Proposed Rules for Nationally Recognized Statistical Rating Organizations, 63866-63904 [E9-28497]
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Federal Register / Vol. 74, No. 232 / Friday, December 4, 2009 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34–61051; File No. S7–28–09]
RIN 3235–AK14
Proposed Rules for Nationally
Recognized Statistical Rating
Organizations
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AGENCY: Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Proposed rules.
SUMMARY: The Commission is proposing
rule amendments and a new rule that
would impose additional requirements
on nationally recognized statistical
rating organizations (‘‘NRSROs’’). The
proposed amendments and rule would
require an NRSRO: to furnish a new
annual report describing the steps taken
by the firm’s designated compliance
officer during the fiscal year with
respect to compliance reviews,
identifications of material compliance
matters, remediation measures taken to
address those matters, and identification
of the persons within the NRSRO
advised of the results of the reviews; to
disclose additional information about
sources of revenues on Form NRSRO;
and to make publicly available a
consolidated report containing
information about revenues of the
NRSRO attributable to persons paying
the NRSRO for the issuance or
maintenance of a credit rating. The
Commission is proposing these rules, in
conjunction with a separate release
being issued today adopting certain rule
amendments, to further address
concerns about the integrity of the credit
rating procedures and methodologies at
NRSROs. Finally, at this time, the
Commission is announcing that it is
deferring consideration of action with
respect to a proposed rule that would
have required an NRSRO to include,
each time it published a credit rating for
a structured finance product, a report
describing how the credit ratings
procedures and methodologies and
credit risk characteristics for structured
finance products differ from those of
other types of rated instruments, or,
alternatively, to use distinct ratings
symbols for structured finance products
that differentiated them from the credit
ratings for other types of financial
instruments. The Commission is also
soliciting comments regarding
alternative measures that could be taken
to differentiate NRSROs’ structured
finance credit ratings from the credit
ratings they issue for other types of
financial instruments through, for
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example, enhanced disclosures of
information. The Commission also is
soliciting comment on whether the rule
amendments being adopted today in a
separate release designed to remove
impediments to determining and
monitoring non-issuer-paid credit
ratings for structured finance products
should be extended to create a
mechanism for determining non-issuerpaid credit ratings for structured finance
products that were issued prior to the
rule becoming effective (e.g., to allow
for non-issuer-paid credit ratings for
structured finance products of the 2004–
2007 vintage). The Commission strongly
encourages market participants and all
others to provide their views.
DATES: Comments should be received on
or before February 2, 2010.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–28–09 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–28–09. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/
proposed.shtml). Comments are also
available for public inspection and
copying in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. All comments received
will be posted without change; we do
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT:
Michael A. Macchiaroli, Associate
Director, at (202) 551–5525; Thomas K.
McGowan, Deputy Associate Director, at
(202) 551–5521; Randall W. Roy,
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Assistant Director, at (202) 551–5522;
Joseph I. Levinson, Special Counsel, at
(202) 551–5598; Sheila Dombal Swartz,
Special Counsel, at (202) 551–5545;
Rose Russo Wells, Special Counsel, at
(202) 551–5527; Rebekah E. Goshorn,
Attorney, at (202) 551–5514; Marlon Q.
Paz, Senior Counsel to the Director, at
(202) 551–5756; Division of Trading and
Markets, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–7010.
SUPPLEMENTARY INFORMATION:
I. Background
On February 2, 2009, the Commission
adopted amendments to its existing
rules governing the conduct of NRSROs
under the Securities Exchange Act of
1934 (‘‘Exchange Act’’).1 The
Commission proposed these rule
amendments in June 2008 to further the
purposes of the Credit Rating Agency
Reform Act of 2006 (‘‘Rating Agency
Act’’) to improve ratings quality for the
protection of investors and in the public
interest by fostering accountability,
transparency, and competition in the
credit rating industry.2 The
amendments also were designed to
further address concerns about the
integrity of the process by which
NRSROs rate structured finance
products, particularly mortgage related
securities.3 Concurrent with the
1 See Amendments to Rules for Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 59342 (February 2, 2009),
74 FR 6485 (February 9, 2009) (‘‘February 2009
Adopting Release’’).
2 Exchange Act Release No. 57967 (June 16, 2008),
73 FR 36212 (June 25, 2008) (‘‘June 2008 Proposing
Release’’). The Commission adopted the initial set
of NRSRO rules in June 2007. See Oversight of
Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 55857 (June 5, 2007), 72
FR 33564 (June 18, 2007) (‘‘June 2007 Adopting
Release’’). In July 2008, the Commission also
proposed a series of amendments to rules under the
Exchange Act, Securities Act of 1933 (‘‘Securities
Act’’), and Investment Company Act of 1940
(‘‘Investment Company Act’’) that would eliminate
references to ratings issued by NRSROs in certain
rules and forms. See References to Ratings of
Nationally Recognized Statistical Rating
Organizations, Exchange Act Release No. 58070
(July 1, 2008), 73 FR 40088 (July 11, 2008);
Securities Ratings, Securities Act Release No. 8940
(July 1, 2008), 73 FR40106 (July 11, 2008);
References to Ratings of Nationally Recognized
Statistical Rating Organizations, Investment
Company Act Release No. 28327 (July 1, 2008), 73
FR 40124 (July 11, 2008).
3 The term ‘‘structured finance product’’ as used
throughout this release refers broadly to any
security or money market instrument issued by an
asset pool or as part of any asset-backed or
mortgage-backed securities transaction. This broad
category of financial instrument includes, but is not
limited to, asset-backed securities such as
residential mortgage-backed securities (‘‘RMBS’’)
and to other types of structured debt instruments
such as collateralized debt obligations (‘‘CDOs’’),
including synthetic and hybrid CDOs, or
collateralized loan obligations (‘‘CLOs’’).
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adoption of those final rule
amendments, the Commission
proposed, in a separate release,
additional amendments to Rule 17g–
2(d) and re-proposed amendments to
paragraphs (a) and (b) of Rule 17g–5 as
well as a new paragraph (e) to Rule 17g–
5 and a conforming amendment to
Regulation FD.4 In separate releases, the
Commission is adopting, with revisions,
the rule amendments proposed in the
February 2009 Proposing Release,5 and
proposing amendments to Regulation S–
K, and rules and forms under the
Securities Act, the Exchange Act and
the Investment Company Act to require
disclosure regarding credit ratings that a
registrant uses in connection with a
registered offering.6 The Commission
also is adopting amendments to remove
references to NRSROs in certain
Commission rules and forms and reopening the comment period to extend
the time to comment on proposals to
remove references to NRSROs in other
Commission rules.7
In this release, the Commission is
proposing amendments to Rule 17g–3 to
require an NRSRO to furnish a new
unaudited annual report to the
Commission describing the steps taken
by the NRSRO’s designated compliance
officer 8 during the fiscal year to fulfill
the compliance officer’s responsibilities
as set forth in Section 15E(j) of the
Exchange Act.9 That statutory provision
requires an NRSRO to designate an
individual responsible for (1)
administering the policies and
procedures that are required to be
established pursuant to Sections 15E(g)
and (h) of the Exchange Act; and (2)
ensuring compliance with securities
laws and rules and regulations,
including those promulgated by the
4 See Re-proposed Rules for Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 59343 (February 2, 2009),
74 FR 6456 (February 9, 2009) (‘‘February 2009
Proposing Release’’).
5 Exchange Act Release No. 61050 (‘‘Companion
Release’’).
6 Securities Act No. 9070 (October 7, 2009) 74 FR
53086 (October 15, 2009).
7 See Exchange Act Release No. 60789 (October 5,
2009), 74 FR 53258 (October 9, 2009) (adopting
release to remove references to NRSROs); see also
Securities Act Release No. 9069 (October 5, 2009)
74 FR 53274 (October 9, 2009) (release to re-open
for comment proposals to remove references to
NRSROs).
8 See 15 U.S.C. 78o–7(j). Section 15E(j) of the
Exchange Act requires an NRSRO to ‘‘designate an
individual responsible for administering the
policies and procedures that are required to be
established pursuant to [Section 15E(g) and Section
15E(h) of the Exchange Act], and for ensuring
compliance with the securities laws and rules and
regulations thereunder, including those
promulgated by the Commission pursuant to
[Section 15E of the Exchange Act].’’ 15 U.S.C. 78o–
7(j).
9 See 15 U.S.C. 78o–7(j).
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Commission pursuant to Section 15E of
the Exchange Act.10 Pursuant to the
proposed amendment to Rule 17g–3, an
NRSRO would be required to furnish a
report to the Commission describing
compliance reviews undertaken by the
compliance officer during the fiscal
year, material compliance matters
identified during the reviews, measures
implemented to remediate the material
compliance issues identified, and
persons within the NRSRO who were
advised of the results of the reviews.
In addition, the Commission is
proposing in this release to amend the
Instructions to Exhibit 6 to Form
NRSRO to require a credit rating agency
applying to be registered as an NRSRO
or an NRSRO providing its annual
update to Form NRSRO to publicly
disclose: (1) The percentage of the net
revenue of the applicant/NRSRO
attributable to the 20 largest users of
credit rating services of the applicant/
NRSRO; and (2) the percentage of the
revenue of the applicant/NRSRO
attributable to services and products
other than credit rating services. The
Commission notes that the first
proposed disclosure would be an
aggregate in that it would be the sum of
the amount of net revenue attributed to
the 20 largest users of credit rating
services (i.e. not 20 separate net revenue
amounts). In conjunction with this
proposed amendment to the Instructions
to Exhibit 6, the Commission is
proposing to move the definitions of
certain terms currently included in the
Instructions to Exhibit 10 to the
Explanation of Terms section of the
Form NRSRO Instructions in order to
make those definitions applicable to
Form NRSRO as a whole.
Finally, the Commission is proposing
a new rule—Rule 17g–7—that would
require an NRSRO, on an annual basis,
to make publicly available on its
Internet Web site a consolidated report
that shows three items of information
with respect to each person that paid
the NRSRO to issue or maintain a credit
rating. First, the NRSRO would be
required to disclose the percent of the
net revenue attributable to the person
that were earned by the NRSRO for that
fiscal year from providing services and
products other than credit rating
services. Second, the NRSRO would
have to indicate the relative standing of
the person in terms of the person’s
contribution to the revenue of the
NRSRO for the fiscal year as compared
with other persons who provided the
NRSRO with revenue. Third, the
NRSRO would be required to identify
10 Id.
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all outstanding credit ratings paid for by
the person.
As discussed in detail below, the
proposed amendments seek to further
advance the goals of the Commission’s
current oversight program for NRSROs,
including increasing transparency and
disclosure, and diminishing conflicts, as
well as continuing to further the goals
of the Rating Agency Act ‘‘to improve
ratings quality for the protection of
investors and in the public interest by
fostering accountability, transparency,
and competition in the credit rating
agency industry.’’ 11
The Commission believes that the
proposed amendment to Rule 17g–3 to
require NRSROs to furnish the
Commission with an additional
unaudited annual report would further
improve the integrity of the ratings
process and enhance accountability by
requiring the designated compliance
officer to annually report on actions
taken to fulfill the officer’s statutory
responsibilities. While each NRSRO has
a designated compliance officer under
Section 15E(j) of the Exchange Act, the
requirement to provide the Commission
with such a report would, the
Commission believes, help establish or
further reinforce a discipline and rigor
in the compliance officer’s performance
of his or her duties.12 It also is designed
to strengthen the Commission’s existing
oversight of NRSROs by highlighting
possible problem areas in an NRSRO’s
rating processes and by providing an
additional tool for the Commission to
determine whether the NRSRO’s
designated compliance officer is
fulfilling the responsibilities prescribed
in Section 15E of the Exchange Act.13 In
addition, this information is designed to
assist the Commission staff in its
examination of NRSROs. The proposed
amendments to the Exhibit 6
Instructions to Form NRSRO that would
require additional disclosures are
designed to further increase
transparency by allowing users of credit
ratings to more effectively evaluate the
integrity of an NRSRO’s credit ratings
and analyze whether the NRSRO is
effectively managing its conflicts of
interests. Finally, the Commission
believes that proposed new Rule 17g–7
11 See Report of the Senate Committee on
Banking, Housing, and Urban Affairs to Accompany
S. 3850, Credit Rating Agency Reform Act of 2006,
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept.
6, 2006) (‘‘Senate Report’’), p. 2.
12 The Commission also notes that other areas of
the Commission’s rules and regulations also require
an annual report by a chief compliance officer with
respect to investment companies and investment
advisers. See generally, Rule 38a–1, 17 CFR
270.38a–1, and Rule 206(4)–7, 17 CFR 275.206(4)–
7.
13 15 U.S.C. 78o–7(j).
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also would further increase
transparency as well as enhance
disclosures with respect to an NRSRO’s
management of its conflicts of interest
by providing users of credit ratings with
information about the potential risk of
undue influence that arises when an
NRSRO is paid to determine a credit
rating for a specific obligor, security, or
money market instrument.
In addition to the proposed rule
amendments, the Commission is
announcing today that it is deferring the
consideration of action with regard to
the rule proposed in the June 2008
Proposing Release that would have
required an NRSRO to include, each
time it published a credit rating for a
structured finance product, a report
describing how the credit ratings
procedures and methodologies and
credit risk characteristics for structured
finance products differ from those of
other types of rated instruments, or,
alternatively, to use distinct ratings
symbols for structured finance products
that differentiated them from the credit
ratings for other types of financial
instruments. Instead, the Commission is
soliciting comment regarding alternative
measures that could be taken to
differentiate NRSROs’ structured
finance credit ratings from the credit
ratings they issue for other types of
financial instruments through, for
example, enhanced disclosures of
information. The Commission also is
soliciting comment on whether the rule
amendments being adopted today in the
Companion Release designed to remove
impediments to determining and
monitoring non-issuer-paid credit
ratings for structured finance products
should be extended to create a
mechanism for determining non-issuerpaid credit ratings for structured finance
products that were issued prior to the
rule becoming effective (e.g., to allow
for non-issuer-paid credit ratings for
structured finance products of the 2004–
2007 vintage). Specifically, the
Commission is soliciting comment on
whether the rule’s goal could be
furthered by applying its requirements
or similar requirements to structured
finance products that were issued prior
to the compliance date of the rule as
amended.
II. Proposed Amendment to Rule
17g–3
The Commission adopted Rule 17g–3
pursuant to authority in Section
15E(k) 14 of the Exchange Act, which
requires an NRSRO to furnish to the
14 15
U.S.C. 78o–7(k).
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Commission, on a confidential basis 15
and at intervals determined by the
Commission, such financial statements
and information concerning its financial
condition as the Commission, by rule,
may prescribe as necessary or
appropriate in the public interest or for
the protection of investors. The statute
also provides that the Commission may,
by rule, require that the financial
statements be certified by an
independent public accountant.16 In
addition, Section 17(a)(1) of the
Exchange Act 17 requires an NRSRO to
make and keep such records, and make
and disseminate such reports, as the
Commission prescribes by rule as
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
Exchange Act.18
Rule 17g–3 currently requires an
NRSRO to furnish to the Commission on
an annual basis the following reports:
audited financial statements; unaudited
consolidating financial statements of the
parent of the NRSRO, if applicable; an
unaudited report concerning revenues
by category of revenue; an unaudited
report concerning compensation of the
NRSRO’s credit analysts; an unaudited
report listing the largest customers of
the NRSRO; and an unaudited report on
the number of credit rating actions taken
during the fiscal year in each class of
credit ratings for which the NRSRO is
registered with the Commission.19 The
rule further requires an NRSRO to
furnish the Commission these reports
within 90 days of the end of its fiscal
year.20
The Commission’s staff understands
that the designated compliance officer
of some NRSROs may, in some cases,
not be fulfilling the compliances
officer’s statutorily mandated duties, as
prescribed by Section 15E(j) of the
Exchange Act.21 Further, during
examinations in 2008 of three of the
largest NRSRO’s, Commission staff also
identified issues with respect to each
NRSROs policies and procedures and
improvements that could be made.22 In
15 An NRSRO can request that the Commission
keep this information confidential. See Section 24
of the Exchange Act (15 U.S.C. 78x), 17 CFR
240.24b–2, 17 CFR 200.80 and 17 CFR 200.83.
16 Id.
17 15 U.S.C. 78q(a)(1).
18 See Section 5 of the Rating Agency Act and 15
U.S.C. 78q(a)(1).
19 17 CFR 240.17g–3(a)(1)–(6).
20 17 CFR 240.17g–3(a).
21 15 U.S.C. 78o–7(j).
22 See generally, Summary Report of Issues
Identified in the Commission Staff’s Examinations
of Select Credit Rating Agencies (July 8, 2008). The
report is available on the Commission’s Internet
Web site, located at https://www.sec.gov/news/
studies/2008/craexamination070808.pdf.
