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Conflict of Interest Management Policy

Preamble

     Credit ratings bear the function of information infrastructure in the capital market. Therefore, a credit rating agency (“CRA”) is expected to ensure adequacy and effectiveness of management of conflicts of interest, appropriateness of credit rating process, and sufficiency of information disclosure.

     The Financial Instruments and Exchange Act (the “FIE Act”) prescribes certain provisions regarding prohibited acts and CRA’s obligation to establish operational control systems, etc., based on the standpoint that conflicts of interest between the CRA and the investors, etc. should be avoided. In the light of such circumstances and to the end that it would not undermine the interest of investors, Rating and Investment Information, Inc. (“R&I”) hereby publishes “Conflict of Interest Management Policy” which stipulates our policy to manage the activities which entail any actual or potential conflicts of interest (“Specified Acts”), corresponding to the content, characteristics and size of the business.

Purpose

  1. (1) R&I enhances the transparency and integrity of the credit rating process, and provides investors and other participants in the financial market with more credible credit ratings.
  2. (2)  To this end, R&I has established measures and procedures to avoid conflicts of interest that should be followed as a company-wide issue, and hereby set “Conflict of Interest Management Policy” (the “Policy”), based on the FIE Act and Cabinet Office Ordinance on Financial Instruments Business, etc. (the “Cabinet Office Ordinance”) and keeping in mind the purpose of “Code of Conduct Fundamentals for Credit Rating Agencies” issued by the International Organization of Securities Commissions (“IOSCO”).
  3. (3) R&I has established internal regulations and operational procedures manuals designed to ensure that R&I shall implement with certainty the philosophies and principles shown in the Policy. R&I requires all the executives and employees to comply with these regulations and procedures manuals. R&I shall disclose any changes to this Conflict of Interest Management Policy in a timely manner.

Identification of the activities which entail any actual or potential conflicts of interest (“Specified Acts”) and grouping of Specified Acts by type

     Conflicts of interest mean acts to undermine the interests of investors, in an attempt to benefit itself, Rating Stakeholders or any other persons.

     R&I identifies in advance and in an appropriate manner the activities which entail any actual or potential conflicts of interest (“Specified Acts”), groups such acts by types, and appropriately manages conflicts of interest, with the aim of complying with Laws and Regulations on Prohibited Acts and preventing certain activities to undermine the interest of investors, even if such activities do not fall under a category of Prohibited Acts. In addition, R&I verifies the appropriateness and effectiveness of the identification of the activities which entail any actual or potential conflicts of interest (“Specified Acts”) and grouping of Specified Acts by types in a timely and appropriate manner, and revises them if needed. 

     As for the way to identify the activities which entail any actual or potential conflicts of interest (“Specified Acts”), R&I evaluates them, for example, in consideration of the contents and contexts of the conflicts of interest whose types are set down below:

  1. (1) Types of the activities which entail any actual or potential conflicts of interest (“Specified Acts”):  

a) Activities which entail any potential conflicts of interest between R&I and the Rating Stakeholders or other persons;

b) Activities which entail any potential conflicts of interest between the executives or employees of R&I, including Person in Charge of Rating, and the Rating Stakeholders or other persons; and,

c) Activities which entail any actual or potential risks to undermine the interest of investors, except for the activities put up in a) and b) above.

  1. (2) Specific examples of the activities which entail any actual or potential conflicts of interest (“Specified Acts”):

a) Activities which entail any potential conflicts of interest between R&I and the Rating Stakeholders or other persons:

- where R&I has been paid by Rating Stakeholders for the Credit Rating Activities;

- where R&I has been paid by Rating Stakeholders for the services except for Credit Rating Activities;

- where R&I has been furnished with loans (including the guarantee of obligations and the offering of collaterals) by Rating Stakeholders;

- where R&I provides a credit rating in cases where the holder of the voting rights of R&I, such as shareholders, etc., falls under a category of Rating Stakeholder for such a credit rating;

- where R&I provides a credit rating where the Rating Stakeholder for such a credit rating acts as the underwriter of securities issued by R&I;

- where R&I forces Rating Stakeholder to have an unnecessary transaction, etc. in an attempt to benefit itself;

- where R&I depends largely on revenues generated by particular clients, or, for particular clients, the proportion of the revenues other than the ones for Credit Rating Activities increases; or,

- where R&I conducts an act of providing to someone or making available to the public credit ratings on matters set up in Cabinet Office Ordinance Article 309, in cases where R&I has a close relationship set up in Cabinet Office Ordinance Article 308 with a Rating Stakeholder.

b) Activities which entail any potential conflicts of interest between the executives or employees of R&I, including Person in Charge of Rating, and the Rating Stakeholders or other persons:

- where the executives or employees of R&I conduct in proprietary or through the third party selling and buying, etc. of the securities issued by or related to the Rating Stakeholder in cases where the executive or employee of R&I is a Person in Charge of Rating related to the subject Rating Stakeholder;

