Page 36 - FINAL CFA II SLIDES JUNE 2019 DAY 1

READINGS 1 AND 2: CFA INSTITUTE CODE OF ETHICS AND STANDARDS OF
MODULE 2.8: STANDARD V PROFESSIONAL CONDUCT GUIDANCE FOR STANDARDS I–VII
V Investment Analysis, Recommendations, and Actions
V(A) Diligence and Reasonable Basis..

Reasonable Basis: The level of research required to satisfy the requirement for due diligence will differ depending on the product or service
offered. A list of some things that should be considered prior to making a recommendation or taking investment action includes:
1) Global and national economic conditions;
2) A firm’s financial results, operating history, and business cycle stage;
3) Fees and historical results for a mutual fund;
4) Limitations of any quantitative models used;
5) 5) A determination of whether peer group comparisons for valuation are appropriate.

Using Secondary or Third-Party Research: Encourage your firms to adopt a policy for periodic review of the quality of third-party research, if
they have not. Examples of criteria to use in judging quality are:
(1) Review assumptions used;
(2) Determine how rigorous the analysis was;
(3) Identify how timely the research is; 1
(4) 4) Evaluate objectivity and independence of the recommendations.
Using Quantitative Research: Must be able to explain the basic nature of the quantitative research and how it is used to make investment
decisions. Members should consider scenarios outside those typically used to assess downside risk and the time horizon of the data used for
model evaluation to ensure that both positive and negative cycle results have been considered.

Developing Quantitative Techniques: The Standard requires greater diligence of members and candidates who create quantitative techniques
than of those who use techniques developed by others. Members and candidates must understand the technical details of the products they offer
to clients. A member or candidate who has created a quantitative strategy must test it thoroughly, including extreme scenarios with inputs that fall
outside the range of historical data, before offering it to clients.

External Advisers: Members should make sure their firms have procedures in place to review any external advisers they use or promote to
ensure that, among other things, the advisers: 1) Have adequate compliance and internal controls; 2) Present returns information that is correct;
3) Do not deviate from their stated strategies.

Group Research and Decision Making: Even if a member does not agree with the independent and objective view of the group, he does not
necessarily have to decline to be identified with the report, as long as there is a reasonable and adequate basis.