressure when the vignette describes a recommendation or action and asks whether the member complied.

Underline the one shortcut in the vignette: no checking, blind reliance, ignored data, or unclear model.
Ask: would a careful professional be comfortable with the work behind this?
If no, it is a V(A) breach. If yes, it is compliant, even if the result was a loss.
For the corrective action, choose the option that adds verification, such as testing the model, confirming the source, or asking to be dissociated from the group.

Common mistakes in Standard V(A): Diligence and Reasonable Basis

Judging a member by whether the investment made or lost money.
Outcomes feel like proof of quality, so a bad result looks like a violation.
Fix: V(A) tests the research process. A sound process with a poor result is compliant. A poor process with a good result is still a breach.
Saying any use of third-party research is a violation.
Students overread the independence wording.
Fix: Reliance is allowed after reasonable efforts to confirm the work is sound. The breach is blind reliance.
Assuming a fixed amount of research is always required.
Students look for a rule with a number or checklist.
Fix: Adequacy depends on the action and the circumstances. Match the depth of work to the stakes.
Believing a member is safe if the group or committee agreed.
Shared responsibility feels like shared protection.
Fix: If a member knows the group's basis is inadequate, they should seek removal of their name and dissociate. Majority approval does not cure a flawed basis.
Treating quantitative model output as a reasonable basis by itself.
Numbers look objective and precise.
Fix: The member must understand the inputs, assumptions and limits, and consider unusual conditions. Unexamined output is not enough.
Confusing V(A) with V(B) or I(C).
All concern recommendations and the research behind them.
Fix: V(A) is about the quality of the work done. V(B) is about how it is communicated to clients. I(C) is about misstating facts or credit for work.

Worked examples

Example 1

Vignette: Lena Fischer, an analyst at a European asset manager, covers a mid-cap industrial firm. A broker publishes a bullish report with a target price. Lena has not read the firm's filings. She copies the broker's earnings forecast into her own note and issues a Buy recommendation to clients. The note does not mention the broker. Q1: Does Lena violate Standard V(A)? Q2: What should she have done?

Show the solution

The action is a recommendation to clients, a higher-stakes use of research.
Lena did no investigation of her own: she did not read the filings or test the forecast.
She relied on third-party work without making reasonable efforts to confirm it was sound.
So she lacks a reasonable and adequate basis. This is a V(A) violation.
Correct action: review the filings, test the broker's assumptions, form her own forecast, and then recommend. Using the broker's report as one input is acceptable if verified.
Failing to credit the broker is a separate concern under Standard I(C), but the question asks about V(A).

Answer: Q1: Yes, she violates V(A) because she relied on the broker without confirming its soundness. Q2: She should have verified the report and done her own research before recommending the stock.

Example 2

Vignette: Tomas Reyes sits on his firm's investment committee. The committee votes to add a structured note to client portfolios. Tomas does not understand how the note's payoff behaves in falling markets, and the issuer's documentation is incomplete. The other four members approve. Tomas votes against, but the committee asks him to sign off on the minutes. Q1: What should Tomas do under V(A)? Q2: Would he be compliant if he signed because the majority approved?

Show the solution

The action is a portfolio investment action affecting clients.
The committee lacks a reasonable basis because the payoff is not understood and the documentation is incomplete.
Tomas knows the basis is inadequate, so he must not simply go along.
He should ask for more research on the note and, if the group proceeds, request that his name be removed from the recommendation and dissociate himself.
Signing off because the majority approved is not a defense when he knows the basis is weak.

Answer: Q1: He should push for further investigation and, if the committee proceeds, ask that his name be removed and dissociate from the decision. Q2: No, majority approval does not make him compliant.

Exam tips

Read the vignette for the shortcut: copied reports, unchecked models, ignored negative data, or groupthink. That is the V(A) trigger.
Choose answers that add verification or dissociation. Reject answers that excuse the member because the outcome was good or because others agreed.
Expect quantitative-model and third-party-research angles. The correct answer usually says the member must understand the limits and confirm soundness.
Watch for look-alikes: if the problem is how the recommendation was explained to the client, think V(B). If it is misstating credit or facts, think I(C).
Name the Standard in your reasoning. It helps you eliminate options citing the wrong one.

Standard V(A): Diligence and Reasonable Basis in other exams

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

Standard V(A): Diligence and Reasonable Basis: frequently asked questions

What is a reasonable basis under Standard V(A)?

It is the support for your analysis, recommendation or action that comes from adequate research and investigation. A careful, independent professional should find it sufficient for the purpose. The depth needed depends on the action and the circumstances.

Can I use third-party research under Standard V(A)?

Yes, but only after making reasonable efforts to confirm it is sound. You must not rely on it blindly or present it as verified when you have not checked it. Use it as an input to your own judgment.

What should I do if I disagree with a group recommendation?

If you believe the group's recommendation lacks a reasonable basis, ask that your name be removed from it and dissociate from it. Raise the concerns with the group first, and escalate if needed. Going along with a flawed decision is not compliant.

Does V(A) apply to quantitative models?

Yes. You should understand the model's inputs, assumptions and limitations and consider how it may behave in unusual conditions. Model output alone is not a reasonable basis if you have not tested or understood it.