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light of these concerns and the
importance of an effective NRSRO
compliance program, the Commission is
proposing to amend Rule 17g–3 by
adding paragraph (a)(7), which would
require an NRSRO to furnish to the
Commission an additional unaudited
annual report. This report would be
furnished to the Commission, on a
confidential basis, consistent with the
other reports required under Rule 17g–
3.23
Proposed new paragraph (a)(7)(i) of
Rule 17g–3 would provide that the new
report must describe the steps taken by
the NRSRO’s designated compliance
officer during the fiscal year to: (1)
Administer the policies and procedures
that are required to be established
pursuant to Sections 15E(g) and (h) of
the Exchange Act; and (2) ensure
compliance with securities laws and
rules and regulations, including those
promulgated by the Commission
pursuant to Section 15E of the Exchange
Act.24 Proposed new paragraph (a)(7)(ii)
of Rule 17g–3 would provide that the
new report must include: (1) A
description of any compliance reviews
of the activities of the NRSRO; (2) the
number of material compliance matters
identified during each review of the
activities of the NRSRO and a brief
description of each such matter; (3) a
description of any remediation
measures implemented to address
material compliance matters identified
during the reviews of the activities of
the NRSRO; and (4) a description of the
persons within the NRSRO who were
advised of the results of the reviews.25
Finally, the Commission is proposing to
amend paragraph (b) to Rule 17g–3 to
require that the proposed new report
required under paragraph (a)(7) be
accompanied by a statement signed by
the NRSRO’s designated compliance
officer stating that the person has
responsibility for the report and, to the
best of the knowledge of the designated
compliance officer, the report fairly
23 See supra notes 14 and 15; see also June 2007
Adopting Release, 72 FR at 33590, footnote 300 and
June 2008 Proposing Release, 73 FR 36234, footnote
143.
24 Section 15E(g) of the Exchange Act provides, in
pertinent part, that an NRSRO must establish,
maintain, and enforce written policies and
procedures reasonably designed, taking into
consideration the nature of the business of such
NRSRO, to prevent the misuse of material,
nonpublic information. 15 U.S.C. 78o–7(g). Section
15E(h) of the Exchange Act, provides, in pertinent
part, that an NRSRO must establish, maintain, and
enforce written policies and procedures reasonably
designed, taking into consideration the nature of the
business of such NRSRO and affiliated persons and
affiliated companies thereof, to address and manage
any conflicts of interest that can arise from such
business. 15 U.S.C. 78o–7(h).
25 See proposed Rule 17g–3(a)(7)(ii).
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presents, in all material respects, steps
taken by the designated compliance
officer for the period presented.
The proposed new report would be
unaudited, consistent with the other
unaudited reports currently required
under Rule 17g–3.26 As discussed
below, the Commission preliminarily
believes that the proposed amendment
would improve the integrity of the
credit ratings process by establishing a
more structured discipline under which
the NRSRO’s designated compliance
officer would need to report to the
Commission the steps taken to fulfill the
officer’s statutory responsibilities. The
act of reporting these steps is designed
to promote the active engagement of the
designated compliance officer in
reviewing an NRSRO’s compliance with
the securities laws and its own internal
policies and procedures. The
Commission preliminarily believes that
because the compliance officer would
be required to report these steps, the act
of reporting should, in turn, foster
improved compliance. Furthermore, the
requirement in the report to identify the
persons within the NRSRO advised of
the results of the review could also
promote the appropriate escalation of
compliance issues to the management of
the NRSRO.
The report also is designed to further
strengthen the Commission’s oversight
of NRSROs by highlighting possible
problem areas in an NRSRO’s rating
processes and providing an additional
tool for the Commission to determine
whether the NRSRO’s designated
compliance officer is fulfilling the
responsibilities prescribed in Section
15E of the Exchange Act.27 For example,
if an NRSRO reports a large number of
material compliance matters in a
particular area, the Commission
examination staff could focus on that
particular area as part of their next
review of the NRSRO. Alternatively, if
a report indicates no problems, but a
subsequent Commission staff
examination reveals material
compliance matters, this could be
brought to the attention of the NRSRO’s
management for appropriate action.
The report is also designed to assist
the Commission in its oversight of
NRSROs to the extent they reveal trends
across NRSROs or material compliance
matters that could migrate from one
NRSRO to other NRSROs because, for
example, they arise from rating similar
products or debt issued by a particular
26 17 CFR 240.17g–3(a)(2)–(6). Under Rule 17g–3,
the only required audited report is the NRSRO’s
financial statements as of its most recent fiscal year.
17 CFR 240.17g–3(a)(1).
27 15 U.S.C. 78o–7(j).
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issuer that engages more than one
NRSRO.
Finally, the Commission preliminarily
believes that the proposed report would
also help facilitate the Commission’s
examination staff efforts to conduct each
exam of an NRSRO in an organized and
efficient manner and thus to allocate
resources to maximize investor
protection.28 The Commission notes
that the proposed report would not be
the sole factor the Commission’s exam
staff would use to determine the
particular focus of an exam, but would
be one of many factors used to make
that determination.
A. Proposed New Paragraph 17g–
3(a)(7)(i)
As stated above, the proposed
amendments to Rule 17g–3 would
require an NRSRO to provide the
Commission with an unaudited annual
report describing the steps taken by the
NRSRO’s designated compliance officer
during the fiscal year.29 Specifically, the
amendments would add a new
paragraph (a)(7)(i) to Rule 17g–3, which
would require an NRSRO to provide the
Commission with a report describing
the steps taken by the NRSRO’s
designated compliance officer during
the fiscal year to:
• Administer the policies and
procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
Act (15 U.S.C. 78o–7(g) and (h)); 30 and
• Ensure compliance with the
securities laws and rules and
regulations thereunder, including those
promulgated by the Commission
pursuant to Section 15E of the Exchange
Act.31
These are the areas of responsibility
for the designated compliance officer
prescribed in Section 15E(j) of the
Exchange Act.32 The report would
require a description of the steps taken
by the compliance officer during the
most recently ended fiscal year to fulfill
these responsibilities. As noted above,
the purpose of the report is to impose
a yearly discipline under which the
compliance officer must describe the
steps taken to fulfill the officer’s
statutory responsibilities. The
Commission’s goal in proposing this
28 The Commission also notes that other areas of
the Commission’s rules and regulations also require
an annual report by a chief compliance officer with
respect to investment companies and investment
advisers. See generally, Rule 38a–1, 17 CFR
270.38a–1, and Rule 206(4)–7, 17 CFR 275.206(4)–
7.
29 See 15 U.S.C. 78o–7(j).
30 See proposed Rule 17g–3(a)(7)(i)(A).
31 See proposed Rule 17g–3(a)(7)(i)(B).
32 15 U.S.C. 78o–7(j).
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amendment is to further enhance the
compliance function within the NRSRO
by prescribing a process that promotes
the active engagement of the compliance
officer in reviewing the NRSRO’s
compliance with internal policies and
procedures and with the securities laws
and rules and regulations.
The first area of responsibility of the
compliance officer under Section 15E(j)
of the Exchange Act—to administer the
policies and procedures that are
required pursuant to Sections 15E(g)
and (h) of the Exchange Act—is
identified in proposed new paragraph
(a)(7)(i)(A) of Rule 17g–3. Sections
15E(g) and (h) of the Exchange Act
require an NRSRO to establish,
maintain, and enforce written policies
and procedures reasonably designed,
taking into consideration the nature of
the business of the NRSRO, to prevent
the misuse of material nonpublic
information and to address and manage
any conflicts of interest, respectively.33
The Commission preliminarily believes
that requiring the designated
compliance officer to describe the steps
taken during the fiscal year in this area
of responsibility could, to the extent it
encourages the compliance officer to
undertake more rigorous compliance
reviews, uncover compliance
weaknesses with respect to the
treatment of material nonpublic
information and the management of
conflicts of interest by the NRSRO. This
would afford the NRSRO the
opportunity to consider whether
corrective action is necessary to
remediate such weaknesses.
The second area of responsibility of
the compliance officer under Section
15E(j) of the Exchange Act—to ensure
compliance with the securities laws and
rules and regulations thereunder,
including those promulgated by the
Commission pursuant to Section 15E of
the Exchange Act—is identified in
proposed new paragraph (a)(7)(i)(B) of
Rule 17g–3. The Commission
preliminarily believes that requiring the
designated compliance officer to
describe the steps taken during the
fiscal year to meet this responsibility
could, to the extent it encourages the
compliance officer to undertake more
rigorous compliance reviews, assist the
NRSRO in identifying areas where its
activities may be in contravention of
securities laws and regulations and,
therefore, allow it to take appropriate
action. The goal of the proposed
compliance report is to enhance the
compliance function and potentially
mitigate compliance failures when they
occur. The Commission preliminarily
33 Id.
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believes that the proposed report the
designated compliance officer would be
required to furnish may serve as an
incentive to further strengthen the
NRSRO’s existing compliance program.
The Commission notes that the size
and scope of an NRSRO’s existing
compliance program would vary
depending on the size and complexity
of the NRSRO. Larger NRSROs with
comprehensive compliance programs
may already periodically review
portions of their compliance programs.
In contrast, smaller NRSROs may have
less extensive compliance programs
because they have simpler
organizational structures, fewer
employees and fewer sources of revenue
than larger NRSROs, which may be part
of a complex global organization with
thousands of employees. Therefore,
while the Commission believes that the
proposed report would serve as
incentive to further strengthen each
NRSRO’s existing compliance program,
the extent of the effect of the proposed
report on improving an NRSRO’s
existing compliance program may vary
from one NRSRO to another.
B. Proposed New Paragraph
17g–3(a)(7)(ii)
The proposed amendment to Rule
17g–3 also would set forth specific
items to be included in the proposed
new report under Rule 17g–3(a)(7). In
requiring the inclusion of certain
information, the Commission does not
intend to dictate how a designated
compliance officer should fulfill the
officer’s responsibilities as set forth in
the Rating Agency Act. The Commission
expects the designated compliance
officer to design and execute a
compliance program taking into
account: The business of the NRSRO;
the procedures and methodologies used
by the NRSRO to determine credit
ratings; the NRSRO’s size; the NRSRO’s
(and its affiliates’) conflicts of interest;
and the complexity of the NRSRO’s
operations. The Commission believes
that the information that would be
required in the report is the type of
information a compliance program
would generate regardless of the specific
design of a particular program.
More specifically, the amendments to
Rule 17g–3 would include new
paragraph (a)(7)(ii), which would
require that the report include:
• A description of any compliance
reviews of the activities of the NRSRO;
• The number of material compliance
matters identified during each review of
the activities of the NRSRO and a brief
description of each such matter;
• A description of any remediation
measures implemented to address
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material compliance matters identified
during the reviews of the activities of
the NRSRO; and
• A description of the persons within
the NRSRO who were advised of the
results of the reviews.
The first item the Commission is
proposing to require in the report is a
description of any compliance reviews
of the activities of the NRSRO.34 One of
the functions of a typical compliance
department is to proactively review
business activities to identify potential
regulatory, compliance, and
reputational risks and to design ways to
minimize such risks.35 The Commission
intends that the designated compliance
officer would describe all such reviews
conducted during the most recently
ended fiscal year. Therefore, this
description would provide the
Commission with an understanding of
the scope of the designated compliance
officer’s reviews of the NRSRO’s
activities and possibly highlight any
areas that were not reviewed.
The second item the Commission is
proposing be included in the report is
the number of material compliance
matters identified during each review of
the activities of the NRSRO and a brief
description of each such matter. The
Commission preliminarily intends a
‘‘material compliance matter’’ to mean a
determination by the NRSRO or a
person within the NRSRO that there has
been a violation of the securities laws 36
or the rules thereunder or a failure to
adhere to the policies, procedures, or
methodologies established, maintained
and enforced by the NRSRO to, for
example, determine credit ratings,
prevent the misuse of material
nonpublic information, manage
conflicts of interest, and comply with
the Commission’s NRSRO rules.37 A
34 See
proposed Rule 17g–3(a)(7)(ii)(A).
e.g., White Paper on the Role of
Compliance, Securities Industry Association,
Compliance and Legal Division (October 2005);
available at https://www.sifmacl.org/attachments/
articles/8/Role%20of%20Compliance.pdf.
36 The term ‘‘securities laws’’ is defined in
Section 3(a)(47) of the Exchange Act.
37 See e.g., 17 CFR 270.38a–1(e)(2). Rule 38a–1
prescribes compliance procedures and practices for
investment companies registered with the
Commission under the Investment Company Act of
1940. Paragraph (a)(4) of Rule 38a–1 requires the
investment company to designate an individual
responsible for administering the fund’s policies
and procedures to, among other things, prevent
violation of the Federal Securities Laws by the fund
(the fund’s ‘‘chief compliance officer’’). Paragraph
(a)(4)(iii) of Rule 38a–1 requires the fund’s chief
compliance officer to provide a written report to the
fund’s board, at least annually, that addresses,
among other things, each ‘‘Material Compliance
Matter’’ that occurred since the last report.
Paragraph (e)(2) of Rule 38a–1 defines a ‘‘Material
Compliance Matter’’ to be, among other things, a
violation of the Federal Securities Law by the fund
35 See
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material compliance matter also would
include a determination that there was
a weakness in the design or
implementation of the policies and
procedures of the NRSRO.38 The
proposed requirement to report a
material compliance matter would be
designed to alert the Commission to
issues identified by the designated
compliance officer that may raise
questions about the integrity of the
NRSRO’s activities and operations. It
also could assist the Commission’s
oversight of NRSROs to the extent a
reported material compliance matter is
one that could arise in other NRSROs
because, for example, it relates to a new
type of debt instrument that is being
rated by more than one NRSRO or
involves potentially inappropriate
interactions with an issuer that hired
several NRSROs to rate its securities.
Finally, the Commission preliminarily
believes that requiring the proposed
report to include the number of material
compliance matters identified would
provide Commission examiners with an
additional tool to assist them in
identifying possible trends and issues
with respect to material compliance
matters at an NRSRO after the first year
of reporting. For example, numerous
material compliance violations over a
period of years could be indicative of
possible lax compliance at an NRSRO.
The third item the Commission is
proposing be included in the report is
a description of any remediation
measures implemented to address
material compliance matters identified
during the reviews of the activities of
the NRSRO.39 The Commission
preliminarily intends ‘‘remediation
measures’’ to include changes made by
the NRSRO in response to the
identification of a material compliance
matter that are designed to prevent the
re-occurrence of a similar material
compliance matter. The reporting of
these measures would assist the
Commission in evaluating the risk of reoccurrences. It also could shed a light
on potential ‘‘best practices’’ for
mitigating the risk of future material
compliance matters. Further, it is
designed to reinforce the discipline of
an NRSRO to review for potential
material compliance matters and take
steps to address them when they occur.
The fourth item the Commission is
proposing to include in the report is a
description of the persons within the
NRSRO who were advised of the results
or its employees, a violation of the policies and
procedures of the fund, or a weakness in the
implementation or design of the policies and
procedures of the fund.
38 Id.
39 See proposed Rule 17g–3(a)(7)(ii)(C).
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of the reviews. The Commission intends
that the description of the persons who
were advised of the results of the
reviews at the NRSRO would include
only key personnel, i.e., those who have
the authority to act on the results of the
reviews or direct others to act. The
Commission does not intend that the
persons advised of the results of the
reviews would be so broad in scope as
to include persons such as
administrative employees, for example,
who may have typed a report related to
a material compliance matter.
The information with respect to those
persons who were advised of the results
of reviews is designed to provide the
Commission with an understanding of
how the NRSRO responds to material
compliance matters and the role and
structure of the compliance program
within the NRSRO. For example, it
would indicate whether the compliance
officer reported the matters to the
NRSRO’s board or senior management
or only to the business unit that
underwent the compliance review. This
is designed to promote the appropriate
escalation of compliance issues to the
management of the NRSRO. The
Commission also believes that this
proposed information would be a useful
tool for examiners to focus examination
resources on practices related to
material compliance matters reported
and assist in making risk-based
decisions on whether to initiate an
examination of a particular NRSRO. The
Commission notes that this information
would only be one of many factors the
Commission’s exam staff may use to
determine the particular focus of an
exam.
C. Proposed Amendment to Paragraph
17g–3(b)
The Commission also is proposing to
amend paragraph (b) of Rule 17g–3 to
create two subparagraphs, Rule 17g–
3(b)(1) and (b)(2).40 Subparagraph (b)(1)
would carry forward, unchanged, the
requirement in current Rule 17g–3(b).
The current text of Rule 17g–3(b)
requires that an NRSRO must attach to
each financial report furnished pursuant
to paragraphs (a)(1) through (a)(6) of
Rule 17g–3 a signed statement by a duly
authorized person associated with the
NRSRO stating that the person has
responsibility for the financial report
and, to the best knowledge of the
person, the financial report fairly
presents, in all material respects, the
financial conditions, results of
operations, cash flows, revenues,
analyst compensation, and credit rating
actions of the NRSRO for the period
40 See
proposed Rule 17g–3(b)(1) and (2).
