Learning Module 7 of Ethical and Professional Standards 10–15% of the exam

Guidance for Standard V: Investment Analysis, Recommendations, and Actions

3 lessons. About 16 minutes in cram mode, 78 minutes in full.

Start with lesson 1 Learn with Sensei Read the module summary Practice this module

Lessons

1
Standard V(A): Diligence and Reasonable Basis
demonstrate 6 min cram, 30 min full
2
Standard V(B): Communication with Clients and Prospective Clients
demonstrate 6 min cram, 30 min full
3
Standard V(C): Record Retention
demonstrate 4 min cram, 18 min full

What the exam expects you to do

Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity.Standard V(A): Diligence and Reasonable Basis
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.Standard V(A): Diligence and Reasonable Basis
Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.Standard V(A): Diligence and Reasonable Basis

Module summary

The whole module on one sheet, organised by lesson: what to memorize, how the ideas fit together, the formulas and the key terms. No paragraphs, just what you need to revise.

Hide what I know

How deeply to learn each part

Know the idea: Understand it in general. It frames other topics, but you will not calculate with it.
Use it: Understand it well enough to solve a question with it. Recognize when it applies.
Memorize: Learn it by heart. The exam will not give it to you.

Standard V(A): Diligence and Reasonable Basis

Known

MemorizeStandard V(A): what to know cold

Situation	What you must do
Your own recommendation	Exercise diligence, independence and thoroughness; have a reasonable and adequate basis backed by research
Secondary (same firm) or third-party (outside firm) research	Make reasonable efforts to confirm it is sound. Check assumptions, rigor, timeliness, objectivity and independence
Quantitative model	Understand its assumptions and limitations; test it before use, including extreme scenarios
External adviser / subadviser	Review as carefully as a security: code of ethics, compliance and controls, return data quality, process and adherence to strategy
Group report you disagree with	Stay on it if the consensus has a reasonable basis and is independent and objective. You may document your dissent
Outcome	A bad result after a diligent process is not a violation

Memory hook Trust, then verify: who wrote it, what did they assume, how hard did they look, is it current, are they independent?

Know it cold No reasonable basis (thin sources, unchecked research, untested model) = violation. A sound process that still loses money = no violation.

Key terms

diligence Memorize
reasonable basis Memorize
third-party research Memorize
quantitative models Use it
external advisers Use it
group research Use it
dissenting opinion Use it

Standard V(A): where a basis comes from and what to check

Reasonable and adequate basisthe evidence behind a recommendation or action

Your own research Use it filings, management calls, industry and macro context
Others' research Memorize
- Secondary research done by someone else in your firm
- Third-party research done outside the firm, such as a broker
- Check assumptions, rigor, timeliness, objectivity and independence
Quantitative models Use it
- Understand assumptions and limitations
- Test before use including extreme scenarios
- Developers owe a higher level of diligence than users
External advisers Use it
- Code of ethics
- Compliance and internal controls
- Quality of reported returns
- Process and adherence to strategy

Standard V(B): Communication with Clients and Prospective Clients

Known

MemorizeStandard V(B): the five duties

#	Duty	Key detail
1	Services and costs	What you will do (and not do) and the costs the client pays, including affiliates and third parties. No dollar amounts or firm costs needed
2	Investment process	Basic format and general principles; promptly disclose changes that might materially affect it
3	Risks and limitations	Significant ones known at the time, such as leverage, liquidity, capacity
4	Important factors	Use reasonable judgment; include what matters so readers can follow and challenge the reasoning
5	Fact vs opinion	Label forecasts and estimates as opinion; state model limits

Memory hook S-P-R-F-F: Services and costs, Process, Risks, Factors, Fact vs opinion. Say what you do, how you do it, what could go wrong, what matters, and what is only a view.

Know it cold Applies to every form of communication, written or spoken. Disclosure is ongoing. A short post is fine if fuller information is available.

Key terms

nature of services and costs Memorize
investment process disclosure Memorize
material changes Memorize
risks and limitations Memorize
fact versus opinion Memorize
forms of communication Use it
report presentation Use it

Standard V(B): what to tell clients

Communication with clients and prospectsany form: report, call, email, social media

Services and costs Memorize what you provide and what the client pays
- Nature of services including what is not provided
- Costs to the client including affiliates and third parties; no dollar figure needed
Investment process Memorize
- Basic format and general principles
- Material changes disclosed promptly
Risks and limitations Memorize
- Significant risks leverage, counterparty, country, credit
- Limitations liquidity and capacity
Report content Use it
- Important factors by reasonable judgment
- Fact vs opinion forecasts labeled as opinion

Standard V(C): Record Retention

Known

MemorizeStandard V(C): what to know cold

Point	The rule
What	Records that support analysis, recommendations, actions and client communications, including reviews that led to no change
Which media	Any: paper, electronic, emails, texts, blog and social media posts
Who owns them	The firm. Leaving? No copies without express consent. Rebuild from public sources, not from memory
How long	Local rules or firm policy first. If none, at least seven years
Who keeps them	Usually the firm, but you must archive your own notes and documents supporting current communications

Memory hook Keep it, it is theirs, seven years: keep what supports the work, the firm owns it, and seven years is the fallback when no rule applies.

Know it cold Law or firm policy beats the guideline. No rule = at least seven years. Records leave with the firm, never with you.

Key terms

record retention Memorize
records are the property of the firm Memorize
new media records Use it
local requirements Memorize
seven-year guideline Memorize

Standard V(C): what to keep, who owns it, how long

Records supporting your workanalysis, recommendations, actions, client communications

Keep Memorize
- Research notes and models inputs and outputs
- Meeting notes and outside research
- Client communications email, texts, social media
- Reviews with no change in position
Ownership Memorize
- Property of the firm not the individual
- Leaving no copies without express consent; rebuild from public sources
Duration Memorize
- Local law or firm policy follow first
- No rule at least seven years