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DOCUMENT ID: [Release No. 34-58001]

NOTICE: NOTICES

SUBJECT CATEGORY: Order Granting Temporary Exemption of Realpoint LLC From the Conflict of Interest Prohibition in Rule 17a-5(c)(1) Under the Securities Exchange Act of 1934

DOCUMENT SUMMARY: June 23, 2008.

I. Introduction

The Credit Rating Agency Reform Act of 2006 (``Rating Agency Act''),\1\ enacted on September 29, 2006, defined the term ``nationally recognized statistical rating organization'' (``NRSRO''), added Section 15E to the Securities Exchange Act of 1934 (``Exchange Act''), and provided authority for the Securities and Exchange Commission (``Commission'') to implement registration, recordkeeping, financial reporting, and oversight rules with respect to registered credit rating agencies. Exchange Act Rule 17g1 (17 CFR 240.17g1), and Form NRSRO (17 CFR 249b.300), prescribe the process for a credit rating agency to apply for registration. Rule 17g1 and Form NRSRO were effective on June 18, 2007, and the other rules, Rules 17g2 through 17g6 (17 CFR 240.17g2 through 17g6), became effective on June 26, 2007.\2\ \1\ Pub. L. No. 109291 (2006).
\2\ Release No. 3455857 (June 5, 2007), 72 FR 33564, 3356465 (June 18, 2007).

In particular, Rule 17g5(c)(1) prohibits an NRSRO from issuing or maintaining a credit rating solicited by a person that, in the most recently ended fiscal year, provided the NRSRO with net revenue equaling or exceeding 10% of the total net revenue of the NRSRO for the fiscal year. In adopting this rule, the Commission stated that such a person would be in a position to exercise substantial influence on the NRSRO, which in turn would make it difficult for the NRSRO to remain impartial.\3\
\3\ Id. at 33598.

II. Application and Exemption Request of Realpoint LLC

Realpoint LLC (``Realpoint''), a credit rating agency, furnished to the Commission an application for registration as an NRSRO under Section 15E of the Exchange Act for the class of credit ratings described in clause (iv) of Section 3(a)(62)(B) of the Exchange Act.\4\ Based on the information provided in the application, Realpoint has a conflict of interest that would cause the firm to be in violation of Rule 17g5(c)(1) if Realpoint became registered. Specifically, for the fiscal year ending December 31, 2007, Realpoint maintained credit ratings solicited by a person that provided Realpoint with 10% or more of its total net revenue for that year.
\4\ This class of credit ratings is for ``issuers of asset backed securities (as that term is defined in section 1101(c) of part 229 of title 17, Code of Federal Regulations * * * '') (``assetbacked securities''). Section 3(a)(62)(B)(iv) of the Exchange Act.

Realpoint has requested \5\ that the Commission exempt it from Rule 17g5(c)(1) for the fiscal year ending December 31, 2007 on the grounds that the prohibition hinders its ability as a small entity to further develop its business issuing credit ratings on assetbacked securities. Realpoint also stated that it expects the percentage of net revenue attributable to the relevant client to decrease to approximately 7.5% of its fiscal year 2008 net revenue.
\5\ Letter dated April 28, 2008 to the Commission from Robert Dobilas, CEO and President of Realpoint.

III. Discussion

The Commission, when adopting Rule 17g5(c)(1), noted that it intended to monitor how the prohibition operates in practice, particularly with respect to assetbacked securities, and whether exemptions may be appropriate.\6\ The Commission notes that the revenue in question was earned by Realpoint before it submitted its application for registration and in the year before Rule 17g5 was adopted, which limited the time for Realpoint to adjust its activities to conform to the requirements of the rule. In addition, the Commission recognizes that, given Realpoint's size, it is more likely that the firm would be affected by Rule 17g5(c)(1) than a larger credit rating agency with a more diversified client base. Further, the Commission notes that Realpoint has stated that it expects that the percentage of total net revenue provided by the client will be below 10% for fiscal year 2008. Finally, the Commission notes that the threshold in Rule 17g5(c)(1) is, of necessity, a bright line, but activities that exceed that threshold may or may not necessarily raise the concerns that are the basis for the rule. Hence, the Commission believes that it is important for the Commission to consider for each application the specific facts and circumstances of the applicant and whether to grant an exemption from Rule 17g5(c)(1). Moreover, in this instance, the Commission recognizes that granting this exemption furthers the primary purpose of the Rating Agency Act, which is to enhance competition in the highly concentrated ratings industry. Granting Realpoint's registration will increase the number of NRSROs registered in the assetbacked security class, which could increase competition.
\6\ Release No. 3455857 (June 5, 2007), 72 FR 33564, 33598 (June 18, 2007).