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presented. This requirement does not
specify who within the NRSRO should
have responsibility for the reports and
for providing the required signed
statement.
Proposed subparagraph (b)(2) would
establish a similar requirement for a
signed statement to accompany the
report under proposed new paragraph
(a)(7) to Rule 17g–3, but would specify
that the designated compliance officer is
required to provide that statement.
Specifically, proposed paragraph (b)(2)
of Rule 17g–3 would require that an
NRSRO attach to the report furnished
pursuant to proposed paragraph (a)(7) of
Rule 17g–3 a signed statement by the
designated compliance officer of the
NRSRO stating that the officer has
responsibility for the report and, to the
best knowledge of the designated
compliance officer, the report fairly
presents, in all material respects, the
information in paragraph (a)(7)(ii) of
Rule 17g–3 for the period presented.
The Commission preliminarily believes
that the designated compliance officer
should have responsibility for providing
the statement since the information to
be submitted in the report is directly
within that individual’s statutorily
mandated responsibilities under Section
15E(j) of the Exchange Act; namely, to
administer the NRSRO’s policies and
procedures and to ensure compliance
with the securities laws and regulations.
D. Summary of Amendments to Rule
17g–3 and Request for Comment
The Commission is proposing these
amendments to Rule 17g–3 under its
authority to require an NRSRO to ‘‘make
and disseminate such reports as the
Commission, by rule, may prescribe as
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of [the Exchange Act].’’ 41 The
Commission preliminarily believes
these proposed amendments are
necessary or appropriate in the public
interest, for the protection of investors
and in furtherance of the Exchange Act
because they are designed to further
improve the quality of credit ratings and
help protect the integrity of the credit
rating process by requiring that an
NRSRO describe the steps taken during
the fiscal year by the designated
compliance officer to administer
required policies and procedures and to
ensure compliance with the securities
laws and regulations.
The Commission preliminarily
believes that requiring the designated
compliance officer to provide such a
41 See Section 17(a)(1) of the Exchange Act (15
U.S.C. 78q(a)(1)).
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report would encourage a more rigorous
compliance program and, thereby,
promote the identification of
compliance failures and weaknesses in
the NRSRO’s policies and procedures.
In addition, the reporting requirements
may encourage an NRSRO to promptly
resolve compliance issues identified,
and thereby improve the quality and
integrity of the NRSRO’s credit ratings
and credit rating processes.42
The proposed rule amendments also
would further enhance the
Commission’s oversight of NRSROs by
providing the Commission staff an
additional resource with which to
evaluate the performance of the
designated compliance officers in
carrying out their statutory
responsibilities prescribed in Section
15E(j) of the Exchange Act. Finally, the
proposed report would help identify
areas within the NRSRO that
Commission staff examiners may want
to include within the scope of their
examinations and that could be
indicative of potentially broader issues
across NRSROs.
The Commission generally requests
comment on all aspects of these
proposed amendments. In addition, the
Commission requests comment on the
following questions related to the
proposal:
• Should the proposal require that the
report be furnished to the NRSRO’s
board or a body performing similar
functions of a board or to the NRSRO’s
senior management in addition to
requiring that it be furnished to the
Commission or as an alternative to it
being furnished to the Commission?
Could the requirement to furnish the
report to the Commission alter the way
the compliance officer conducts
compliance reviews or reports the
results of those reviews to others within
the NRSRO? Would the requirement
that it be furnished to the Commission
potentially impact the designated
compliance officer’s incentive to
perform a comprehensive and in depth
review of the NRSRO’s activities,
policies, and procedures or to identify
material compliance matters? Would
requiring the report instead be sent to
the board, to a similar body, or to senior
management result in a more or less
comprehensive review?
• Should the Commission require
other items to be included in the report
in addition to those prescribed in
proposed paragraph (a)(7)(ii) of Rule
17g–3? Commenters believing this
42 The Commission notes that this information
would only be one of many factors the
Commission’s exam staff may use to determine the
particular focus of an exam.
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would be beneficial should specifically
identify the additional items and
describe how the additional information
would be useful to the Commission or
to the NRSRO.
• Should the Commission exclude
any of the items currently identified in
proposed paragraph (a)(7)(ii) of Rule
17g–3? Commenters believing this
would be beneficial should specifically
identify the items to be deleted and
describe why they would not be useful
information for the Commission or the
NRSRO?
• Should the Commission define the
term ‘‘material compliance matter’’ in
Rule 17g–3? If so, what should the
definition be? Alternatively, is the
interpretation of the term ‘‘material
compliance matter’’ set forth in the
release sufficient and appropriate?
Should there be limitations on what
constitutes a material compliance
matter? If so, what should these
limitations be? For example, are there
securities laws violations that do not
rise to the level of concern that they
would need to be reported? If so, should
such violations be reported if the
number of occurrences passes a certain
threshold? How should the Commission
evaluate what that threshold would be
(e.g. taking into account the number of
occurrences and the severity of the
violation)?
• As noted above, the Commission
has proposed an interpretation of the
category of person that would trigger the
reporting requirement if such person
were apprised of the finding of the
compliance officer. Is the proposed
interpretation sufficiently clear to
indicate when the reporting requirement
applies? For example, should the rule
specify that it is a decision maker,
someone with authority to implement
remedial measures, or some other
defined category of person? How should
that category be defined?
• Should the Commission permit or
require someone other than the
designated compliance officer certify
the report? If so, which person(s) should
it be?
• To what extent, if any, should the
designated compliance officer be able to
rely on subcertifications? What purpose
would the subcertifications serve? In
some cases, would the designated
compliance office not have all the
relevant information in order to sign the
statement required by proposed Rule
17g–3(b)(2) without subcertifications? If
this is true, would this in some way
negate any of the objectives of the
proposed amendments to Rule 17g–3?
• What effect would the proposed
requirement to furnish the report to the
Commission have on the designated
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compliance officer’s duties? How could
any adverse effects be addressed?
• Should the Commission as an
alternative to the proposed report from
the compliance officer consider
proposing a requirement that an
independent third party perform a
review of the NRSRO’s adherence to its
policies and procedures and its
compliance with the securities laws.
Commenters who believe such a
requirement would be appropriate are
asked to provide data with respect to the
costs and benefits associated with such
a review.
III. Amendments to the Instructions to
Form NRSRO
The Commission is proposing to
amend the instructions for Exhibit 6 to
Form NRSRO to require a credit rating
agency in an application for registration
as an NRSRO or an NRSRO providing its
annual update to disclose: (1) The
percentage of the net revenue of the
applicant/NRSRO attributable to the 20
largest users of credit rating services of
the applicant/NRSRO; and (2) the
percentage of the net revenue of the
applicant/NRSRO attributable to other
services and products of the applicant/
NRSRO. In conjunction with this
proposed amendment to the instructions
to Exhibit 6, the Commission is
proposing to move the definitions of
certain terms currently included in the
instructions to Exhibit 10 to the
‘‘Explanation of Terms’’ section of the
Form NRSRO Instructions in order to
make those definitions applicable to
Form NRSRO as a whole.
A credit rating agency that seeks to
register as an NRSRO must furnish an
application for registration to the
Commission. Section 15E(a)(1)(A) of the
Exchange Act provides that the credit
rating agency must furnish the
application in a form prescribed by
Commission rule.43 After registration,
the credit rating agency—now an
NRSRO—must publicly disclose most of
the information in its application.44
Section 15E(b)(1) of the Exchange Act
requires the NRSRO to promptly amend
the application if, after registration, any
information or document provided as
part of the application becomes
materially inaccurate.45 Section
15E(b)(2) of the Exchange Act provides
that the information on credit ratings
performance statistics required to be
disclosed in the application pursuant to
Section 15E(a)(1)(B) of the Exchange Act
must be updated annually.46 In
43 15
U.S.C. 78o–7(a)(1)(A).
CFR 240.17g–1(i).
45 15 U.S.C. 78o–7(b)(1).
46 Id.
44 17
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addition, Section 15E(b)(2) of the
Exchange Act requires an NRSRO to
furnish the Commission with an
amendment to its registration not later
than 90 days after the end of each
calendar year (the ‘‘annual
certification’’).47 This section further
provides that the NRSRO must (1)
certify that the information and
documents provided in the application
for registration continue to be accurate
and (2) list any material change to the
information and documents during the
previous calendar year.48
With respect to the contents of the
application, Section 15E(a)(1)(B) of the
Exchange Act prescribes certain
minimum information the applicant
must provide in the application.
Furthermore, Section 15E(a)(1)(B)(x) of
the Exchange Act provides that the
Commission can require any other
information and documents as the
Commission, by rule, may prescribe as
necessary or appropriate in the public
interest or for the protection of
investors.49 In the Commission’s initial
rulemaking implementing the Rating
Agency Act—which established the
registration and oversight program for
NRSROs—the Commission adopted
Rule 17g–1 and Form NRSRO and its
accompanying instructions.50 In
February 2009, the Commission
amended Form NRSRO to require
additional disclosures.51
Rule 17g–1 prescribes, among other
things, how a credit rating agency must
apply to be registered with the
Commission as an NRSRO, keep its
information up-to-date after registration,
and comply with the statutory
requirement to furnish the Commission
with an annual certification.52 In
particular, all of these actions must be
accomplished by furnishing the
Commission with a Form NRSRO. As
described below, Form NRSRO requires
information about the credit rating
agency applying for registration and,
after registration, about the NRSRO,
including the information required
under 15E(a)(1)(B) of the Exchange Act
and additional information prescribed
by the Commission.53
Form NRSRO contains 8 line items
and 13 exhibits. The line items require
information about the applicant/NRSRO
such as its address; corporate form;
credit rating affiliates that would be, or
47 15
U.S.C. 78o–7(b)(2).
48 Id.
49 15
U.S.C. 78o–7(a)(1)(B).
June 2007 Adopting Release, 72 FR at
33566–33582.
51 See February 2009 Adopting Release, 74 FR at
6457–6460.
52 See 17 CFR 240.17g–1.
53 15 U.S.C. 78o–7(a)(1)(B).
50 See
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are, a part of its registration; the classes
of credit ratings for which it is seeking
to be, or is, registered as an NRSRO; the
number of credit ratings it has issued in
each class and the date it began issuing
credit ratings in each class; and whether
it or a person associated with it has
committed or omitted any act, been
convicted of any crime, or is subject to
any order or findings identified in
Section 15(d) of the Exchange Act.54
The 13 exhibits to Form NRSRO elicit
the information required under Sections
15E(a)(1)(B)(i) through (ix) of the
Exchange Act and additional
information prescribed by the
Commission.55 Exhibits 1 through 9
require certain information about the
applicant/NRSRO, including credit
rating performance statistics, its
methodologies and procedures used to
determine credit ratings, its policies and
procedures designed to prevent the
misuse of material non-public
information, its organizational structure,
its code of ethics, the conflicts of
interest inherent in its business
operations, its policies and procedures
for managing those conflicts of interest,
summary data about the qualifications
of its credit analysts, and the identity of
its chief compliance officer. An NRSRO
must make Exhibits 1 through 9
publicly available after it is registered.
Exhibits 10 through 13 require
financial information about the
applicant credit rating agency that the
Commission evaluates in deciding
whether it can make the finding
required under Section 15E(a)(2)(C)(ii)
of the Exchange Act 56 that the applicant
fails to maintain adequate financial and
managerial resources to consistently
produce credit ratings with integrity and
to materially comply with the
procedures and methodologies
disclosed pursuant to Section
15E(a)(1)(B) of the Exchange Act 57 and
established pursuant Sections 15E(g),
(h), (i) and (j) of the Exchange Act.58
These Exhibits are not required to be
publicly disclosed by the NRSRO after
the applicant is granted registration as
an NRSRO. If registration is granted, the
NRSRO is required to furnish financial
information to the Commission in an
annual report required by Rule 17g–3
that is similar to the information
required in Exhibits 10 through 13.59
The rules do not require that the annual
reports furnished to the Commission
54 15
U.S.C. 78o(d).
U.S.C. 78o–7(a)(1)(B)(i)–(x).
56 15 U.S.C. 78o–7(a)(2)(C)(ii).
57 15 U.S.C. 78o–7(a)(1)(B).
58 15 U.S.C. 78o–7(g), (h), (i) and (j).
59 See 17 CFR 240.17g–3 and 15 U.S.C. 78o–7(k).
55 15
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pursuant to Rule 17g–3 be made
publicly available by the NRSRO.60
The Commission is proposing
amending the instructions for Exhibit 6
to augment the information about
conflicts of interest currently required to
be disclosed in Form NRSRO. The
Commission prescribed the current
requirements for Exhibit 6 to implement
Section 15E(a)(1)(B)(vi) of the Exchange
Act, which requires that an application
for registration contain information
regarding any conflict of interest
relating to the issuance of credit ratings
by the applicant/NRSRO.61 The
Exchange Act does not define or
identify the types of conflicts of interest
that should be disclosed pursuant to
Section 15E(a)(1)(B)(vi) of the Exchange
Act.62 The Commission, in adopting
Form NRSRO and its accompanying
instructions, required that an applicant/
NRSRO provide in Exhibit 6 a list of the
types of conflicts of interest relating to
its issuance of credit ratings.63 To assist
the applicant/NRSRO and promote
consistent disclosures, the instructions
to the Exhibit contain a list of potential
conflicts of interest that may apply to an
applicant/NRSRO based on its business
model and activities.64 The instructions
further provide that the applicant/
NRSRO can use the descriptions
provided in the instructions to identify
an applicable conflict of interest.65 An
applicant/NRSRO also can choose to
provide its own description of the
conflict or provide further explanations
to one of the descriptions in the
instructions.66 Finally, Exhibit 6 to
Form NRSRO is one of the public
exhibits that the NRSRO is required to
make readily accessible to the public
and to keep current through furnishing
updated information on Form NRSRO.67
One purpose of the disclosure in
Exhibit 6 is to alert users of credit
ratings to the potential conflicts of
interest inherent in the NRSRO’s
business model.68 The information also
is designed to allow users of credit
ratings to assess an NRSRO’s procedures
for managing conflicts by comparing the
types of conflicts disclosed in Exhibit 6
with its procedures for managing
60 See Rule 17g–3 and 15 U.S.C. 78o–7(k); see also
June 2007 Adopting Release, 72 FR at 33590.
61 See 15 U.S.C. 78o–7(a)(1)(B)(vi); June 2007
Adopting Release, 72 FR at 33577.
62 Id.
63 See Form NRSRO Instructions for Exhibit 6.
64 Id.
65 Id.
66 Id.
67 See Form NRSRO General Instructions.
68 See June 2007 Adopting Release, 72 FR at
33577.
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conflicts of interest disclosed in Exhibit
7.69
The disclosure also is designed to
assist the Commission in evaluating
whether an NRSRO has sufficient
financial and managerial resources to
comply with the procedures for
managing conflicts of interest required
under Section 15E(h) of the Exchange
Act.70 Being informed of the conflicts of
interest identified by the applicant/
NRSRO in Exhibit 6 to Form NRSRO
assists the Commission in evaluating
whether the disclosed financial and
managerial resources of the NRSRO
appear to be sufficient in light of the
magnitude and extent of any conflicts.71
The Commission is proposing to
amend Exhibit 6 to require an applicant/
NRSRO to disclose information
regarding the revenues it receives from
major clients as well as the revenues
attributable to services other than
determining credit ratings. The
proposed new disclosure is designed to
assist users of NRSRO credit ratings in
assessing the conflicts of interest,
including the potential magnitude of
such conflicts, inherent in a given
NRSRO’s business operations. In
particular, an NRSRO’s disclosure of
information about revenues received
from major clients and revenues
attributable to other services provided to
clients would allow users of credit
ratings to have more information about
the dimensions of the conflict arising
from NRSROs being paid to determine
credit ratings as well as the conflict of
offering other services to persons who
pay for credit ratings. It would also
provide investors and other users of
credit ratings more specific information
about the extent to which NRSRO
revenues are from a concentrated group
of clients. Users of NRSRO credit ratings
could then use this information to
evaluate the integrity of the credit
ratings issued by the NRSRO and
whether they believe the NRSRO is
effectively managing these conflicts of
interests. Also, an NRSRO’s disclosure
of this information in Exhibit 6 to Form
NRSRO would allow users of credit
ratings to ascertain the types and
dimensions of a given NRSRO’s
conflicts of interest. The ready
availability of this information in a
single location would facilitate the
evaluation by users of credit ratings of
the probability that the conflicts of
interest could adversely impact the
integrity of the NRSRO’s credit ratings
69 Id.
70 15
U.S.C. 78o–7(h).
