Put the Diligence and Reasonable Basis standard, V(A), into practice
The idea
Members must exercise diligence, independence and thoroughness in analysing investments and making recommendations, and must have a reasonable and adequate basis, supported by appropriate research and investigation. Relying on a third party's research is permitted only after making reasonable efforts to establish its soundness — the source's reputation alone is not sufficient. Relying on a quantitative model requires understanding its assumptions and limitations, not merely its output. The level of diligence required scales with how much the recommendation depends on the analysis and how material the position will be.
A practice question
May a member rely on research produced by a third party?
- Yes, after reasonable efforts to check it is sound — correct
- Yes, if the third party is a well-known firmWhy not: Reputation is a reason to expect quality rather than evidence of it, and the Standard asks the member to look.
- No, under no circumstancesWhy not: A prohibition would make research impossible, since almost all analysis builds on work done elsewhere.
Standard V(A) Diligence and Reasonable Basis permits reliance on third-party research after reasonable efforts to establish that it is sound. Reliance is allowed; unexamined reliance is not.
A harder one
What does Standard V(A) require of a member using a quantitative model built by someone else?
- That the model be disclosed to clientsWhy not: Disclosure of the process belongs to Standard V(B), and telling a client about a model the member does not understand helps neither of them.
- Its assumptions and limitations, not just the output — correct
- That the model be independently rebuiltWhy not: Rebuilding is one way to understand a model and is not what the Standard demands.
Standard V(A) requires the member to understand the model's assumptions and limitations, not merely its output, because a reasonable basis means knowing when the output can be relied on.
The hardest tier
An analyst proposes a concentrated position rather than a small satellite holding. What changes?
- Nothing, the same work is owed either wayWhy not: A flat requirement would either over-research trivial decisions or under-research consequential ones.
- The depth of research owed rises with the stakes — correct
- Only the disclosure requirementWhy not: Disclosure under Standard V(B) may also change, and what shifts here is the work behind the recommendation.
Standard V(A) makes diligence proportionate. A concentrated position puts more of the outcome on this analysis, so more research is owed.
In the app: 9 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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