
[Federal Register: June 26, 2008 (Volume 73, Number 124)]
[Notices]               
[Page 36362-36363]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jn08-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58001]

 
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

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 17g-1 (17 CFR 240.17g-1), and Form NRSRO 
(17 CFR 249b.300), prescribe the process for a credit rating agency to 
apply for registration. Rule 17g-1 and Form NRSRO were effective on 
June 18, 2007, and the other rules, Rules 17g-2 through 17g-6 (17 CFR 
240.17g-2 through 17g-6), became effective on June 26, 2007.\2\
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    \1\ Pub. L. No. 109-291 (2006).
    \2\ Release No. 34-55857 (June 5, 2007), 72 FR 33564, 33564-65 
(June 18, 2007).
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    In particular, Rule 17g-5(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\
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    \3\ Id. at 33598.
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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 17g-5(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.
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    \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 * * * '') 
(``asset-backed securities''). Section 3(a)(62)(B)(iv) of the 
Exchange Act.
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    Realpoint has requested \5\ that the Commission exempt it from Rule 
17g-5(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 asset-backed 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.
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    \5\ Letter dated April 28, 2008 to the Commission from Robert 
Dobilas, CEO and President of Realpoint.
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III. Discussion

    The Commission, when adopting Rule 17g-5(c)(1), noted that it 
intended to monitor how the prohibition operates in practice, 
particularly with respect to asset-backed 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 17g-5 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 17g-5(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 17g-5(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 17g-5(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 asset-backed security 
class, which could increase competition.
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    \6\ Release No. 34-55857 (June 5, 2007), 72 FR 33564, 33598 
(June 18, 2007).
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    For these reasons, the Commission finds that granting Realpoint an 
exemption from Rule 17g-5(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.
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    \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.
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    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\
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    \8\ Release No. 34-58000 (June 23, 2008).
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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 17g-5(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. E8-14530 Filed 6-25-08; 8:45 am]

BILLING CODE 8010-01-P