Section 15E(a)(2)(C) of the Exchange Act
(15 U.S.C. 780–7(a)(2)(C)); June 2007 Adopting
Release, 72 FR at 33577.
71 See
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and credit rating processes. Users of
credit ratings could then judge for
themselves whether they believe that
certain conflicts of interests are
adversely impacting the integrity of an
NRSRO’s credit ratings and credit
ratings processes based on their
evaluation of the information disclosed
in Exhibit 6.
Because the proposed amendment
would require that the information be
provided as part of the application to
register as an NRSRO, the Commission
would be able to review the disclosures
before they would be required to be
made public (ten business days after the
credit rating agency is granted
registration).72 The information also
would assist the Commission in
evaluating whether an applicant has
sufficient financial and managerial
resources to comply 73 with the
procedures for managing conflicts of
interest required under Section 15E(h)
of the Exchange Act after consideration
of the conflicts of interest identified by
the applicant, including the magnitude
of such conflicts.74
The Commission proposes dividing
Exhibit 6 into a Part A and a Part B. Part
A would require an applicant/NRSRO to
provide the information on conflicts of
interest currently required to be
disclosed by Exhibit 6. Part B would
require an applicant/NRSRO to provide
new disclosures relating to revenues
from its most recently ended fiscal year.
In particular, Part B to Exhibit 6 would
require an applicant/NRSRO to provide
the following disclosures, as applicable:
• The percentage of the applicant/
NRSRO’s net revenue attributable to the
20 largest users of credit rating services
of the applicant/NRSRO; and
• The percentage of the applicant/
NRSRO’s revenue attributable to
services and products other than credit
rating services of the applicant/NRSRO.
To perform the calculations to
determine these disclosures, the
applicant/NRSRO would be required to
use the definitions of ‘‘net revenue’’ and
‘‘credit rating services’’ currently
specified in Exhibit 10 to Form
NRSRO.75 The Commission is proposing
to move these definitions from the
instructions to Exhibit 10 to the
‘‘Explanation of Terms’’ section of the
Form NRSRO Instructions in order to
72 See
17 CFR 240.17g–1(i).
U.S.C. 78o–7(h).
74 See Section 15E(a)(2)(C) Exchange Act (15
U.S.C. 78o–7(a)(2)(C)).
75 See Form NRSRO Instructions for Exhibit 10.
The same definitions also are used in Rule 17g–3
for purposes of calculating the list of largest users
of credit ratings to be furnished in an NRSRO’s
annual financial report to the Commission. See 17
CFR 240.17g–3(a)(5) and accompanying note.
73 15
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make them applicable to Form NRSRO
as a whole, including the proposed
amendment to Exhibit 6. The
Commission does not propose otherwise
altering those definitions. The
Commission believes that it is
appropriate to place these definitions in
the Explanation of Terms section of the
Form NRSRO Instructions because, in
addition to the NRSROs being familiar
with these definitions, the definitions
are appropriate in light of the disclosure
objectives of the proposed rule.76
Finally, the Commission notes that
using the same terms throughout the
Form NRSRO Instructions would
promote consistency for comparison
purposes with respect to the financial
information the applicant/NRSRO
furnishes to the Commission.
As defined in the instructions to
Exhibit 10 of Form NRSRO, the term
‘‘net revenue’’ means revenue earned by
the applicant or NRSRO for any type of
service or product, regardless of
whether related to credit rating services,
and net of any rebates and allowances
paid or owed to the person by the
applicant or NRSRO.77 The Commission
explained in the June 2007 Adopting
Release that this definition excludes
revenues received by affiliates that are
not part of the credit rating
organization.78 Also, the intent in
defining ‘‘net revenues’’ as payables net
of any ‘‘rebates or allowances’’ was to
limit the allowable offsets that reduce
net revenue to items that directly reduce
a payable on the revenue side and to
exclude unrelated payables (e.g.,
payables for utility bills).79 Finally, by
using the term ‘‘revenue earned’’ the
Commission stated that the applicant/
NRSRO must apply its standard
accounting convention for recognizing
revenue as this will make revenue
calculations consistent across the
various financial reports required in
Form NRSRO and Rule 17g–3.80 As
discussed above, the Commission is
proposing to move the definition of ‘‘net
revenue’’ from the instructions to
Exhibit 10 of Form NRSRO to the
‘‘Explanation of Terms’’ section of the
Form NRSRO Instructions, making the
definition applicable to Form NRSRO as
a whole, including the proposed
amendments to Exhibit 6.
As defined in the instructions to
Exhibit 10 of Form NRSRO, the term
‘‘credit rating services’’ means any of
the following: rating an obligor
76 See June 2007 Adopting Release, 72 FR at
33580–33581.
77 See Form NRSRO Instructions for Exhibit 10.
78 See June 2007 Adopting Release, 72 FR at
33580–33581.
79 Id.
80 Id.
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(regardless of whether the obligor or any
other person paid for the credit rating);
rating an issuer’s securities or money
market instruments (regardless of
whether the issuer, underwriter, or any
other person paid for the credit rating);
and providing credit ratings, credit
ratings data, or credit ratings analysis to
a subscriber.81 The Commission
explained in the June 2007 Adopting
Release that this definition includes—
along with persons that pay for credit
ratings and subscriptions—persons that
are rated, or whose securities or money
market instruments are rated, but that
did not pay for the credit rating.82 Even
though these persons may not have paid
for the credit rating, they potentially
could have undue influence on the
credit rating agency if they provide
substantial net revenue for other
services or products.83 The Commission
preliminarily believes that it is
appropriate to include these persons
within the definition to the proposed
amendment to Exhibit 6 to Form
NRSRO. By applying the same
definitions, the proposed calculations in
Exhibit 6 to Form NRSRO would
continue to be consistent across the
various financial reports required in
Form NRSRO and Rule 17g–3. Also, as
explained in the June 2007 Adopting
Release, the term ‘‘subscribers’’ in the
definition of ‘‘net revenue’’ was
intended to include persons who pay for
credit ratings data and the analysis
behind credit ratings because it may be
difficult to separate these subscribers
from other subscribers.84 As the
Commission has previously noted,
credit rating agencies that make their
credit ratings publicly available for free
sometimes offer subscriptions to receive
feeds of the credit ratings or to receive
reports detailing the analysis behind the
credit ratings.85 The Commission is
proposing to move the definition of
‘‘credit rating services’’ from the
instructions to Exhibit 10 of Form
NRSRO to the ‘‘Explanation of Terms’’
section of the Form NRSRO
Instructions, making the definition
applicable to Form NRSRO as a whole,
including the proposed amendments to
Exhibit 6.
As noted above, under proposed
amendments to the Instructions to
Exhibit 6, the applicant/NRSRO would
need to make two new types of
disclosures. The first proposed new
disclosure in Exhibit 6 would require
81 See
Form NRSRO Instructions for Exhibit 10.
June 2007 Adopting Release, 72 FR at
33580–33581.
83 Id.
84 Id.
85 Id.
82 See
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that an applicant/NRSRO disclose the
percentage of net revenue attributable to
the 20 largest users of credit rating
services of the applicant/NRSRO. The
proposed instructions further provide
that the applicant/NRSRO would be
required to calculate this ratio by
dividing the amount of net revenue
earned by the applicant/NRSRO
attributable the 20 largest users of credit
rating services by the total amount of
the four classifications of revenue of the
applicant as reported in Exhibit 12 to
Form NRSRO or in the financial report
furnished to the Commission under
Exchange Act Rule 17g–3(a)(4).86 As
noted above, Exhibit 12 and Rule 17g–
3(a)(4) currently elicit information
regarding: (1) Revenue from determining
and maintaining credit ratings; (2)
revenue from subscribers; (3) revenue
from granting licenses or rights to
publish credit ratings; and (4) revenue
from all other services and products
offered by the applicant/NRSRO.87 The
proposed disclosures would be
calculated annually, as of the end of the
fiscal year of the applicant/NRSRO.
The Commission preliminarily
believes that the proposed disclosure of
the percentage of net revenue
attributable to the 20 largest users of
credit rating services of the applicant/
NRSRO would provide investors and
other users of credit rating services with
useful disclosure, as explained below,
related to a significant sample of the
largest users of credit rating services of
the applicant/NRSRO. The Commission
preliminarily believes this proposed
new disclosure would assist investors
and other users of credit ratings by
providing them with information
concerning the degree to which
revenues earned by the NRSRO come
from a concentrated base of customers.
This could be useful in understanding
the conflicts inherent in the NRSRO’s
business. Specifically, a large
percentage of revenues attributable to a
concentrated group of clients could
increase the potential risk that those
clients’ contribution to the NRSRO’s
revenues could influence the objectivity
of its credit ratings. Making the degree
of this concentration more transparent
in Exhibit 6 to Form NRSRO would
allow investors and market participants
to take this potential risk into account
86 See Form NRSRO Instructions for Exhibit 12
and 17 CFR 240.17g–3(a)(4).
87 Id. The Commission intends that an applicant/
NRSRO apply its standard accounting convention
for recognizing revenue to make revenue
calculations consistent across the various financial
reports required in Form NRSRO and Rule 17g–3.
The Commission notes it is proposing to use the
terms revenue and net revenue as originally
adopted by the Commission.
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when considering the reliability of the
NRSRO’s credit ratings. The proposed
new disclosures also would assist users
of credit ratings in comparing
concentration of revenues across all
NRSROs.
The second proposed new disclosure
in Exhibit 6 to Form NRSRO would
require the applicant/NRSRO to disclose
the percentage of revenue attributable to
other services and products of the
applicant/NRSRO. The proposed
instructions to Exhibit 6 would provide
that the applicant/NRSRO must
calculate this ratio by dividing the total
amount of revenue earned by the
applicant for ‘‘all other services and
products’’ as reported in Exhibit 12 to
Form NRSRO or as reported in the
annual financial report furnished to the
Commission under Exchange Act Rule
17g–3(a)(4) by the total amount of the
four classifications of revenue of the
applicant as reported in Exhibit 12 or of
the NRSRO as reported in the financial
report furnished pursuant to 17g–
3(a)(4). As noted above, Exhibit 12 and
Rule 17g–3(a)(4) elicit the same
information about revenues.88
The Commission preliminarily
believes this information would be
useful to investors and other users of
credit ratings because it would provide
information about the relative size of
revenues an NRSRO earns from
providing services other than credit
ratings. There is the potential that an
NRSRO that obtains substantial
revenues from other services might be
inclined to favor a client that purchases
those other services when determining
credit ratings solicited by that client.
Consequently, creating greater
transparency about the revenues
generated from other services could
provide increased information to assist
investors and other users of credit
ratings in assessing the potential risks to
the NRSRO’s objectivity.
With respect to the two proposed new
disclosures, the proposed amended
instructions to Form NRSRO would
provide that an applicant must provide
the information for the fiscal year
ending immediately before the date of
the applicant’s initial application to the
Commission. The Commission is
proposing this timeframe as it is
consistent with the current instructions
for the financial information elicited in
Exhibits 10, 12, and 13.89
88 See Form NRSRO Instructions for Exhibit 12
and 17 CFR 240.17g–3(a)(4).
89 Exhibit 11 requires financial statements for the
three calendar or fiscal years ending immediately
before the date of the application. This proposed
timeframe also is consistent with the requirements
for the reports required to be published by NRSROs
in Rule 17g–3(a). 17 CFR 240.17g–3(a).
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Further, after registration, an NRSRO
would be required to provide the
proposed information as of the end of its
most recent fiscal year. As such, the
Commission is proposing amendments
to the Instructions to Exhibit 6 to
provide that after registration, an
NRSRO with a fiscal year end of
December 31 must update the
information in Exhibit 6, Part B, as part
of its annual certification. Rule 17g–1(f)
requires an NRSRO to furnish the
annual certification no later than 90
days after the calendar year.90 This also
is the time frame for NRSROs with
December 31 fiscal year-ends to furnish
their annual financial reports required
pursuant to Rule 17g–3.91 Moreover, the
information furnished in the annual
reports would be needed to generate the
proposed Exhibit 6 disclosures.
Further, the proposed instructions
would require that an NRSRO with a
fiscal year end that is not December 31
must provide this information with an
Update of Registration no later than 90
days after the end of each fiscal year.
These provisions would require the
disclosure within 90 days of the closing
of an NRSRO’s books regardless of
whether the year-end is December 31 or
some other date. This also is the time
frame for NRSROs to furnish their
annual financial reports required
pursuant to Rule 17g–3.92
The Commission is proposing these
amendments to Exhibit 6 to Form
NRSRO to further implement Section
15E(a)(1)(B)(vi) of the Exchange Act,
which requires that an application for
registration as an NRSRO contain
information regarding any conflict of
interest relating to the issuance of credit
ratings by the applicant and NRSRO.93
It also is proposing the amendments, in
part, pursuant to Section 15E(a)(1)(B)(x)
of the Exchange Act, which provides
that the Commission can require any
other information and documents as the
Commission by rule, may prescribe as
necessary or appropriate in the public
interest or for the protection of
investors.94 The proposed disclosures
are designed to increase transparency
regarding sources of revenue that might
create conflicts of interest for an
NRSRO, and, thereby, allow investors
and users of credit ratings to better
assess these potential conflicts of
interest that could influence an
NRSRO’s objectivity in determining
credit ratings. Finally, the proposed
amendments are designed to enhance
90 17
CFR 240.17g–1(f).
CFR 240.17g–3.
92 17 CFR 240.17g–3.
93 15 U.S.C. 78o–7(a)(1)(B)(vi).
94 15 U.S.C. 78o–7(a)(1)(B).
91 17
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the disclosures already made by
NRSROs in Exhibit 6 to Form NRSRO
and to provide users of credit ratings
with tools to compare concentrations of
revenues across all NRSROs. The
proposed additional disclosures would
provide more detail about an NRSRO’s
conflicts of interest, and thereby, allow
users of credit ratings to better evaluate
the potential risk that an NRSRO’s
credit ratings could be compromised.
The Commission generally requests
comment on all aspects of these
proposed amendments. In addition, the
Commission requests comment on the
following questions related to the
proposal.
• Should the proposed disclosure of
information about the percentage of
revenues attributable to the 20 largest
clients use a different number of clients?
For example, should it be a lesser
number such as the 5, 10, or 15 largest
clients or a larger number such as the
25, 30, or 35 largest clients?
• Are the revenues attributable to the
20 largest clients an appropriate proxy
for an NRSRO’s ‘‘major clients?’’ Might
there be notable differences between the
percentage of revenue attributable to the
largest client and the percentage of
revenue attributable to, say, the
twentieth largest client?
• Would including revenue earned by
persons directly or indirectly
controlling, controlled by, or under
common control with, the NRSRO (i.e.,
affiliates) in calculating revenues
attributable to the 20 largest clients, be
useful information for investors and
other users of credit ratings?
• Should the proposed disclosure of
information about the percentage of
revenues derived from services other
than determining credit ratings be
expanded to include revenues earned by
persons directly or indirectly
controlling, controlled by, or under
common control with, the NRSRO (i.e.,
affiliates)? If so, would it be useful for
investors and other users of credit
ratings to have this information?
• If the term affiliate was added to the
proposed disclosures in Exhibit 6 to
Form NRSRO, should the Commission
define the term affiliate? For example, if
an NRSRO controlled less than 51% of
an entity, should the entity be
considered an affiliate? If a natural
person controlled or owned an NRSRO,
should other entities the individual
owns or controls be considered affiliates
of the NRSRO for purposes of the
proposed rule?
• For the purposes of calculating the
percentage of net revenue attributable to
the 20 largest users of credit rating
services of the applicant/NRSRO in
Exhibit 6 to Form NRSRO, should the
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Commission only count ‘‘users’’ to be
persons who paid for the service? For
example, if the payer of a rating is the
underwriter, should the Commission
also attribute the payment to the issuer
in calculating the percentage of net
revenue to the NRSRO for the purpose
of showing how much of the NRSRO’s
revenue is being earned from rating this
particular issuer’s securities? Similarly,
if the payer of the rating is an issuer,
should the Commission also attribute
the payment to the underwriter in the
calculation for purposes of highlighting
whether this particular underwriter is a
frequent or dominant underwriter that is
involved in many deals rated by that
NRSRO?
• Would the proposed rule give
investors and other users of credit
ratings sufficient information to assess
the potential risk to objectivity? If not,
is there other information that would be
useful for this purpose?
• Is it appropriate to use existing
definitions of ‘‘net revenue’’ and ‘‘credit
rating services?’’
• Do any other NRSRO services lend
themselves more to potential conflicts of
interest that could influence the quality
of the rating?
• Will the proposed rule generate
additional information that is useful to
users of NRSRO credit ratings?
• Is Exhibit 6 of Form NRSRO the
most practical place for an NRSRO to
make the proposed additional
disclosures? Are there alternative places
where an NRSRO could make these
proposed disclosures that would be
more useful to an investor or other users
of an NRSRO’s credit ratings? For
example, would it be more useful for
investors or other users of credit ratings
if the proposed amendments to Exhibit
6 to Form NRSRO were disclosed along
with the information required in the
new Rule 17g–7?