- where the executives or employees of R&I benefit themselves or avoid losses in the conducts of the sale and purchase or other transactions of securities, etc. by utilizing, etc. non-public information they have obtained in the course of their work;

- where the executives or employees of R&I make any approach in an attempt to assume the position of an Officer or any other position equivalent thereto of the Rating Stakeholder;

- where the executives or employees of R&I conduct acts of providing to someone or making available to the public credit ratings on matters set up in Cabinet Office Ordinance Article 309, in cases where R&I has a close relationship set up in Cabinet Office Ordinance Article 308 with a Rating Stakeholder;

- where R&I determines prior to the leave of Rating Analyst from R&I an inappropriate credit rating of any matter in which Rating Stakeholder have interests, in cases where the subject Rating Analyst assumes the position of an Officer, etc. of the Rating Stakeholder.

c) Activities which entail any actual or potential risks to undermine the interest of investors, except for the activities put up in a) and b) above.

- where R&I or the executives or employees of R&I possibly benefit themselves economically or avoid economic losses at the cost of investors;

- where there are economic or other incentives to put a high priority on other clients over the interests of investors;

- where R&I or the executives or employees of R&I demand Rating Stakeholders to provide them with benefits by utilizing the position in which they conduct rating activity;

- where R&I or the executives or employees of R&I possibly benefit themselves economically or avoid economic losses by unreasonably utilizing information that they have received in the course of rating activity, etc.; or,

- where R&I or the executives or employees of R&I detract credibility of R&I and credit ratings by undermining the objectivity, fairness and neutrality of rating activity, etc.

Method to Manage Conflicts of Interest

     R&I works on the prevention of adverse effects arising from conflicts of interest and acts to undermine the interests of investors, by selecting one of the following methods or by appropriately compounding such methods:

a) Method to separate divisions that conduct the activities which entail any actual or potential conflicts of interest (“Specified Acts”) from other divisions;

b) Method to exclude a Person in Charge who conducts the activities which entail any actual or potential conflicts of interest (“Specified Acts”) from the position as a Person in Charge;

c)  Method to change the conditions or methods of the activities which entail any actual or potential conflicts of interest (“Specified Acts”);

d) Method to refrain from conducting the activities which entail any actual or potential conflicts of interest (“Specified Acts”);

e) Method to disclose the fact that the interest of investors may be undermined by the activities which entail any actual or potential conflicts of interest (“Specified Acts”);

Management Policy

     R&I has established procedures to conduct its Credit Rating Activities. R&I shall make judgments by comprehensively taking into account any and all collected information pertaining to the credit status of the rated entities, and shall determine credit ratings.

     Credit ratings shall be assigned by the Rating Committee and not by any individual Rating Analyst. R&I determines credit ratings in accordance with Rating Methodologies which R&I publishes, taking into account any and all collected information pertaining to the credit status of the rated entities, for the purpose of making a judgment. Rating Analysts make rating opinions concerning the creditworthiness of the rated entities, exercising the expert knowledge and skills, as an individual or as a group.

      R&I implements the measures to secure compliance with Laws and Regulations, internal regulations and “Code of Conduct for Credit Rating” and has designated a Chief Compliance Officer as the officer who is responsible for controlling a company-wide promotion of compliance. The Chief Compliance Officer shall, based on “Compliance Monitoring Provisions” fulfill this duty by, among other things, regularly and consistently engaging in activities designed to focus all the executives and employees toward compliance with corporate ethics, Laws and Regulations and internal regulations, including the avoidance of conflicts of interest, observance of confidentiality obligation, and reports the result of the monitoring directly to the Board of Directors. Chief Compliance Officer is independent from the reporting line of the credit rating business divisions and the amount of remuneration, etc. payable to the Chief Compliance Officer would not be affected by the performance outcome of the operation of the Credit Rating Business.

     R&I and its Rating Analyst shall use care and professional judgment to maintain both the substance and appearance of independence and objectivity.

     The determination of a credit rating shall be influenced only by factors relevant to the credit assessment.

     R&I shall keep the divisions conducting Credit Rating Activities independent from all other divisions in terms of information control and operational management.

     R&I shall adopt written internal procedures and mechanisms to (1) identify, and (2) eliminate, or manage and disclose, as appropriate, any actual or potential conflicts of interest that may influence the opinions and analyses R&I makes or the judgment and analyses of the executives and employees who have an influence on ratings decisions. R&I shall disclose such conflict avoidance and management measures in this Conflict of Interest Management Policy.

     R&I’s disclosures of actual and potential conflicts of interest shall be complete, timely, clear, concise, specific and prominent. R&I discloses this Conflict of Interest Management Policy on the free public website.

     R&I shall disclose the general nature of its compensation arrangements with rated entities.

