Order Granting Temporary Exemption of LACE Financial Corp. From the Conflict of Interest Prohibition in Rule 17a-5(c)(1) of the Securities Exchange Act of 1934, 8721-8722 [E8-2771]
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Federal Register / Vol. 73, No. 31 / Thursday, February 14, 2008 / Notices
statistical rating organization
(‘‘NRSRO’’) under section 15E of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) for the classes of
credit ratings described in clauses (i)
through (v) of section 3(a)(62)(B) of the
Exchange Act.
Based on the information provided in
the application, LACE has a conflict of
interest relating to the fourth class that
would cause the firm to be in violation
of Exchange Act Rule 17g–5(c)(1) (17
CFR 240.17g–5(c)(1)) if it became
registered. LACE requested that the
Commission grant LACE an exemption
from the conflict of interest prohibition
in Exchange Act Rule 17g–5(c)(1).
Simultaneously with this Order, the
Commission is issuing an Order
(‘‘Exemptive Order’’) granting LACE an
exemption from Exchange Act Rule
17g–5(c)(1) until January 1, 2009.1
The Commission finds that the
application furnished by LACE is in the
form required by Exchange Act section
15E, Exchange Act Rule 17g–1 (17 CFR
240.17g–1), and Form NRSRO (17 CFR
249b.300) and contains the information
described in subparagraph (B) of section
15E(a)(1) of the Exchange Act.
Based on the application and
Exemptive Order, the Commission finds
that the requirements of section 15E of
the Exchange Act are satisfied.
Accordingly,
It is ordered, under paragraph
(a)(2)(A) of section 15E of the Exchange
Act, that the registration of LACE
Financial Corp. with the Commission as
an NRSRO under section 15E of the
Exchange Act for the classes of credit
ratings described in clauses (i) through
(v) of section 3(a)(62)(B) of the Exchange
Act is granted.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E8–2772 Filed 2–13–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57301]
Order Granting Temporary Exemption
of LACE Financial Corp. From the
Conflict of Interest Prohibition in Rule
17a–5(c)(1) of the Securities Exchange
Act of 1934
rwilkins on PROD1PC63 with NOTICES
February 11, 2008.
I. Introduction
The Credit Rating Agency Reform Act
of 2006 (‘‘Rating Agency Act’’),1 enacted
1 Release
1 Public
No. 34–57301 (February 11, 2008).
Law 109–291 (2006).
VerDate Aug<31>2005
16:49 Feb 13, 2008
Jkt 214001
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
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
8721
ratings on asset-backed securities. LACE
indicated in its application that it
expects the percentage of revenue
attributable to the relevant client to
decrease based on LACE’s revenue
trend, continued growth, and the
problems in the asset-backed securities
market.
II. Application and Exemption Request
of LACE Financial Corporation
LACE Financial Corp. (‘‘LACE’’), a
credit rating agency, furnished to the
Commission an application for
registration as an NRSRO under Section
15E of the Exchange Act for the classes
of credit ratings described in clauses (i)
through (v) of Section 3(a)(62)(B) of the
Exchange Act. Based on the information
provided in the application, LACE has
a conflict of interest relating to the
fourth class 4 that would cause the firm
to be in violation of Rule 17g–5(c)(1) if
LACE became registered. Specifically,
for the fiscal year ending December 31,
2007, LACE maintained credit ratings
on asset-backed securities solicited by a
person that provided LACE with 10% or
more of its total revenues for that year.
LACE has requested that the
Commission exempt it from Rule 17g–
5(c)(1) on the grounds that the
prohibition hinders its ability as a small
entity to grow its business issuing credit
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.5 The
Commission notes that the revenue in
question was earned by LACE before it
submitted its application for registration
and in the year before Rule 17g–5 was
adopted, which limited the time for
LACE to adjust its activities to conform
to the requirements of the Rule. In
addition, the Commission recognizes
that, given LACE’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 LACE has stated that it expects that
the percentage of total revenue provided
by the client will decrease. 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 LACE registration in
the asset-backed security class will
increase the number of NRSROs
registered in this class, which could
increase competition.
For these reasons, the Commission
finds that granting LACE 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.6 The
2 Release No. 34–55857 (June 5, 2007), 72 FR
33564, 33564–65 (June 18, 2007).