• Is the most recent fiscal year an
appropriate timeframe for the proposed
disclosure? If not, what should it be?
For example, would it be more
appropriate to use the three, five or ten
most recently ended fiscal years to
provide a trend analysis?
IV. New Rule 17g–7—Credit Rating
Reports on Revenues
As discussed in detail in Section VI
below, at this time the Commission has
determined to defer consideration of
action with respect to the proposal, set
forth in the June 2008 Proposing
Release, that would have required an
NRSRO to publish a report each time
the NRSRO published a credit rating for
a structured finance product. Under that
proposal, an NRSRO would have been
required to disclose in the report how
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the credit ratings procedures and
methodologies and credit risk
characteristics for structured finance
products differ from those of other types
of rated instruments such as corporate
and municipal debt securities. As an
alternative to publishing the report, an
NRSRO would have been allowed to use
ratings symbols for structured finance
products that differentiated them from
the credit ratings for other types of debt
securities.95
Today, the Commission is proposing
a new Rule 17g–7.96 This new rule
would require an NRSRO to make
publicly available on its Internet Web
site a consolidated report containing
information about the revenues earned
by the NRSRO and, if applicable, its
affiliates as a result of providing
services and products to persons that
paid the NRSRO to issue or maintain a
credit rating. This report would need to
be updated annually.
Specifically, proposed Rule 17g–7
consists of three paragraphs: (a), (b), and
(c). As described in more detail below,
proposed paragraph (a)(1) would require
the NRSRO to include in the report: (1)
The percent of the net revenue
attributable to the person that paid the
NRSRO that were earned by the NRSRO
during the most recently ended fiscal
year from providing services and
products other than credit rating
services to the person; (2) the relative
standing of the person in terms of the
person’s contribution to the NRSRO’s
net revenue as compared with other
persons that contributed to the NRSRO’s
net revenues; and (3) the identity of all
outstanding credit ratings issued by the
NRSRO and paid for by the person.
Paragraph (a)(2) of proposed Rule 17g–
7 would exempt an NRSRO from
publishing the reports if, as of the end
of the fiscal year, the NRSRO had no
credit ratings outstanding that the
NRSRO issued or maintained as a result
of a person paying the NRSRO for the
issuance or maintenance of the credit
ratings. Paragraph (b) of proposed Rule
17g–7 would provide that the NRSRO
must prominently include a generic
disclosure statement each time the
NRSRO publishes a credit rating or
credit ratings indicating where on its
Internet Web site the consolidated
95 See June 2008 Proposing Release, 73 FR, at
36235. The Commission proposed codifying these
requirements in the Code of Federal Regulations
(‘‘CFR’’) as Rule 17g–7, which would follow
existing Rule 17g–6. As discussed in this section,
the Commission is today proposing that a different
rule be codified as Rule 17g–7 in the CFR. The
Commission is proposing to use the title ‘‘Rule 17g–
7’’ for this proposed new rule in order to maintain
the numerical sequence of the current NRSROs
rules—Rules 17g–1 through 17g–6.
96 Id.
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report required pursuant to paragraph
(a) is located. Paragraph (c) of proposed
Rule 17g–7 would contain definitions
applicable to the section. Specifically,
paragraph (c)(1) would define the term
‘‘credit rating services’’ and paragraph
(c)(2) would define the term ‘‘net
revenue.’’
The purpose of this proposed rule is
to provide users of credit ratings with
information to assist them in evaluating
the potential risk to the integrity of a
credit rating that arises from the conflict
inherent when an NRSRO is paid to
determine a credit rating for a specific
obligor, security, or money market
instrument. Specifically, the risk that
the revenue generated from the person
soliciting the NRSRO to determine the
credit rating could compromise the
NRSRO’s objectivity and cause the
NRSRO to determine a higher credit
rating than it otherwise would have
determined. Under such circumstances,
the credit rating may not accurately
reflect the NRSRO’s true view of the
level of credit risk inherent in the
obligor, security, or money market
instrument being rated. Providing users
of credit ratings with the information in
this consolidated report would enable
them to better assess the degree that a
particular credit rating may be subject to
this risk.
The increased transparency resulting
from the proposed rule also could have
the ancillary benefit of helping to
mitigate the possibility that a large
consumer of the services and products
of the NRSRO and its affiliates could
successfully use its status to exercise
undue influence on the NRSRO.
Specifically, by making the potential
conflict more transparent to the
marketplace, the proposed rule could
assist users of credit ratings, market
participants, and others in evaluating
how credit ratings solicited by large
revenue providers are handled by the
NRSRO.
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A. Proposed Paragraph (a) of Rule
17g–7
Paragraph (a)(1) of proposed Rule
17g–7 would provide that an NRSRO
must annually, not later than 90
calendar days after the end of its fiscal
year (as indicated on its current Form
NRSRO) make publicly available on its
Internet Web site a consolidated report
that shows, with respect to each person
that paid the NRSRO to issue or
maintain a credit rating that was
outstanding as of the end of the fiscal
year, information about the person as
described in proposed paragraph
(a)(1)(i)–(a)(1)(iii) of proposed Rule 17g–
7.
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Paragraph (a)(1)(i) of proposed Rule
17g–7 would require an NRSRO to show
the percent of the net revenue
attributable to the person earned by the
NRSRO for the fiscal year from
providing services and products other
than credit rating services to the person.
Paragraph (c)(1) of proposed Rule 17g–
7 would define ‘‘credit rating services’’
to mean any of the following: ‘‘Rating an
obligor (regardless of whether the
obligor or any other person paid for the
credit rating); rating an issuer’s
securities or money market instruments
(regardless of whether the issuer,
underwriter, or any other person paid
for the credit rating); and providing
credit ratings, credit ratings data, or
credit ratings analysis to a subscriber.’’
This is the current definition of ‘‘credit
rating services’’ contained in the
instructions for Exhibit 10 to Form
NRSRO.97
Paragraph (c)(2) of proposed Rule
17g–7 would define the term ‘‘net
revenue’’ to mean ‘‘revenue earned for
any type of service or product provided
to a person, regardless of whether
related to credit rating services, and net
of any rebates and allowances paid or
owed to the person.’’ This definition
mirrors the definition of ‘‘net revenue’’
in the instructions to Exhibit 10 to Form
NRSRO and in Rule 17g–3. This
information about the person set forth in
proposed Rule 17g–3(a)(1)(i) is required
to be made publicly available in the
consolidated report posted on the
NRSRO’s Internet Web site and is
designed to benefit users of credit
ratings by alerting them to the potential
risk that the revenues earned by the
NRSRO could influence the objectivity
of the NRSRO in determining credit
ratings paid for by the person.
The method of calculating net
revenue would be the same for the
requirements in Form NRSRO (existing
and proposed herein), Rule 17g–3, and
proposed Rule 17g–7. Consequently,
just as with the existing definitions in
Form NRSRO and Rule 17g–3, the
inclusion in the proposed Rule 17g–7
definition of revenues net of ‘‘rebates or
allowances’’ is intended to limit offsets
that reduce net revenue to items that
directly reduce a payable on the revenue
side and to exclude unrelated payables
(e.g., payables for utility bills). In other
words, the definition of ‘‘net revenues’’
is intended to be the same as used in
Form NRSRO and Rule 17g–3 in all
respects.
To generate the information on
revenues earned by the NRSRO from
providing services other than credit
rating services to the person that paid
97 See
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for the issuance or maintenance of a
credit rating, the NRSRO would be
required to undertake a number of steps,
as described below, no later than 90
calendar days after the end of its fiscal
year or prior to its registration as an
NRSRO. These steps would be based on
the NRSRO’s results for the most
recently ended fiscal year, consistent
with other information disclosed on
Form NRSRO or furnished to the
Commission under Rule 17g–3. In
particular, under paragraph (a)(3)(i) of
proposed Rule 17g–7, the NRSRO would
be required to take the following steps,
respectively, within 90 days of closing
its books or before its registration as an
NRSRO:
• Calculate the net revenue
attributable to the person earned by the
NRSRO for the fiscal year from
providing services and products other
than credit rating services to the person;
• Calculate the net revenue
attributable to the person earned by the
NRSRO for the fiscal year from
providing all services and products,
including credit rating services, to the
person; and
• Divide the amount calculated
pursuant to paragraph (a)(3)(i)(A) by the
amount calculated pursuant to
paragraph (a)(3)(i)(B) and convert that
quotient to a percent.
These steps would generate the
information the NRSRO would use in
the report on the percent of revenues
attributable to providing non-credit
rating services to a person that paid the
NRSRO for the issuance or maintenance
of a credit rating. The following is an
example of how the information would
be generated for purposes of the
proposed report with respect to a
hypothetical NRSRO, ABC Credit Rating
Agency, and a consumer of ABC Credit
Rating Agency’s services and products,
XYZ Corp. For the purposes of the first
step, prescribed in paragraph (a)(3)(i)(A)
of proposed Rule 17g–7, assume ABC
Credit Rating Agency earned gross
revenues of $220,000 from providing
services other than credit rating services
to XYZ Corp. Assume further that ABC
Credit Rating Agency agreed to rebate
$20,000 of that amount back to XYZ
Corp. because it exceeded $100,000. In
this case the net revenue attributable to
providing services other than credit
rating services to XYZ Corp. would be
$200,000.
Next, for the purposes of the second
step, prescribed in paragraph (a)(3)(1)(B)
of proposed Rule 17g–7, assume ABC
Credit Rating Agency earned gross
revenues of $1,100,000 from providing
all services to XYZ Corp. Assume
further that ABC Credit Rating Agency
agreed to rebate $100,000 of that amount
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back to XYZ Corp because it exceeded
$100,000. In this case the net revenue
attributable to providing all services and
products to XYZ Corp. would be
$1,000,000.
The next step, prescribed in
paragraph (a)(3)(i)(C) of proposed Rule
17g–7, would be for ABC Credit Rating
Agency to divide $200,000 by
$1,000,000 to calculate the percent of
the total revenues earned from
providing all services to XYZ Corp.
attributable to providing services other
than credit rating services. Under the
hypothetical, this calculation would
yield a figure of 20%. Consequently, for
purposes of the consolidated report, the
NRSRO would need to indicate that
20% of the net revenues earned from
providing services to XYZ Corp. was for
services other than credit rating
services.
Paragraph (a)(1)(ii) of proposed Rule
17g–7 would require an NRSRO to
indicate in the consolidated report to be
made publicly available on its Internet
Web site the relative standing of the
person that paid the NRSRO to issue or
maintain a credit rating in terms of the
amount of net revenue earned by the
NRSRO attributable to the person as
compared to other persons that
provided the NRSRO net revenues. To
compute this information, the NRSRO
would need to take the following steps
not more than 90 calendar days after the
end of each fiscal year:
• For each person from whom the
NRSRO earned net revenue during the
fiscal year, calculate the net revenue
attributable to the person earned by the
NRSRO for the fiscal year from
providing all services and products,
including credit rating services, to the
person;
• Make a list that sorts the persons
subject to the calculation above in order
from largest to smallest in terms of the
amount of net revenue attributable to
the person, as determined pursuant to
that calculation; and
• Divide the list generated above into
the following categories: top 10%, top
25%, top 50%, bottom 50%, and bottom
25% and determine which category
contains the person.
These steps would generate the
information to indicate the relative
standing of each person that paid the
NRSRO to issue or maintain a credit
rating that was outstanding as of the
fiscal year end. The Commission
preliminarily believes that the proposed
categories (top 10%, top 25%, top 50%,
bottom 50%, and bottom 25%) would be
helpful to investors or other users of
credit ratings because the rankings
provide insight into customers that—
given the level of revenues they provide
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to the firm—may be able to exercise
greater undue influence.
This calculation would be performed
as follows. Assume the NRSRO earned
revenues from 1,000 clients during the
most recently ended fiscal year.
Moreover, assume that the greatest
amount of net revenue derived from a
client was $2,500,000 and that the 100th
largest amount of net revenue derived
from a client was $900,000. In this case,
using hypothetical above, XYZ Corp.—
from which the NRSRO derived
$1,000,000 in net revenue—would rank
somewhere between the largest and
100th largest clients of the NRSRO.
Consequently, because there are 1,000
clients total, XYZ Corp. would need to
be classified in the consolidated report
as being in the top 10% of the persons
that provided the NRSRO with net
revenue in terms of the amount of net
revenue.
Paragraph (a)(1)(iii) of proposed Rule
17g–7 would require an NRSRO to
identify for each person listed in the
consolidated report all outstanding
credit ratings paid for by that person,
which the NRSRO would need to
determine in accordance with proposed
paragraph (a)(3)(iii) of Rule 17g–7.
Specifically, the NRSRO would need to
identify by name of obligor, security, or
money market instrument and, as
applicable, CIK number, CUSIP, or ISIN
each outstanding credit rating generated
as a result of the person paying the
NRSRO for the issuance or maintenance
of the credit rating and attribute the
outstanding credit rating to the person.
For example, assume XYZ Corp. had
paid the NRSRO to issue and maintain
credit ratings for three different classes
of debt instruments issued by XYZ
Corp. and there were credit ratings
outstanding for each of these classes of
debt instruments as of the end of the
NRSRO’s fiscal year. In this case, each
of these debt instruments would need to
be identified by name and CUSIP
number and associated with XYZ Corp.
on the consolidated report.
Proposed paragraph (a)(2) of Rule
17g–7 would provide an exemption to
the requirement to generate the
consolidated report or to include with
the publication of a credit rating the
statement required by paragraph (b) of
proposed Rule 17g–7 (discussed below)
if, as of the end of the fiscal year, there
were no credit ratings of the NRSRO
outstanding that were issued or
maintained as a result of a person
paying the NRSRO for the issuance or
maintenance of the credit rating. For
example, a subscriber-paid NRSRO may
be exempt from the requirements of the
proposed rule if it is not paid by
obligors, issuers, underwriters or
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investors to issue or maintain specific
credit ratings. This would mean that a
subscriber-paid NRSRO would not need
to generate the report or make the
generic statement, provided it only was
paid by subscribers to access its credit
ratings. However, it would need to
generate the report if it was paid, for
example, by an investor to issue or
maintain a credit rating on a specific
debt instrument.
B. Proposed Paragraph (b) of Rule
17g–7
Proposed paragraph (b) of Rule 17g–
7 would provide that an NRSRO must
prominently include a statement that
identifies where on its Internet Web site
the consolidated report required
pursuant to paragraph (a)(1) is located
each time the NRSRO publishes a credit
rating or credit ratings in a research
report, press release, announcement,
database, Internet Web site page,
compendium, or any other written
communication that makes the credit
rating publicly available for free or a
reasonable fee. Specifically, the NRSRO
would need to include the following
statement: ‘‘Revenue information about
persons that paid the nationally
statistical rating organization for the
issuance or maintenance of a credit
rating is available at: [Insert address to
Internet Web site].’’ The proposed
statement is intended to be generic and,
thereby, to minimize the burden of
including it when a credit rating (or
credit ratings) is published. The
proposal is designed to simply alert
users of credit ratings and others where
they can locate the consolidated report
containing information about persons
who paid the NRSRO to issue or
maintain a credit rating. This would
allow the users of credit ratings and
others accessing the consolidated report
to research the persons who had paid
the NRSRO for credit ratings
outstanding as of the fiscal year end.
The researchers could review the
amount of net revenue earned by the
NRSRO attributable to providing
services other than credit ratings to
persons who paid for specific credit
ratings, the relative standing of the
persons who paid for the credit ratings
in terms of providing net revenue to the
NRSRO, and the credit ratings that the
persons paid the NRSRO to issue or
maintain.
C. Conclusion
The Commission is proposing these
amendments under authority to require
an NRSRO to ‘‘make and disseminate
such reports as the Commission, by rule,
prescribes as necessary or appropriate in
the public interest, for the protection of
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investors, or otherwise in furtherance of
the purposes of [the Exchange Act].’’
The Commission preliminarily believes
these proposed amendments are
necessary and appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Exchange Act for the
reasons stated above and because they
are designed to provide investors and
other users of credit ratings with
information to assess the degree of risk
that a credit rating may be compromised
by the undue influence of the person
that paid for the issuance or
maintenance of the credit rating.
D. Request for Comment
The Commission generally requests
comment on all aspects of this proposed
new rule. In addition, the Commission
requests comment on the following
questions related to the proposal.
• Are the classifications in terms of
revenue provided to the NRSRO (top
10%, top 25%, top 50%, bottom 50% or
bottom 25%) proposed in new Rule
17g–7 appropriate? How uniform are the
potential conflicts of interest with
respect to the clients within these
categories? Should there be more or less
classifications? What should they be?