For these reasons, the Commission finds that granting Realpoint an exemption from Rule 17g5(c)(1) for calendar year 2008 is necessary and appropriate in the public interest and is consistent with the protection of investors.\7\ The exemption will expire on January 1, 2009 (Realpoint's fiscal year ends on December 31, 2008). The Commission believes that providing Realpoint with the opportunity to be registered as an NRSRO during this time frame is an appropriate approach to addressing the unique circumstances of a small credit rating agency, while balancing this against the goal of Rule 17g 5(c)(1)to prohibit a conflict that has the potential to influence a credit rating agency's impartiality. Consequently, this exemption is [[Page 36363]]
conditioned on Realpoint disclosing in Exhibit 6 to Form NRSRO that the firm received more than 10% of its net revenue in fiscal year 2007 from a client that paid it for a credit rating. This disclosure is designed to alert users of credit ratings to the existence of this specific conflict.
\7\ Section 36 of the Exchange Act authorizes the Commission, by rule, regulation, or order, to conditionally or unconditionally exempt any person from any rule under the Exchange Act, to the extent that the exemption is necessary or appropriate in the public interest and is consistent with the protection of investors. 15 U.S.C. 78mm.

Simultaneously with this Order, the Commission is issuing an Order granting the registration of Realpoint with the Commission as an NRSRO under Section 15E of the Exchange Act.\8\
\8\ Release No. 3458000 (June 23, 2008).

IV. Conclusion

Accordingly, pursuant to Section 36 of the Exchange Act,

it is hereby ordered that Realpoint LLC is exempt from the conflict of interest prohibition in Exchange Act Rule 17g5(c)(1) until January 1, 2009, provided that Realpoint LLC discloses in Exhibit 6 to Form NRSRO that the firm received more than 10% of its net revenue in fiscal year 2007 from a client that paid it for a credit rating.

By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E814530 Filed 62508; 8:45 am]
BILLING CODE 801001P

SUMMARY: Order Granting Temporary Exemption of Realpoint LLC from the Conflict of Interest Prohibition,

DOCUMENT BODY 2: June 23, 2008.

I. Introduction

The Credit Rating Agency Reform Act of 2006 (``Rating Agency Act''),\1\ enacted on September 29, 2006, defined the term ``nationally recognized statistical rating organization'' (``NRSRO''), added Section 15E to the Securities Exchange Act of 1934 (``Exchange Act''), and provided authority for the Securities and Exchange Commission (``Commission'') to implement registration, recordkeeping, financial reporting, and oversight rules with respect to registered credit rating agencies. Exchange Act Rule 17g1 (17 CFR 240.17g1), and Form NRSRO (17 CFR 249b.300), prescribe the process for a credit rating agency to apply for registration. Rule 17g1 and Form NRSRO were effective on June 18, 2007, and the other rules, Rules 17g2 through 17g6 (17 CFR 240.17g2 through 17g6), became effective on June 26, 2007.\2\ \1\ Pub. L. No. 109291 (2006).
\2\ Release No. 3455857 (June 5, 2007), 72 FR 33564, 3356465 (June 18, 2007).

In particular, Rule 17g5(c)(1) prohibits an NRSRO from issuing or maintaining a credit rating solicited by a person that, in the most recently ended fiscal year, provided the NRSRO with net revenue equaling or exceeding 10% of the total net revenue of the NRSRO for the fiscal year. In adopting this rule, the Commission stated that such a person would be in a position to exercise substantial influence on the NRSRO, which in turn would make it difficult for the NRSRO to remain impartial.\3\
\3\ Id. at 33598.