3 Id. at 33598.
4 The fourth 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.
5 Release No. 34–55857 (June 5, 2007), 72 FR
33564, 33598 (June 18, 2007).
6 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.
PO 00000
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Fmt 4703
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8722
Federal Register / Vol. 73, No. 31 / Thursday, February 14, 2008 / Notices
exemption will expire on January 1,
2009 (LACE’s fiscal year ends on
December 31, 2008). The Commission
believes that providing LACE with the
opportunity to be registered in the assetbacked security class 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
conditioned on LACE 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 to rate asset-backed
securities. This disclosure is designed to
alert users of credit ratings to the
existence of this specific conflict.
Simultaneously with this Order, the
Commission is issuing an Order
granting the registration of LACE with
the Commission as an NRSRO under
Section 15E of the Exchange Act.7
IV. Conclusion
Accordingly, pursuant to Section 36
of the Exchange Act,
It is hereby ordered that LACE
Financial Corp. is exempt from the
conflict of interest prohibition in
Exchange Act Rule 17g–5(c)(1) until
January 1, 2009, provided that LACE
Financial Corp. 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 to rate asset-backed securities.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E8–2771 Filed 2–13–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57296; File No. SR–Amex–
2008–08]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Immediate Effectiveness
of a Proposed Rule Change to
Eliminate Percentage Orders and
Passive Price Improving Orders on the
AEMI Platform
rwilkins on PROD1PC63 with NOTICES
February 8, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
6, 2008, the American Stock Exchange
LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared substantially by the
Amex. The Amex has submitted the
proposed rule change under section
19(b)(3)(A) of the Act 3 and Rule 19b–
4(f)(6) thereunder,4 which renders the
proposal effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Amex proposes to revise its rules
to eliminate percentage orders and
passive price improvement (‘‘PPI’’)
orders as valid order types for securities
traded on the Amex’s AEMI platform.
According to the Amex, neither order
type is currently being used.
The text of the proposed rule change
is available at https://www.amex.com,
the principal office of the Amex, and the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Amex included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item III below. The Amex has
prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
In March 2007, the Commission
approved PPI orders as a valid order
type on AEMI.5 According to the Amex,
PPI orders were designed to encourage
specialists and Registered Traders to
provide inbound aggressing orders with
increased opportunities for price
improvement. PPI orders would provide
undisplayed liquidity on the AEMI
3 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
5 See Securities Exchange Act Release No. 55464
(March 13, 2007), 72 FR 13146 (March 20, 2007)
(order approving File No. SR–Amex–2007–08).
Book and would react to aggressing
orders according to criteria met at the
time of order entry. The Amex states
that it never implemented PPI orders
and, therefore, that PPI orders are not
being used currently by Amex market
participants. The Amex now proposes to
eliminate PPI orders from the AEMI
rules.
The percentage order is another valid
order type under the Amex’s AEMI rules
that, according to the Amex, is not in
use currently. The Amex states that on
November 30, 2006, it issued Amex
Notice 2006–60, ‘‘Disablement of
Percentage Orders in AEMI,’’ which
prohibited the entry of percentage
orders for securities that had migrated
from the Amex’s legacy systems onto
the AEMI platform. That prohibition,
which the Amex originally expected to
be temporary, has remained in effect.
The Amex notes, further, that
percentage orders, which involve
discretionary action by the specialist,
inherently require the specialist to act in
an agency capacity for the order.
Because the Amex intends to move
toward a specialist model that
deemphasizes the broker role, the Amex
proposes to eliminate percentage orders
from the AEMI rules.
The Amex therefore proposes to
delete the definitions of percentage
order and PPI order from Rule 131–
AEMI, ‘‘Types of Orders,’’ and all crossreferences to such orders in other AEMI
rules. In addition, the Amex proposes to
delete from Rule 1A–AEMI,
‘‘Applicability, Definitions, References,
and Phase-In,’’ the definitions of
Automatic Conversion, Manual
Conversion, Active Manual Conversion,
and Passive Manual Conversion, all of
which relate only to percentage orders.