Should the classifications be defined
differently, such as on the size of the
client, the total revenue, the types of
other services provided to the clients?
• How would investors and other
users of credit rating ratings use this
information?
• Given the potential heterogeneity
among clients in a particular tier, how
similar is the risk of a potential conflict
of interest with regard to clients within
a given tier?
• Is being in a top-tier classification
likely to create an undue concern that
suggests to investors that a rating is
conflicted, even if it is not? To the
extent a negative connotation exists
when an issuer is in a top percentile,
what risk, if any, exists that clients will
seek out those NRSROs for which their
revenue contribution is less significant?
Does such behavior risk
disproportionately impact smaller
NRSROs? If so, how? If not, why not?
What other potential behavioral changes
might the disclosure induce?
• To what extent is the information in
these reports already observable? Can
someone look at the information on
rated bonds to determine who an
NRSRO’s biggest clients are? Is there
overlap between the biggest clients for
rating services and the biggest overall
clients of an NRSRO?
• Are there any potential unintended
consequences of the proposed
disclosures?
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• Is 90 days after the end of the fiscal
year sufficient time for an NRSRO to
generate the information to be used for
the next twelve-month period?
• Would more frequent updates of the
required information provide more
meaningful information to investors?
Would the cost of producing more
frequently updated reports greatly
increase the costs to NRSRO?
• Should a newly-registered NRSRO
be exempt from having to generate the
consolidated report and make the
generic statement until the end of its
first fiscal year as a registered NRSRO?
• Would including revenue earned by
persons directly or indirectly
controlling, controlled by, or under
common control with, the NRSRO (i.e.,
affiliates) provide a more enhanced
disclosure of the potential conflicts of
undue influence, since the organization
as a whole may care about its revenues
regardless of which part of the business
earned the revenues? If so, would it be
useful for investors and other users of
credit ratings to have this information?
Would it be complicated and costly to
do the calculations under proposed Rule
17g–7 if affiliates are included?
• If the term affiliate was added to the
proposed disclosures, should the
Commission define the term affiliate?
For example, if an NRSRO controlled
less than 51% of an entity, should the
entity be considered an affiliate? If a
natural person controlled or owned an
NRSRO, should other entities the
individual owns or controls be
considered affiliates of the NRSRO for
purposes of the proposed rule?
• How is the data to be reported
currently entered and stored at NRSROs,
and would such data be able to be
published on an automated or nearly
automated basis after a one-time
systems adjustment?
• Would it be useful for investors or
other users of credit ratings to require an
NRSRO to calculate and disclose
revenue information with respect to
other persons in addition to persons that
paid the NRSRO for services? For
example, should the Commission
attribute underwriter-paid ratings to the
issuer? In addition, should the
consolidated report provide for double
counting of revenues earned by the
NRSRO if the Commission attributes
payment to both the underwriter and
issuer so that users of a credit rating
could more easily evaluate whether a
large percentage of the NRSRO’s
revenues are attributable to particular
issuers or underwriters or a
concentrated group of clients?
• Would it be useful to require
another disclosure item in the proposed
consolidated report to show the issuer
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63879
or underwriter who did not pay for the
service but was a party to a deal? If so,
should there be a particular order of
disclosing this item to highlight the
frequency of this person’s involvement
in deals that are rated by a particular
NRSRO? For example, should there be
a separate disclosure item to reveal the
percentage of net revenue earned by the
NRSRO in which the party who did not
pay for the service was involved in the
deal?
Additionally, the Commission is
soliciting comment from investors,
market participants, and others as to
whether it would be appropriate to
require that specific information be
reported when a credit rating action is
made publicly available (i.e., more than
a generic statement of where relevant
information can be located).
Specifically, the Commission solicits
comment on the following:
• Should an NRSRO be required to
include the information proposed to be
included in the consolidated report
about a person that paid for the issuance
or maintenance of a credit rating along
with the publication of the credit rating?
If such a requirement were in place,
would it be more beneficial to users of
NRSROs of credit ratings than the
requirements of proposed Rule 17g–7
discussed above? Would such a
requirement have higher costs than
proposed Rule 17g–7?
• Should an NRSRO be required to
disclose the principal procedures and
methodologies used in determining the
credit rating? Should this disclosure
include information about key
assumptions used and the qualitative
and quantitative models, if any,
employed in determining the credit
rating? Should the level of disclosure be
sufficient so that ‘‘outside parties can
understand how a rating was arrived at’’
by the NRSRO? What would be the
benefits and costs associated with such
a requirement?
• If an NRSRO should disclose
information about the key assumptions
used, should an NRSRO also be required
to disclose the degree to which the
NRSRO has analyzed how sensitive a
rating is to changes in these
assumptions? What would be the
benefits and costs associated with such
a requirement?
• Should an NRSRO be required to
disclose if a rating action is being taken
as a result of a change to a procedure or
methodology, including a change to an
applicable qualitative or quantitative
model? What would be the benefits and
costs associated with such a
requirement?
• Should an NRSRO be required to
disclose that a rating action is being
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taken as a result of an error identified
in a procedure or methodology used to
generate the credit rating? What would
be the benefits and costs associated with
such a requirement?
• Should an NRSRO be required to
disclose information on the limitations
of the credit rating, including
information on the reliability, accuracy,
and quality of the data relied on in
determining the rating? What would be
the benefits and costs associated with
such a requirement?
• Would a statement on the extent to
which key data inputs for the credit
rating were reliable or limited,
including any limits on the adequacy of
historical data and limits on the
availability and completeness of other
relevant information be beneficial?
What would be the benefits and costs
associated with such a requirement?
• Should an NRSRO be required to
disclose a description of relevant data
about the obligor, issuer, security, or
money market instrument being rated
that was used and relied on for the
purpose of determining the credit
rating? What would be the benefits and
costs associated with such a
requirement?
• Should an NRSRO be required to
disclose whether material nonpublic
information was used in determining
the credit rating? Should an NRSRO be
required to disclose, in general terms,
the type of confidential information
used and the impact this information
had on its rating action? What would be
the benefits and costs associated with
such a requirement?
• Is the timeframe for disclosure (the
NRSRO’s most recent fiscal year end)
the best timeframe to evaluate whether
a conflict exists and the potential extent
of the conflict? For example, should the
information disclosed be based on the
results over a 3-, 5-, or 10-year period
in order to better capture longer term
trends?
V. Technical Amendments to Form
NRSRO Instructions
The Commission also is proposing to
make certain technical amendments to
the Instructions to Form NRSRO. The
Commission is proposing to amend the
title to Exhibit 6 to read ‘‘Information
concerning conflicts of interest or
potential conflicts of interest relating to
the issuance of credit ratings by the
credit rating agency,’’ rather than the
current ‘‘Identification of conflicts of
interest relating to the issuance of credit
ratings.’’ The Commission is proposing
this change to the title of Exhibit 6 to
Form NRSRO to better reflect the
additional disclosures proposed to be
required, as described in Section III
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above. In addition, in the General
Instructions 98 to the Form NRSRO
Instructions, the Commission is
proposing to add ‘‘Division of Trading
and Markets’’ and ‘‘Mail Stop 7010’’ to
the mailing address for Form NRSRO.
This is designed to facilitate receipt of
Form NRSRO by the Division of Trading
and Markets.
Further, in the ‘‘Instructions for
Annual Certifications,’’ the Commission
is prosing to clarify that the annual
financial reports that an NRSRO must
furnish to the Commission pursuant to
Section 15E(k) of the Exchange Act and
Exchange Act Rules 17g–3(a)(1) through
(a)(6), as applicable, should not be
furnished as part of the annual
certification on Form NRSRO. The
Commission also is proposing
additional amendments to the
instructions to state that pursuant to
paragraph (b) of Rule 17g–3, the NRSRO
must attach to each financial report the
certification required by Rule 17g–3.99
There has been some confusion
among some NRSROs on the
requirement to provide a certification
for each financial report. The annual
certification is a statutory requirement
set forth in Section 15E(b)(2) of the
Exchange Act.100 The Commission
adopted Rule 17g–1(f) to require that an
NRSRO furnish the Commission with its
annual certification on Form NRSRO.101
The annual financial reports that an
NRSRO must furnish to the Commission
pursuant to Section 15E(k) of the
Exchange Act and Exchange Act Rules
17g–3(a)(1) through (a)(6), are separate
and distinct requirements from the
Form NRSRO requirements.
Consequently, the Rule 17g–3 reports
should be furnished separately from the
Form NRSRO that is used to make the
annual certification. Therefore, the
Commission is proposing this
amendment to clarify the distinct
requirements with respect to Form
NRSRO and Rule 17g–3(a)(1) through
(a)(6).
The Commission also is proposing to
correct certain typographical errors in
the Form NRSRO. The Commission is
proposing to change the phrase
‘‘withdrawal of registration’’ to
‘‘withdrawal from registration’’ in the
first sentence in the ‘‘Instructions for
Specific Line Items, Item 5.’’ to the
Form NRSRO Instructions.102 In
addition, in the instructions to Exhibit
98 See Paragraph A.8. ‘‘Address’’ in the General
Instructions to the Form NRSRO Instructions.
99 See 17 CFR 240.17g–3(b).
100 15 U.S.C. 78o–7(b)(2).
101 17 CFR 240.17g–1(f).
102 See Paragraph H in the ‘‘Instructions for
Specific Line Items, Item 5.’’ to the Form NRSRO
Instructions.
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8 to Form NRSRO, the Commission is
proposing to delete the phrase ‘‘(See
definition below)’’. In the instructions to
Exhibit 10 to Form NRSRO, the
Commission is proposing to change the
word ‘‘person’’ to ‘‘user of credit rating
services’’ in the first sentence. Finally,
the Commission is proposing to change
the paragraph heading for the section
titled ‘‘Explanation of Terms’’ from ‘‘F.’’
to ‘‘I.’’ The corrected heading will read:
‘‘I. EXPLANATION OF TERMS’’.
The Commission generally requests
comment on all aspects of these
proposed amendments to Form NRSRO.
VI. Differentiating Structured Finance
Credit Ratings
The Commission has adopted
requirements that are designed to allow
investors and other users of credit
ratings to better understand the
differences between structured finance
products and their credit ratings and
other types of debt instruments and
their credit ratings. For example, the
rules adopted in the February 2009
Adopting Release and in today’s
Companion Release include
requirements for specific disclosures
about the methodologies and procedures
for determining credit ratings for
structured finance products and the
public disclosure of credit rating
performance statistics and histories by
class of credit rating. For instance, the
February 2009 Adopting Release
amended Exhibit 1 to Form NRSRO to
require disclosure of performance
statistics for each class of credit rating
for which the NRSRO is registered with
the Commission.103 Moreover, the
Commission amended the Exhibit to
require that the performance statistics
for the class of credit ratings specified
in Section 3(a)(62)(B)(iv) of the Rating
Agency Act 104 include credit ratings of
any security or money market
instrument issued by an asset pool or as
part of any asset-backed or mortgagebacked securities transaction.105 This
was designed to capture ratings actions
for credit ratings of structured finance
products that do not meet the narrower
statutory definition of ‘‘issuers of assetbacked securities (as that term is
defined is section 1101(c) of part 229 of
title 17, Code of Federal
Regulations).’’ 106 The amendment
requires that an NRSRO registered in
this class of credit ratings must generate
and disclose performance statistics for
this class, which includes all structured
103 See February 2009 Adopting Release, 74 FR at
6457–6459.
104 15 U.S.C. 78c(a)(62)(B)(iv).
105 See February 2009 Adopting Release, 74 FR at
6457–6459.
106 Id.
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finance products. As a result, these
statistics can be compared with
performance statistics for other classes
of credit ratings for which the NRSRO
is registered, such as corporate issuers.
Similarly, the Commission adopted
amendments to paragraph (d) of Rule
17g–2, which require that an NRSRO
make publicly available, on a six-month
delayed basis ratings action information
for a random sample of 10% of ratings
documented pursuant to paragraph
(a)(8) for each class of credit rating for
which the NRSRO is registered and has
issued 500 or more ratings paid for by
the obligor being rated or by the issuer,
underwriter, or sponsor of the security
being rated (‘‘issuer-paid credit
ratings’’).107 This requirement will
allow investors and market participants
to compare the rating action histories for
an NRSRO’s issuer-paid structured
finance ratings with the histories of
other classes of credit ratings where the
NRSRO has 500 or more outstanding
issuer-paid credit ratings. In the
Companion Release being issued today,
the Commission is adopting an
amendment to Rule 17g–2 to require the
disclosure of all outstanding credit
ratings initially determined on or after
June 26, 2007.108 This will further
enhance the ability of investors and
other users of credit ratings to track the
relative performance of structured
finance credit ratings as compared with
performance of other classes of credit
ratings.
In the February 2009 Adopting
Release, the Commission also adopted
amendments to Exhibit 2 to Form
NRSRO requiring specific disclosures
with respect to the procedures and
methodologies for determining credit
ratings for structured finance
products.109 The amendments require,
among other things, that an NRSRO
disclose: (1) Whether and, if so, how
information about verification
performed on assets underlying or
referenced by a security or money
market instrument issued by an asset
pool or as part of any asset-backed or
mortgage-backed securities transaction
is relied on in determining credit
ratings; and (2) whether and, if so, how
assessments of the quality of originators
of assets underlying or referenced by a
security or money market instrument
issued by an asset pool or as part of any
asset-backed or mortgage-backed
107 See February 2009 Adopting Release, 74 FR at
6460–6463.
108 See Companion Release.
109 See February 2009 Adopting Release, 74 FR at
6459–6460.
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securities transaction play a part in the
determination of credit ratings.
All these measures will assist
investors and other users of credit
ratings in understanding the different
characteristics and risks of structured
finance products and the credit ratings
for those products. The Commission,
however, also continues to explore
further ways to increase investor
understanding of the differences
between structured finance products
and other types of debt instruments and
the respective credit ratings for those
products.
In the sections below, the
Commission solicits comments on the
following: (1) How the goal of the
proposed Rule 17g–7 set forth in the
June 2008 Proposing Release could be
promoted through other measures
designed to enhance investor
understanding of the differences
between the risk characteristics of
structured finance products and other
classes of debt instruments and the
differences between the risk
characteristics of credit ratings for
structured finance products and credit
ratings for other classes of credit ratings;
and (2) what measures could be taken to
facilitate the ability of NRSROs to
determine unsolicited credit ratings for
existing debt instruments issued by
structured finance products. The goal of
either initiative would be to provide the
marketplace and investors with
information that would allow them to
differentiate structured finance credit
ratings from credit ratings for other
types of debt instruments.
A. The Use of Different Symbols for
Structured Finance Products
In the June 2008 Proposing Release,
the Commission proposed a new rule—
Rule 17g–7—that would have required
an NRSRO to issue a report with respect
to a structured finance credit rating or,
alternatively, to use a distinct
symbology to identify structured finance
credit ratings.110 Specifically, paragraph
(a) of the Rule 17g–7 proposed in 2008
would have required an NRSRO to
publish a report accompanying every
credit rating it published for a security
or money market instrument issued by
an asset pool or as part of any assetbacked or mortgage-backed securities
transaction. The NRSRO would have
110 As discussed above, the Commission is
proposing in this release that a different proposed
rule be codified as Rule 17g–7 in the CFR. The Rule
17g–7 being proposed in this Release would require
an NRSRO to make publicly available a
consolidated report containing information about
relative percent of revenues of the NRSRO
attributable to persons paying the NRSRO for the
issuance or maintenance of a credit rating.
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been required to describe in the report
the rating methodology used to
determine the credit rating and how it
differed from a rating for any other type
of obligor or debt security, as well as
how the risks associated with a security
or money market instrument issued by
an asset pool or as part of any assetbacked or mortgage-backed securities
transaction are different from the risks
of other types of rated obligors and debt
securities. Paragraph (b), however,
would have permitted an NRSRO to
comply with the rule by distinguishing
its rating symbols for structured finance
products. The Commission did not
propose requiring that specific rating
symbols be used to distinguish credit
ratings for structured finance products,
instead proposing that an NRSRO would
be permitted to choose the appropriate
symbol or identifier.111
The Commission proposed Rule 17g–
7 in the June 2008 Proposing Release to
address concerns that certain investors
assumed the risk characteristics for
structured finance products, particularly
highly rated instruments, were the same
as for other types of similarly rated
instruments, as well as concerns that
some investors may not have performed
adequate internal risk analysis on
structured finance products before
purchasing them.112 The goal of the
proposal was to spur investors to
perform more rigorous internal risk
analysis on such products so that they
would not overly rely on NRSRO credit
ratings in making investment decisions.