II. Application and Exemption Request of Realpoint LLC

Realpoint LLC (``Realpoint''), a credit rating agency, furnished to the Commission an application for registration as an NRSRO under Section 15E of the Exchange Act for the class of credit ratings described in clause (iv) of Section 3(a)(62)(B) of the Exchange Act.\4\ Based on the information provided in the application, Realpoint has a conflict of interest that would cause the firm to be in violation of Rule 17g5(c)(1) if Realpoint became registered. Specifically, for the fiscal year ending December 31, 2007, Realpoint maintained credit ratings solicited by a person that provided Realpoint with 10% or more of its total net revenue for that year.
\4\ This class of credit ratings is for ``issuers of asset backed securities (as that term is defined in section 1101(c) of part 229 of title 17, Code of Federal Regulations * * * '') (``assetbacked securities''). Section 3(a)(62)(B)(iv) of the Exchange Act.

Realpoint has requested \5\ that the Commission exempt it from Rule 17g5(c)(1) for the fiscal year ending December 31, 2007 on the grounds that the prohibition hinders its ability as a small entity to further develop its business issuing credit ratings on assetbacked securities. Realpoint also stated that it expects the percentage of net revenue attributable to the relevant client to decrease to approximately 7.5% of its fiscal year 2008 net revenue.
\5\ Letter dated April 28, 2008 to the Commission from Robert Dobilas, CEO and President of Realpoint.

III. Discussion

The Commission, when adopting Rule 17g5(c)(1), noted that it intended to monitor how the prohibition operates in practice, particularly with respect to assetbacked securities, and whether exemptions may be appropriate.\6\ The Commission notes that the revenue in question was earned by Realpoint before it submitted its application for registration and in the year before Rule 17g5 was adopted, which limited the time for Realpoint to adjust its activities to conform to the requirements of the rule. In addition, the Commission recognizes that, given Realpoint's size, it is more likely that the firm would be affected by Rule 17g5(c)(1) than a larger credit rating agency with a more diversified client base. Further, the Commission notes that Realpoint has stated that it expects that the percentage of total net revenue provided by the client will be below 10% for fiscal year 2008. Finally, the Commission notes that the threshold in Rule 17g5(c)(1) is, of necessity, a bright line, but activities that exceed that threshold may or may not necessarily raise the concerns that are the basis for the rule. Hence, the Commission believes that it is important for the Commission to consider for each application the specific facts and circumstances of the applicant and whether to grant an exemption from Rule 17g5(c)(1). Moreover, in this instance, the Commission recognizes that granting this exemption furthers the primary purpose of the Rating Agency Act, which is to enhance competition in the highly concentrated ratings industry. Granting Realpoint's registration will increase the number of NRSROs registered in the assetbacked security class, which could increase competition.
\6\ Release No. 3455857 (June 5, 2007), 72 FR 33564, 33598 (June 18, 2007).

For these reasons, the Commission finds that granting Realpoint an exemption from Rule 17g5(c)(1) for calendar year 2008 is necessary and appropriate in the public interest and is consistent with the protection of investors.\7\ The exemption will expire on January 1, 2009 (Realpoint's fiscal year ends on December 31, 2008). The Commission believes that providing Realpoint with the opportunity to be registered as an NRSRO during this time frame is an appropriate approach to addressing the unique circumstances of a small credit rating agency, while balancing this against the goal of Rule 17g 5(c)(1)to prohibit a conflict that has the potential to influence a credit rating agency's impartiality. Consequently, this exemption is [[Page 36363]]
conditioned on Realpoint disclosing in Exhibit 6 to Form NRSRO that the firm received more than 10% of its net revenue in fiscal year 2007 from a client that paid it for a credit rating. This disclosure is designed to alert users of credit ratings to the existence of this specific conflict.
\7\ Section 36 of the Exchange Act authorizes the Commission, by rule, regulation, or order, to conditionally or unconditionally exempt any person from any rule under the Exchange Act, to the extent that the exemption is necessary or appropriate in the public interest and is consistent with the protection of investors. 15 U.S.C. 78mm.

Simultaneously with this Order, the Commission is issuing an Order granting the registration of Realpoint with the Commission as an NRSRO under Section 15E of the Exchange Act.\8\
\8\ Release No. 3458000 (June 23, 2008).

IV. Conclusion

Accordingly, pursuant to Section 36 of the Exchange Act,

it is hereby ordered that Realpoint LLC is exempt from the conflict of interest prohibition in Exchange Act Rule 17g5(c)(1) until January 1, 2009, provided that Realpoint LLC discloses in Exhibit 6 to Form NRSRO that the firm received more than 10% of its net revenue in fiscal year 2007 from a client that paid it for a credit rating.

By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E814530 Filed 62508; 8:45 am]
BILLING CODE 801001P