Subject 15. Standard V (A) Diligence and Reasonable Basis PDF Download
V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
A. Diligence and Reasonable Basis.
Members and Candidates must:
- Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
- Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.
Members must perform the diligent and thorough investigations necessary to make an investment recommendation or to take investment action. Three factors determine the nature of the diligence, thoroughness of the research, and level of investigation required by the standard:
- Investment philosophy followed.
- The role of the member or candidate in the investment decision-making process.
- The support and resources provided by the employer.
Members must establish a reasonable basis for all investment recommendations and actions. Diligence must be exercised to avoid any material misrepresentation. In other words, members cannot be quick or negligent in making investment recommendations.
You are very excited about a small high-tech firm that is developing a new method of making Internet connections more efficient. You advise your clients to buy this security and tell them that a full report will be available shortly. Your recommendation is neither diligent nor thorough. You have not provided reasonable basis for the recommendation. It is impossible to distinguish between fact and opinion without further information.
Using secondary or third-party research
Secondary research: research conducted by someone else in the member or candidate's firm.
Third-party research: research conducted by entities outside the member or candidate's firm.
Members and candidates should check if research is sound. Examples of criteria include the assumptions used, the rigor of analysis, the timeliness of the research, and the objectivity and independence of recommendations. If the research is suspected to lack a sound basis, members and candidates should refrain from relying on it.
User Contributed Comments 6
|asianl6||shouldn't make recommendations until a thorough pursue of evidence.|
|AUAU||Sometimes, analysts are wrongly predict/conclude a recommendation should they be subject violation of standards or be sued???|
|kforcfa||why do we need longer than 3 year period?|
|bhaynes||AUAU - No. As long as their analysis was thorough and they did due diligence, they have not violated the standard.
Kforcfa - 3 years is too short of a time period. The time frame should longer, i.e. 10 year time horizon or back to inception if available
|leftcoast||Isn't the issue with the investment banker not giving a range of production numbers something other than a violation of diligence and reasonable basis?
Sounds like misrepresentation to me. Standard I.C. I believe?
|johntan1979||No, it is V(A) Diligence. He failed to do his homework of churning out a range of production scenarios (best case to worst case), which demands a lot of effort.|
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
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