At the time, the Commission noted that
a potential ancillary benefit of the rule
would be that it could cause certain
investors to seek to better understand
the risks of structured finance products
that are not necessarily addressed in
credit ratings, such as market and
liquidity risk.113
In the June 2008 Proposing Release,
the Commission expressed its
preliminarily belief that requiring an
NRSRO to publish a report along with
each publication of a credit rating for a
structured finance product likely would
provide certain investors with useful
information about structured finance
products and spur investors to perform
more rigorous internal risk analysis on
structured finance products.114
Alternatively, the Commission noted,
the use of distinct symbology would
alert investors that a structured finance
product was being rated and, therefore,
111 See
112 See
June 2008 Proposing Release.
June 2008 Proposing Release, 73 FR at
36235.
113 Id.
114 Id.
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raise the question of how it differs from
other types of debt instruments.115
The Commission generally requested
comment on all aspects of the proposed
new rule as well as on several specific
questions.116 A total of 40 commenters
responded to this request.117 Sixteen
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115 Id.
116 See June 2008 Proposing Release, 73 FR at
36236.
117 Letter dated June 10, 2008 from Deborah A.
Cunningham and Boyce I. Greer, Co-Chairs
Company, Co-Chairs, SIFMA Credit Rating Agency
Task Force (‘‘First SIFMA Symbology Letter’’); letter
dated June 19, 2008 from Rupert Schoder, Financial
Engineer, Socit Gnrale, France (‘‘SGF Symbology
Letter’’); letter dated July 14, 2008 from Robert
Dobilas, President, CEO, Realpoint LLC (‘‘Realpoint
Symbology Letter’’); letter dated July 21, 2008 from
Dottie Cunningham, Chief Executive Officer,
Commercial Mortgage Securities Association
(‘‘CMSA Symbology Letter’’); letter dated July 21,
2008 from Bruce Goldstein, SunTrust Robinson
Humphrey (‘‘STRH Symbology Letter’’); letter dated
July 21, 2008 from Raymond E. Petersen, President,
Inland Mortgage Capital Corporation (‘‘Inland
Symbology Letter’’); letter dated July 21, 2008 from
Leonard W. Cotton, Vice Chairman, Centerline
Capital Group (‘‘Centerline Symbology Letter’’);
letter dated July 22, 2008 from Kevin Kohler, VP—
Levered Finance, Capmark Investments LP
(‘‘Capmark Symbology Letter’’); letter dated July 22,
2008 from Mary A. Downing, Director—
Surveillance and Due Diligence, Hillenbrand
Partners (‘‘Hillenbrand Symbology Letter’’); letter
dated July 23, 2008 from Kent Wideman, Group
Managing Director, Policy & Rating Committee and
Mary Keogh, Managing Director, Policy &
Regulatory Affairs, DBRS (‘‘DBRS Symbology
Letter’’); letter dated July 24, 2008 from Takefumi
Emori, Managing Director, Japan Credit Rating
Agency, Ltd. (‘‘JCR Symbology Letter’’); letter dated
July 24, 2008 from Amy Borrus, Deputy Director,
Council of Institutional Investors (‘‘Council
Symbology Letter’’); letter dated July 24, 2008 from
Vickie A. Tillman, Executive Vice President,
Standard & Poor’s Ratings Services (‘‘S&P
Symbology Letter’’); letter dated July 24, 2008 from
Deborah A. Cunningham and Boyce I. Greer, CoChairs Company, Co-Chairs, SIFMA Credit Rating
Agency Task Force (‘‘Second SIFMA Symbology
Letter’’); letter dated July 25, 2008 from Sally Scutt,
Managing Director, and Pierre de Lauzun,
Chairman, Financial Markets Working Group,
International Banking Federation (‘‘IBFED
Symbology Letter’’); letter dated July 25, 2008 from
Denise L. Nappier, Treasurer, State of Connecticut
(‘‘Nappier Symbology Letter’’); letter dated July 25,
2008 from Suzanne C. Hutchinson, Mortgage
Insurance Companies of America (‘‘MICA
Symbology Letter’’); letter dated July 25, 2008 from
Kieran P. Quinn, Chairman, Mortgage Bankers
Association (‘‘MBA Symbology Letter’’); letter dated
July 25, 2008 from Frank Chin, Chairman,
Municipal Securities Rulemaking Board (‘‘MSRB
Symbology Letter’’); letter dated July 25, 2008 from
Charles D. Brown, General Counsel, Fitch Ratings
(‘‘Fitch Symbology Letter’’); letter dated July 25,
2008 from Bill Lockyer, State Treasurer, California
(‘‘Lockyer Symbology Letter’’); letter dated July 25,
2008 from Jeremy Reifsnyder and Richard Johns,
Co-Chairs, American Securitization Forum Credit
Rating Agency Task Force (‘‘ASF Symbology
Letter’’); letter dated July 25, 2008 from Francisco
Paez, Metropolitan Life Insurance Company
(‘‘MetLife Symbology Letter’’); letter dated July 25,
2008 from Cate Long, Multiple-Markets (‘‘MultipleMarkets Symbology Letter’’); letter dated July 25,
2008 from Kurt N. Schacht, Executive Director and
Linda L. Rittenhouse, Senior Policy Analyst, CFA
Institute Centre for Financial Market Integrity
(‘‘CFA Institute Symbology Letter’’); letter dated
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commenters expressed opposition to the
proposed rule as a whole,118 while six
commenters expressed either full or
conditional support for both parts of the
proposed amendment.119 Eleven
commenters argued in favor of adopting
paragraph (a) alone, thereby requiring
the publication of a report to accompany
structured finance ratings and
eliminating the paragraph (b) option of
using a distinct symbology.120 TwentyJuly 25, 2008 from Lawrence J. White, Professor of
Economics, Stern School of Business, New York
University (‘‘White Symbology Letter’’); letter dated
July 25, 2008 from Jack Davis, Head of Fixed
Income Research, Schroder Investment
Management North America Inc. (‘‘Schroders
Symbology Letter’’); letter dated July 25, 2008 from
Karrie McMillan, General Counsel, Investment
Company Institute (‘‘ICI Symbology Letter’’); letter
dated July 25, 2008 from Michael Decker, Co-Chief
Executive Officer and Mike Nicholas, Co-Chief
Executive Officer, Regional Bond Dealers
Association (‘‘RBDA Symbology Letter’’); letter
dated July 25, 2008 from Richard M. Whiting,
Executive Director and General Counsel, Financial
Services Roundtable (‘‘Roundtable Symbology
Letter’’); letter dated July 25, 2008 from James H.
Gellert, Chairman and CEO and Dr. Patrick J.
Caragata, Founder and Executive Vice Chairman,
Rapid Ratings International Inc. (‘‘Rapid Ratings
Symbology Letter’’); letter dated July 25, 2008 from
James A. Kaitz, President and CEO, Association for
Financial Professionals (‘‘AFP Symbology Letter’’);
letter dated July 25, 2008 from Gregory W. Smith,
General Counsel, Colorado Public Employees’
Retirement Association (‘‘Colorado PERA
Symbology Letter’’); letter dated July 25, 2008 from
Keith A. Styrcula, Chairman, Structured Products
Association (‘‘SPA Symbology Letter’’); letter dated
July 28, 2008 from Michel Madelain, Chief
Operating Officer, Moody’s Investors Service
(‘‘Moody’s Symbology Letter’’); letter dated July 28,
2008 from Keith F. Higgins, Chair, Committee on
Federal Regulation of Securities and Vicki O.
Tucker, Chair, Committee on Securitization and
Structured Finance, American Bar Association
(‘‘ABA Business Law Committees Symbology
Letter’’); letter dated July 31, 2008 from Robert S.
Khuzami Managing Director and General Counsel,
Deutsche Bank Americas (‘‘DBA Symbology
Letter’’); letter dated August 8, 2008 from Jeffrey A.
Perlowitz, Managing Director and Co-Head of
Global Securitized Markets, and Myongsu Kong,
Director and Counsel, Citigroup Global Markets Inc.
(‘‘Citi Symbology Letter’’); letter dated August 12,
2008 from John J. Niebuhr, Managing Director,
Lehman Brothers, Inc. (‘‘Lehman Symbology
Letter’’); letter dated August 17, 2008 from Olivier
Raingeard, Ph.D (‘‘Raingeard Symbology Letter’’);
letter dated August 22, 2008 from Robert Dobilas,
CEO and President, Realpoint LLC (‘‘Realpoint
Symbology Letter’’).
118 See Realpoint Symbology Letter; CMSA
Symbology Letter; STRH Symbology Letter; Inland
Symbology Letter; Centerline Symbology Letter;
Capmark Symbology Letter; Hillenbrand Symbology
Letter; DBRS Symbology Letter; JCR Symbology
Letter; S&P Symbology Letter; Nappier Symbology
Letter; MBA Symbology Letter; MetLife Symbology
Letter; AFP Symbology Letter; Moody’s Symbology
Letter; Raingeard Symbology Letter.
119 See MICA Symbology Letter; Lockyer
Symbology Letter; CFA Symbology Letter; RDBA
Symbology Letter; Colorado PERA Symbology
Letter; MSRB Symbology Letter.
120 See Second SIFMA Symbology Letter; IBFED
Symbology Letter; ASF Symbology Letter;
Schroders Symbology Letter; ICI Symbology Letter;
Principal Symbology Letter; Rapid Ratings
Symbology Letter; ABA Business Law Committees
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nine commenters expressed their
opposition to adopting paragraph (b).121
Commenters criticized the proposed
amendment as burdensome 122 and as
providing little, if any, benefit to
investors.123 Several commenters argued
that the proposed new requirements
would be confusing and, therefore,
detrimental to investors.124 Others
expressed concerns that the proposed
amendments would stigmatize
structured finance products and further
weaken the market for these
instruments.125
The Commission, like a number of
commenters, is concerned that the
proposal, if adopted, could have limited
utility in encouraging investors to
perform more rigorous internal risk
analysis on such products because
NRSROs likely would have opted to use
a distinguishing symbology as the less
costly alternative. The Commission is
concerned about whether the use of a
distinct symbol or identifier for
structured finance ratings might not
achieve the goal of the proposal:
Promoting independent analysis and
understanding of the distinct risks of
structured finance products.
Furthermore, the Commission is
concerned that mandating a distinct
symbology could create the inaccurate
impression that the Commission
believes other types of debt instruments
Symbology Letter; DBA Symbology Letter; Citi
Symbology Letter; Lehman Symbology Letter.
121 See First SIFMA Letter; Realpoint Symbology
Letter; CMSA Symbology Letter; STRH Symbology
Letter; Inland Symbology Letter; Centerline
Symbology Letter; Capmark Symbology Letter;
Hillenbrand Symbology Letter; DBRS Symbology
Letter; JCR Symbology Letter; S&P Symbology
Letter; Second SIFMA Symbology Letter; IBFED
Symbology Letter; Nappier Symbology Letter; MBA
Symbology Letter; ASF Symbology Letter; Fitch
Symbology Letter; MetLife Symbology Letter; Rapid
Ratings Symbology Letter; Roundtable Symbology
Letter; Schroders Symbology Letter; ICI Symbology
Letter; Principal Symbology Letter; AFP Symbology
Letter; Moody’s Symbology Letter; Raingeard
Symbology Letter; ABA Business Law Committees
Symbology Letter; DBA Symbology Letter; Citi
Symbology Letter; Lehman Symbology Letter.
122 See JCR Symbology Letter; S&P Symbology
Letter; Moody’s Symbology Letter; Roundtable
Symbology Letter.
123 See Realpoint Symbology Letter; Schroders
Symbology Letter; Raingeard Symbology Letter;
MICA Symbology Letter; Roundtable Symbology
Letter.
124 See CMSA Symbology Letter; STRH
Symbology Letter; Inland Symbology Letter;
Centerline Symbology Letter; Capmark Symbology
Letter; Hillenbrand Symbology Letter; DBRS
Symbology Letter; JCR Symbology Letter; ICI
Symbology Letter; Principal Symbology Letter;
MetLife Symbology Letter; Rapid Ratings
Symbology Letter;
125 See First SIFMA Symbology Letter; Realpoint
Symbology Letter; Principal Symbology Letter;
MBA Symbology Letter; Lockyer Symbology Letter;
ASF Symbology Letter; MetLife Symbology Letter;
ABA Business Law Committees Symbology Letter;
DBA Symbology Letter; Lehman Symbology Letter.
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are less risky. The Commission believes
a more effective way to differentiate
credit ratings for structured finance
products may be by enhancing investor
understanding of the distinct risk
characteristics of these debt instruments
and their credit ratings. For these
reasons, at this time the Commission is
deferring consideration of action on the
proposal to issue a report or use a
distinct symbology at this time. Instead,
the Commission wants to study further
whether there are other ways to better
achieve the goals of the proposal: greater
investor awareness of the unique risks
of structured finance products and
credit ratings for structured finance
products.
The Commission believes that some
differences in the risk characteristics
seem readily apparent and are fairly
well understood by investors. For
example, the Commission believes that
an investor would understand that the
continued payment of principal and
interest to the holder of a structured
finance debt instrument typically
depends on the performance of a pool
of underlying financial assets such as
mortgages, business and student loans,
or credit card receivables; whereas the
performance of a corporate bond
typically depends on the issuer’s ability
to generate income from business
operations, and the performance of a
municipal bond typically depends on
the issuer’s ability to collect taxes or
earn revenues from services provided by
a specific utility such as a sewer or
water company.
However, even high-level
generalizations about the differences
between classes of debt instruments
may not always hold true. Some
structured finance issuers actively
manage the composition of the pool of
underlying financial assets (in contrast
to a static pool) and, as a result, these
products are more risk-sensitive to the
discretion of the manager. For example,
the performance of the structured
finance issuer will depend on the
judgment of the manager of the pool of
underlying assets. This is similar to how
the performance of corporate issuers is
sensitive to the judgment of senior
management and their boards.
Moreover, some corporate issuers—
particularly in the financial sector—are
highly risk-sensitive to the performance
of financial assets similar to structured
finance issuers that hold or reference
the same types of assets. In short,
generalizations about differences that
are not carefully crafted run the risk of
creating more confusion or
misunderstanding than clarity for
investors.
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For these reasons, the Commission is
asking a series of questions below
designed to elicit further views from
market participants and others on how
the risk characteristics of structured
finance products and credit ratings
differ from the risk characteristics of
corporate, municipality, and sovereign
nation debt instruments and their credit
ratings.126 Specifically, the Commission
requests market participants and others
to provide their views in the following
four areas: (1) The differences between
structured finance products and other
debt instruments; (2) the differences
between credit ratings for structured
finance products and credit ratings for
other types of debt instruments; (3)
potential measures to communicate
differences in structured finance
products to investors; and (4) potential
measures to communicate differences in
structured finance credit ratings to
investors.127
Persons making submissions are
asked to provide detailed explanations
of their views and analyses and cite
relevant studies.
Differences Between Structured Finance
Products and Other Debt Instruments
• What do market participants and
others believe are the significant
differences in the risk characteristics of
structured finance debt instruments as
compared with debt instruments issued
by corporate issuers, municipalities, and
sovereign nations in terms of credit risk,
market risk, interest rate risk, and
liquidity risk? What do market
participants and others believe are the
main drivers of the differences in risk
characteristics?
• How do market participants and
others believe the trading markets for
structured finance products compare
with the trading markets for debt
instruments of corporate issuers,
municipalities, and sovereign nations in
terms of transparency and providing
liquidity to investors? Do market
participants and others believe
differences in the trading markets for
these debt instruments create differing
levels of credit risk, market risk, interest
126 For the purposes of this request for comment,
the Commission intends the term ‘‘corporate issuer’’
to include any issuer that is not a structured finance
issuer or a government issuer.
127 For views on some of these issues see, for
example, The Role of Credit Rating Agencies in the
Structured Finance Markets, May 2008, Technical
Committee of the International Organization of
Securities Commissioners; The Role of Ratings in
Structured Finance: Issues and Implications, (CGFS
2005), January 2005, Committee on the Global
Financial System, Bank of International
Settlements; The Role of Credit Rating Agencies in
Structured Finance, Consultation Paper, February
2008, The Committee of European Securities
Regulators.
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rate risk, or liquidity risk for structured
finance products as compared with debt
instruments issued by corporate issuers
companies, municipalities, and
sovereign nations?
• How do market participants and
others assess the relative use of leverage
by structured finance issuers as
compared with corporate issuers,
municipalities, and sovereign nations?
Do differences in the use of leverage
create differing levels of credit risk,
market risk, interest rate risk, or
liquidity risk for structured finance
products as compared with debt
instruments issued by corporate issuers,
municipalities, and sovereign nations?
Does leverage act as a driver of differing
levels of risk for structured finance
products and account for the fact that
certain corporate issuers also employ
leverage?
• How do market participants and
others assess the relative complexity of
structured finance issuers as compared
with corporate issuers, municipalities,
and sovereign nations in terms of capital
structure and operations? For example,
in assessing complexity, how do market
participants and others account for the
fact that a structured finance product
can be comprised of a static pool of cash
flow assets whereas a corporate issuer
may have an array of business lines
operated through hundreds of affiliates
located around the globe? Do differences
in complexity create differing levels of
credit risk, market risk, interest rate risk,
and liquidity risk for structured finance
products as compared with debt
instruments issued by corporate issuers,
municipalities, and sovereign nations?
