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News October 23, 2006 Issue

Discussion of Specific Issuers in Market Commentary Not Prohibited Past Specific Recommendations, Says Plaze

At last week’s National Society of Compliance Professionals conference in Washington, DC, in front of an audience of 800 or so compliance professionals, Division of Investment Management associate director Robert Plaze made the following pronouncement:

In the context of discussing market and economic events, an adviser may discuss the performance of specific issuers without running afoul of Rule 206(4)-1’s prohibition on past specific recommendations, even if the adviser does not comply with the "mechanical tests" set out in the Franklin Management no-action letter. Plaze reasoned that such a discussion would not be a specific recommendation, even if the adviser had, in fact, bought or held that specific issuer for its clients’ portfolios, as long as the market commentary did not mention the fact that the adviser had bought, held, or otherwise recommended the issuer. The prohibition on past specific recommendations, said Plaze, "simply doesn’t apply to a discussion of the marketplace."

In response to IM Insight’s inquiry, Plaze cited the 1965 SEC order in the matter of Spear & Staff for indirect support of this position.

Plaze’s view break ranks with the industry’s general understanding that advisers could not discuss specific companies in their general market commentary sections (unless they complied with the Franklin letter or listed every past recommendation, per the advertising rule). As Investment Adviser Association general counsel Karen Barr described it back in an October 2004 IM Insight article, when it comes to market commentary, the view has been that "if you talk about industry sectors, you are okay, as long as you don’t get into discussing specific issuers."

So. Who's going to volunteer to go in for the letter?