Members and Candidates must:
1 Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment
2 Have a reasonable and adequate basis, supported by appropriate
research and investigation, for any investment analysis, recommendation, or action.
Members must take care to cover all pertinent issues when issuing investment recommendations. Communicating the thoroughness of analysis taken before making a judgment allows clients to understand the basis for taking action. Relevant considerations include:
- relevant macroeconomic conditions
- industry and business cycle conditions
- the company’s operating and financial history
- the appropriateness of peer group considerations
- fee structures
- the output and limitations of models used
- the quality of assets being securitized
When third-party research is used, reasonable efforts should be made to ensure that it is sound. Members should judge the assumptions made, the rigor of the analysis, the timeliness of the information, and the objectivity of the author.
When relying on quantitative models, members must understand the parameters used and the data incorporated, the assumptions and limitations of the model, and how the results contributed to the decision being made.
When hiring external advisors, members should:
- review the advisor’s code of ethics
- understand the advisor’s compliance and control procedures
- assess the quality of reported performance information
- review the advisor’s investment process and whether they adhere to it
When undertaking group research, an analyst may disagree with some aspects of the collective decision. However, it is acceptable to remain associated with the research as long as the analyst believes it has a reasonable and adequate basis and is objective.
Firms should appoint a supervisory analyst or review committee to verify that research and recommendations have a reasonable and adequate basis. Written due diligence procedures should be made available to analysts. Firms hiring external managers should have a consistent set of criteria for evaluating them.
The CFA Institute Standards of Practice Handbook provides several examples of potential violations of diligence and reasonable basis.
- failing to conduct sufficient diligence due to time constraints
- failing to consider a wide range of scenarios
- using a limited number of sources
- failing to update a report to reflect relevant new information
- failing to consider all relevant factors
- making arbitrary decisions
- failing to understand the parameters of models used