The Amex also proposes to delete the
detailed requirements for percentage
order conversions in paragraph (j) of
Rule 154–AEMI, ‘‘Orders in AEMI.’’
2. Statutory Basis
The Amex believes that the proposed
rule change is consistent with
Regulation NMS,6 as well as Section
6(b) of the Act,7 in general, and furthers
the objectives of Section 6(b)(5) of the
Act,8 in particular, in that it is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
4 17
7 Release
No. 34–57300 (February 11, 2008).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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16:49 Feb 13, 2008
Jkt 214001
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
6 17
CFR 242.600 et seq.
U.S.C. 78f(b).
8 15 U.S.C. 78f(b)(5).
7 15
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]]>Agencies
[Federal Register Volume 73, Number 31 (Thursday, February 14, 2008)]
[Notices]
[Pages 8721-8722]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-2771]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57301]
Order Granting Temporary Exemption of LACE Financial Corp. From
the Conflict of Interest Prohibition in Rule 17a-5(c)(1) of the
Securities Exchange Act of 1934
February 11, 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\
---------------------------------------------------------------------------
\1\ Public Law 109-291 (2006).
\2\ Release No. 34-55857 (June 5, 2007), 72 FR 33564, 33564-65
(June 18, 2007).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\3\ Id. at 33598.
---------------------------------------------------------------------------
II. Application and Exemption Request of LACE Financial Corporation
LACE Financial Corp. (``LACE''), a credit rating agency, furnished
to the Commission an application for registration as an NRSRO under
Section 15E of the Exchange Act for the classes of credit ratings
described in clauses (i) through (v) of Section 3(a)(62)(B) of the
Exchange Act. Based on the information provided in the application,
LACE has a conflict of interest relating to the fourth class \4\ that
would cause the firm to be in violation of Rule 17g-5(c)(1) if LACE
became registered. Specifically, for the fiscal year ending December
31, 2007, LACE maintained credit ratings on asset-backed securities
solicited by a person that provided LACE with 10% or more of its total
revenues for that year.
---------------------------------------------------------------------------
\4\ The fourth 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.
---------------------------------------------------------------------------
LACE has requested that the Commission exempt it from Rule 17g-
5(c)(1) on the grounds that the prohibition hinders its ability as a
small entity to grow its business issuing credit ratings on asset-
backed securities. LACE indicated in its application that it expects
the percentage of revenue attributable to the relevant client to
decrease based on LACE's revenue trend, continued growth, and the
problems in the asset-backed securities market.
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.\5\ The Commission notes that the revenue
in question was earned by LACE before it submitted its application for
registration and in the year before Rule 17g-5 was adopted, which
limited the time for LACE to adjust its activities to conform to the
requirements of the Rule. In addition, the Commission recognizes that,
given LACE'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 LACE has
stated that it expects that the percentage of total revenue provided by
the client will decrease. 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 LACE registration in the asset-backed security class will
increase the number of NRSROs registered in this class, which could
increase competition.
---------------------------------------------------------------------------
\5\ Release No. 34-55857 (June 5, 2007), 72 FR 33564, 33598
(June 18, 2007).
---------------------------------------------------------------------------
For these reasons, the Commission finds that granting LACE 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.\6\ The
[[Page 8722]]
exemption will expire on January 1, 2009 (LACE's fiscal year ends on
December 31, 2008). The Commission believes that providing LACE with
the opportunity to be registered in the asset-backed security class
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 conditioned on LACE 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 to rate asset-
backed securities. This disclosure is designed to alert users of credit
ratings to the existence of this specific conflict.
---------------------------------------------------------------------------
\6\ 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 LACE with the Commission as an NRSRO under
Section 15E of the Exchange Act.\7\
---------------------------------------------------------------------------
\7\ Release No. 34-57300 (February 11, 2008).
---------------------------------------------------------------------------
IV. Conclusion
Accordingly, pursuant to Section 36 of the Exchange Act,
It is hereby ordered that LACE Financial Corp. is exempt from the
conflict of interest prohibition in Exchange Act Rule 17g-5(c)(1) until
January 1, 2009, provided that LACE Financial Corp. 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 to rate asset-
backed securities.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E8-2771 Filed 2-13-08; 8:45 am]
BILLING CODE 8011-01-P
