Subject: File No. S7-04-07
From: Barron H Putnam, Ph.D.
Affiliation: Owner and Advisor, LACE Financial Corporation

May 3, 2007


Audited Financial Statements. We have estimated that the overall cost of SEC regulation for LACE Financial would be $207,515.

We suggest the SEC would adjust its regulator requirements for small NRSROs to help keep the costs down. In this regard, I would like to suggest for companies our size the following:

Establish a threshold for providing audited financial statements of $5 or $10 million in asset size. NRSRO companies under this size would provide: (a) a year-end balance sheet and income statement signed by their accountant and a statement by the Company President that he has reviewed the statements and to the best of his knowledge are true and accurate and reflect the financial condition of the company and (b) a federal Income Tax Statement prepared and signed by their accountants. If for any reason the SEC felt there was a problem with these statements or the SEC was concerned about the financial condition of the company, they would impose the audit requirement.

For small companies, especially those that report on a cash basis, I doubt that there would be much difference in the reported financials between the companys income tax returns and audit statements. If a small rating company has not or is not currently being audited, this will cause a large and significant cost to the company. If regulatory costs significantly reduce earnings for new entrants to the credit rating business, it will obviously impede the companys growth through less retained earnings for capital.

Supporting Schedule. LACE Financial has no problem in reporting to the SEC an update of its list of its 10 largest clients or information about revenues, total aggregate credit analysts compensation, and median compensation.

Disclosing information about analysts. LACE does not feel it is appropriate to disclose employment information concerning experience and employment history of its analysts. We have no problems doing this for senior managers, such as for the Advisor to, President, and Compliance Officer. In general, it is LACEs policy not to disclose employment information concerning its employees.

Recordkeeping. Although it may be stated in the SEC proposal to regulate NRSROs, it was not clear to me as to the time frame that records are to be kept and for what periods. Are records to be kept for each time a credit rating is derived or on an annual basis? LACE rates approximately 20,000 institutions a quarter, 80,000 a year. LACE has stated in previous correspondence to the SEC that it is willing to keep rating sheets for three years and maintain records on each company we have rated quarterly or semi-annually that gives the credit rating, the date the credit rating was issued, and the key ratios that will explain why the institution was assigned that specific rating. These records are kept at our Frederick office and we can answer promptly why and how an institution was rated for any period of time over the past 23 years. These records cover 1.3 million ratings.

We would suggest that LACE not be required to use a third party to store our rating sheets because:
1. It would duplicate our storage costs because we want ready access to these records and keep a copy to answer inquiries from our clients.
2. It would increase our costs.
3. It could reveal trade secrets on specific details of our rating process.

I would like to suggest to the SEC if high regulatory costs are imposed every time a rating is issued, rating companies will rate less frequently, thus reducing the frequency of the evaluation of the financial condition of institutions to investors.

Management of Conflicts. #1 pg 92

make it unlawful for a NRSRO to have a conflict relating to the issuance of a credit rating where the person soliciting the credit rating was the source of 10% of the total net revenue of the NRSRO.

Barron Putnam owns 90% of LACE and could conceivably draw 90% of LACE earnings. Although LACE does not charge for credit ratings, it does charge for new issue ratings. The revenue from rating a very large pool of structured preferred securities and each of its members could possibly exceed 10% of net revenue. Obviously, we want to comply with the SEC but may have to meet with the SEC staff to ensure we dont perform an unlawful act. We are not suggesting that the SEC change its proposed rule, but possibly a company could request a waiver based on atypical circumstances.

Page 95 Unsolicited Ratings. To be fair in the rating practice, we rate all institutions within an industry that meet general reporting requirements such as, all domestic bank holding companies that have consolidated assets greater than $500 million (approximately 900). The SEC may want to note that we reserve the right not to rate a company for any reason. Generally, the reasons are: (1) the company does not want to be rated, we feel that there might be problems with the data being reported, we feel the company is atypical, or (2) has not been in business long enough for us to properly rate its financial condition. We supply our clients with data (public) on the company but assign it an NR (not rated).