     R&I cannot disclose information regarding the transaction with individual client in the light of the protection of R&I’s proprietary information and confidentiality obligation agreement with clients. As an alternative measure, R&I monitors some largest clients by revenue so that the revenue from a specific large client does not exceed a certain level. In addition, on a free website, R&I discloses the amount of revenues of rating business and other businesses, respectively, out of all the company revenue.

     R&I and its executives and employees shall not engage in any securities or derivatives trading[1], other than holdings in diversified collective investment schemes; presenting conflicts of interest with R&I’s Credit Rating Activities.

     In instances where rated entities (e.g., governments) have, or are simultaneously pursuing, oversight functions related to R&I, R&I shall use different employees to conduct its rating actions than those employees involved in its oversight issues.

     R&I shall structure reporting lines for R&I employees and their compensation arrangements to eliminate or effectively manage actual and potential conflicts of interest.

     Rating Analyst of R&I would not be remunerated, or evaluated, based on the fees R&I receives from the issuer as a rated entity or the issuer R&I routinely has relation with.

     R&I shall conduct an official and regular monitoring on the remuneration policy and practices for the Rating Analysts and other employees who participate in the rating process or who may affect such a process, and secures that the subject policy and practices would not harm the objectivity of R&I’s rating process.

     R&I shall prohibit the act of the executives and employees conducting the credit rating to participate in the negotiation process for determining the rating fee for the credit rating.

     R&I executives and employees conducting the Credit Rating Activities (and his/her spouse or dependents) shall not buy or sell or engage in any transaction in any security or derivative based on a security issued, guaranteed, or otherwise supported by any entity within primary analytical area where such Rating Analyst is in charge, other than holdings in diversified collective investment schemes.

     R&I shall prohibit the act of any executives or employees conducting the Credit Rating Activities, in the process of determining credit rating, of accepting any money or goods delivered by any Rating Stakeholder, to demand the delivery thereof, or to accept an offer for the delivery thereof (excluding the cases where the total value of such money or goods received in the same day is three thousand yen or less, and the cases as may be necessary in the course of trade).

     R&I shall require any R&I Rating Analyst who becomes involved in any personal relationship that creates the potential for any real or apparent conflicts of interest to disclose such relationship to the appropriate manager of R&I, as determined by R&I’s internal rules and regulations.

     R&I shall establish policies and procedures for reviewing the past work of Rating Analysts in cases where any Rating Analyst who no longer assume the position of executive or employee of R&I assumes the position of an Officer or any other position equivalent thereto of the Rating Stakeholder the subject Rating Analyst has been involved in the rating process.

     R&I shall adopt procedures and mechanisms to protect the confidential nature of information shared with them by issuers under the terms of a confidentiality agreement or otherwise under a mutual understanding that the information is shared confidentially.

     R&I executives and employees shall be prohibited from engaging in transactions in securities when they possess confidential information concerning the issuer of such securities.

     R&I executives and employees shall not use or share confidential information for the purpose of trading securities, or for any other purpose except the conduct of R&I’s business.

[1] R&I prohibits noto only securities trading and derivatives trading under its name or any other person's name, but also to exercise the voting rights or any other rights as a shareholder of the issuing company of securities or to give instructions on the exercise of said voting rights or any other rights in accordance with the provisions of a monetary trust contract or any other contracts.

Systems for the Management of Conflicts of Interest

     As stipulated in the “(Management Policy)”, R&I has set Chief Compliance Officer in place as the officer who is responsible for securing compliance with Laws and Regulations, etc. and who is independent from the credit rating business divisions and the marketing divisions, etc. The Chief Compliance Officer identifies the activities which entail any actual or potential conflicts of interest (“Specified Acts”), conducts the uniform management of such activities, verifies the appropriateness and effectiveness of the control system, etc. in a timely and appropriate manner, and revises them if needed.

     R&I has established measures and procedures to avoid conflicts of interest that should be followed as a company-wide issue, and published this “Conflict of Interest Management Policy”. R&I requires all the executives and employees of R&I to comply with Laws and Regulations, etc., internal regulations and other codes related to the management of conflicts of interest, and implements regular-basis education and training, etc. for the executives and employees.

     R&I believes that it is R&I’s mission to secure the interest of investors and fairly, neutrally, and faithfully conduct the work assignments for the users of credit ratings, while complying with FIE Act, Cabinet Office Ordinance, Guidelines for Supervision, and this “Conflict of Interest Management Policy”, etc. 

Supplementary provisions

Amendment to any part of the Conflict of Interest Management Policy shall be made by the Board of Directors.

Enacted on March 1, 2009
Revised on September 1, 2009
Revised on July 1, 2010
Revised on July 27, 2010
Revised on August 6, 2010
Revised on May 1, 2011
Revised on November 28, 2011
Revised on May 28, 2013