• How do market participants and
others assess the relative sensitivity of
structured finance issuers to
macroeconomic factors as compared
with corporate issuers, municipalities,
and sovereign nations? For example, do
structured finance products have greater
or lesser risk sensitivity to a
macroeconomic stress event such as a
recession than debt instruments issued
by corporate issuers, municipalities, and
sovereign nations?
• How do market participants and
others assess the relative risks of a
sector of structured finance issuers such
as issuers that rely on the performance
of a particular type of financial asset
(e.g., residential mortgages or credit card
receivables) as compared with an
industry of corporate debt issuers (e.g.,
financial services, automakers,
technology companies, or healthcare
providers) or geographically
concentrated municipal issuers (e.g.,
within a State) or sovereign debt issuers
(e.g., within a region of the globe)? For
example, does a structured finance
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sector have greater or lesser risk
sensitivity to a macroeconomic stress
event such as a recession than corporate
debt issuers within a specific industry
or geographically concentrated
municipal or sovereign issuers?
• How do market participants and
others perceive the degree of
idiosyncratic risk inherent in structured
finance products relative to debt
instruments issued by corporate issuers,
municipalities, and sovereign nations?
Do market participants and others
believe the different ways these debt
issuers generate income to meet
principal and interest payments to debt
holders (e.g., through underlying
income generating assets for structured
finance products, revenues generated
through business operations for
corporate issuers, and taxing authority
or utility revenues for municipal and
sovereign issuers) create differing levels
of idiosyncratic risk?
• In assessing the relative level of
idiosyncratic risk inherent in structured
finance issuers as compared with debt
instruments issued by corporate issuers,
municipalities, and sovereign nations,
what do market participants and others
believe is the impact of the fact that
different structured finance issuers can
hold the same types of underlying cash
flow generating assets (e.g., residential
mortgages) and have very similar legal
structures? What is the impact of the
fact that corporate issuers can operate
using different business models and
have differing levels of management
competence?
• Do market participants and others
believe there are material differences
between structured finance products
and debt instruments issued by
corporate issuers, municipalities, and
sovereign nations in terms of recovery
after default? Do market participants
and others believe debt holders are
likely to recover more or less principal
after a structured finance debt
instrument default than after the default
of a debt instrument issued by a
corporate issuer, municipality, or
sovereign nation?
• Do market participants and others
believe there are important differences
in the level of moral hazard present in
structured finance products relative to
debt instruments issued by corporate
issuers, municipalities and sovereign
nations? Could the fact that structured
finance products consist of asset pools
which are ultimately purchased from
originators of such assets result in lower
quality assets for structured finance
products as compared with the assets of
corporate issuers, municipalities and
sovereign nations?
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• To the extent that market
participants and others identify
differences between the risk
characteristics of structured finance
products and other debt instruments, do
they believe the differences identified
apply across all types of structured
finance products or just to certain
categories of products? Are
generalizations about the different risk
characteristics of structured finance
products as compared to other debt
instruments appropriate or is it more
appropriate to categorize structured
finance products by underlying asset
type (e.g., residential mortgage,
commercial mortgage, student loan,
credit card receivable, lease) or structure
type (e.g., asset-backed security,
collateralized debt obligation (CDO),
CDO-squared or cubed, synthetic or
hybrid CDO, constant proportion debt
obligation, asset-backed commercial
paper conduit)?
Differences Between Credit Ratings for
Structured Finance Products and Credit
Ratings for Other Types of Debt
Instruments
• What are the significant differences
in the risk characteristics of credit
ratings for structured finance products
as compared with credit ratings for debt
instruments issued by corporate issuers,
municipalities, and sovereign nations in
terms of ratings accuracy and
performance?
• Are structured finance debt
instruments inherently more difficult to
rate accurately than debt instruments
issued by corporate issuers,
municipalities, and sovereign nations? If
so, what do market participants and
others believe are the factors that make
structured finance products more
difficult to rate?
• Does the fact that the
creditworthiness of a structured finance
issuer typically depends on the
performance of a pool of financial assets
make these debt instruments more
difficult to rate accurately than debt
instruments issued by corporate issuers,
municipalities, and sovereign nations?
• Do market participants and others
believe that the reliance on quantitative
analysis (e.g., statistical models and
historical data) to determine credit
ratings for structured finance products
as compared with a greater reliance on
qualitative analysis to determine credit
ratings for debt instruments issued by
corporate issuers, municipalities, and
sovereign nations increases or decreases
the accuracy risk for structured finance
credit ratings?
• Do market participants and others
believe that the information available
about structured finance issuers used to
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determine credit ratings as compared to
the information available to be used to
determine credit ratings about corporate
issuers, municipalities, and sovereign
nations makes it more difficult to
determine accurate credit ratings for
structured finance debt instruments
and/or to conduct surveillance on
outstanding structured finance credit
ratings? If so, do market participants
and others believe it is easier to
determine accurate credit ratings, and
monitor those ratings, for corporate
issuers that are required to file periodic
public reports and financial statements
and provide access to management? Is
the information used to determine and
monitor credit ratings of corporate
issuers, municipalities, or sovereign
nations more forward looking (e.g.,
based on more on forecasts)? In
addition, do market participants and
others believe that the historical data
used to determine and monitor
structured finance credit ratings of
shorter duration or otherwise less robust
than the historical data used to
determine and monitor credit ratings for
corporate issuers, municipalities, or
sovereign nations?
• Do market participants and others
believe it is more difficult for investors
and market observers to perform
independent analysis of structured
finance products than of securities
issued by corporate issuers,
municipalities, and sovereign nations? If
so, does this impact the accuracy of
structured finance credit ratings as
compared to credit ratings for corporate
issuers, municipalities, and sovereign
nations?
• Do market participants and others
believe the conflict of being paid to
determine credit ratings is more
attenuated in the structured finance
sector than in the corporate, municipal,
and sovereign sectors? If so, why? Does
this impact the accuracy of structured
finance credit ratings?
• Do market participants and others
believe structured finance credit ratings
are more likely to have a greater number
of ratings transitions (i.e., upgrades or
downgrades) than credit ratings for debt
instruments issued by corporate issuers,
municipalities, or sovereign nations? If
so, what are the factors that create this
effect?
• Are structured finance credit ratings
more likely to experience transitions of
greater magnitude (i.e., upgrades or
downgrades that span a larger number
of credit rating categories (notches))
than credit ratings for debt instruments
issued by corporate issuers,
municipalities, or sovereign nations? If
so, what are the factors that make
structured finance credit ratings more
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prone to transitions of greater
magnitude in credit rating category?
• Do market participants and others
believe issuers, arrangers, sponsors, and
managers of structured finance products
are able to ‘‘game’’ rating agency
methodologies resulting in credit ratings
that are less accurate than ratings for
other debt instruments? Do they believe
the ability of issuers, arrangers, sponsors
and managers to adjust the
characteristics of structured finance
products, including the number and
relative size of tranches and the
composition of the asset pool in order
to achieve particular credit ratings,
result in ratings that are less accurate
than ratings for debt instruments issued
by corporate issuers, municipalities and
sovereign nations?
• To the extent that market
participants and others identify
differences between the risk
characteristics of structured finance
credit ratings and credit ratings for other
debt instruments, do differences
identified apply globally to all
structured finance products or just to
certain categories of products? Do
market participants and others believe
generalizations about the different risk
characteristics of credit ratings for
structured finance products as
compared to credit ratings for other debt
instruments can be made? Is it more
appropriate to categorize structured
finance credit ratings by underlying
asset type (e.g., residential mortgage,
commercial mortgage, student loan,
credit card receivable, lease) or structure
type (e.g., asset-backed security,
collateralized debt obligation (CDO),
CDO-squared or cubed, synthetic or
hybrid CDO, constant proportion debt
obligation, asset-backed commercial
paper conduit)?
Measures To Communicate Differences
in Structured Finance Products to
Investors
• To the extent that market
participants and others identified
significant differences in the risk
characteristics of structured finance
debt instruments as compared with debt
instruments issued by corporate issuers,
municipalities, and sovereign nations in
terms of credit risk, market risk, interest
rate risk, and liquidity risk, what are
their views on whether steps should be
taken to better communicate these
differences to investors in a manner
reasonably designed to enhance investor
understanding of the differences?
• Do market participants and others
believe structured finance issuers
should be required to disclose these
general differences in the types of
securities? If so, how should the
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disclosures be made? For example,
should they be stated in offering
documents and periodic reports or are
there other mechanisms that could be
used to convey the differences in the
types of securities?
• Do market participants and others
believe NRSROs should be required to
disclose these differences? If so, how
should the disclosures be made? For
example, should the disclosures be
included in a report issued at the same
time a rating action is taken with respect
to a structured finance product, in Form
NRSRO, or through some other
mechanism?
• Do market participants and others
believe the disclosure documents
should required to be delivered to
prospective investors in investment
pools that may hold structured finance
products be required to include these
disclosures? If so, how should these
disclosures be made?
Measures To Communicate Differences
in Structured Finance Credit Ratings to
Investors
• To the extent that market
participants and others identified
material differences in the risk
characteristics of credit ratings for
structured finance debt instruments as
compared with credit ratings for debt
instruments issued by corporate issuers,
municipalities, and sovereign nations in
terms of ratings accuracy and
performance, what are their views on
measures that can be taken to
communicate these differences to
investors in a manner reasonably
designed to enhance investor
understanding of the differences?
• Do market participants and others
believe structured finance issuers
should be required to disclose these
differences? If so, how should the
disclosures be made? Should they be
stated in offering documents and
periodic reports, or are there other
mechanisms that could be used to
convey the disclosures?
• Do market participants and others
believe NRSROs should be required to
disclose these differences? For example,
it has been suggested that NRSRO
disclose the following types of
information about structured finance
products: 128
1. The diligence that is performed by
or provided to the NRSRO about the
underlying assets, and quality control of
numerical data provided to the NRSRO;
128 See e.g., June 25, 2008 Letter from Jeff
Riefsnyder and Richard Johns on behalf of the
American Securitization Forum to the US Securities
and Exchange Commission regarding ‘‘Exchange
Act Release No. 34–57967 (File No. S7–13–08)’’.
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2. The characteristics and sensitivities
of models used or relied upon by the
NRSRO in assessing the likely
performance of the structured finance
product or the underlying assets;
3. The extent to which the NRSRO
relies on representations and warranties
made by transaction participants;
4. The assumptions as to future events
and economic conditions that are
embedded in the analytical models used
by the NRSRO in arriving at a given
rating;
5. Publishing ‘‘what if’’ scenario
analyses that address the ratings
implications of changes in the
underlying assumptions upon which
ratings are based and provide insight
into ratings tolerance to changing
economic or risk circumstances;
6. Providing additional information
relating to default probability, loss
sensitivity, severity of loss given
default, short-tail and long-tail risk and
similar risk metrics associated with each
class of credit ratings.
• If you believe these types of
disclosures and other disclosures
should be made by NRSROs, how
should the disclosures be made? Should
the disclosures be stated in a report
issued at the same time a rating action
is taken with respect to a structured
finance product, in Form NRSRO, or
through some other mechanism?
• Do market participants and others
believe the disclosure documents
required to be delivered to prospective
investors in investment pools that may
hold structured finance products should
be required to include the disclosures?
If so, how should the disclosures be
made?
B. Credit Ratings for Existing Structured
Finance Debt Instruments
Another way to differentiate credit
ratings for structured finance products
from other types of debt instrument
ratings is to increase the opportunity for
independent analysis of the credit
worthiness of the products. To this end,
in the companion release, the
Commission is adopting amendments to
Rule 17g–5 that require NRSROs that are
paid by arrangers to determine credit
ratings for structured finance products
to provide other NRSROs access to a
password-protected Internet Web site
that lists each deal they have been hired
to rate. A hired NRSRO also would be
required to obtain representations from
the arranger hiring the NRSRO that the
arranger will maintain a passwordprotected Internet Web site that contains
all the information the arranger provides
to the hired NRSRO to determine and
monitor the credit rating and that it will
make this information available to
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NRSROs not hired to determine and
monitor the rating. As discussed in
detail in the Commission’s Companion
Release, these requirements are
designed to create a mechanism by
which non-hired NRSROs will be able
to access the NRSRO Internet Web sites
to learn of new deals being rated and
then access the arranger Internet Web
sites to obtain the information provided
by the arranger to the hired NRSRO
during the entire initial rating process
and, thereafter, for the purpose of
surveillance.129 The hired NRSRO need
only provide access to its passwordprotected Internet Web site to a nonhired NRSRO whose certification
provided to the Commission indicates
that it has either (1) determined and
maintained credit ratings for at least
10% of the issued securities and money
market instruments for which it
accessed information pursuant to Rule
17g–5(a)(3) as amended in the calendar
year prior to the year covered by the
certification, if it accessed such
information for 10 or more issued
securities or money market instruments;
or (2) has not accessed information
pursuant to Rule 17g–5(a)(3) as
amended 10 or more times in the
calendar year prior to the year covered
by the certification. NRSROs also will
be required to disclose in their
certifications the number of deals for
which they obtained information
through accessing the Internet Web sites
and the number of ratings they issued
using that information during the most
recent calendar year during which it
obtained information through accessing
these Internet Web sites certification or
that they previously had not accessed
such information 10 or more times in a
calendar year.
These amendments to Rule 17g–5
described above are designed to allow
NRSROs not hired to rate a structured
finance deal to get sufficient
information to determine a credit rating
for the debt instruments to be issued.
Generally, the information relied on by
the hired NRSROs to rate new debt
issuances of structured finance issuers
is non-public. This makes it difficult for
other NRSROs to rate these securities
and money market instruments. As a
result, the products frequently are
issued with ratings from only one or two
NRSROs and only by NRSROs that are
hired by the issuer, sponsor, or
underwriter (i.e., NRSROs that may be
subject to the conflict of being
repeatedly paid by certain arrangers to
rate these securities and money market
instruments).
129 See
130 See February 2009 Proposing Release, 74 FR
at 6493.
Companion Release.
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The rule amendments also are
designed to require the disclosure of the
necessary information to any NRSRO—
whether hired or not—to permit nonhired NRSROs to determine credit
ratings for the debt instruments to be
issued. The Commission believes that
absent this requirement a non-hired
NRSRO would have a much more
difficult time obtaining the information
necessary to issue an unsolicited credit
rating at the time the debt instruments
were issued into the market. Without
the rule amendment, in most cases, the
non-hired NRSRO’s prospects for
determining a pre-issuance credit rating
would depend on the issuer’s
willingness to provide the information
to the NRSRO notwithstanding the fact
that the issuer was paying other
NRSROs to rate the to-be-issued debt
instruments.
The goal is to increase the number of
credit ratings extant for a given
structured finance security or money
market instrument and, in particular,
promote the issuance of credit ratings by
NRSROs that are not hired by the
arranger. This is designed to provide
users of credit ratings with a broader
range of views on the creditworthiness
of the security or money market
instrument. In addition, the rule
amendments are designed to make it
more difficult for arrangers to exert
influence over the NRSROs they hire to
determine credit ratings for structured
finance products. By opening up the
rating process to more NRSROs, the rule
amendments make it easier for the hired
NRSRO to resist such pressure by
increasing the likelihood that any steps
taken to inappropriately favor the
arranger could be exposed to the market
through the credit ratings issued by
other NRSROs.
As the Commission noted in the
February 2009 Proposing Release, the
text of paragraph (a)(3)(i) refers to
transactions where the NRSRO is in the
process of determining an ‘‘initial’’
credit rating.130 The rule does not
require the NRSRO to include on the
Internet Web site information about
securities or money market instruments
once the NRSRO has published the
initial rating and is monitoring the
rating. The amendment is designed to
alert other NRSROs about new deals and
direct them to the Internet Web site of
the arranger where information to
determine initial ratings and monitor
the ratings can be accessed.
Consequently, upon publication of the
initial rating, the NRSRO can remove
the information about the security or
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money market instrument from the list
it maintains on the Internet Web site.
Similarly, if the arranger decides to
terminate the rating process before a
hired NRSRO publishes an initial rating,
the NRSRO would be permitted to
remove the information from the list.131
The Commission is aware that there
are conflicting characterizations about
the ability of market participants and
others, including NRSROs not hired to
rate the deal, to obtain information
necessary to determine and monitor a
credit rating for structured finance debt
instrument after issuance. The
Commission understands that some of
the trustees and servicers involved with
the structured finance issuer provide
monthly reports that allow NRSROs not
hired to rate the issuer’s debt
instruments to determine and monitor
credit ratings for those securities and
money market instruments. The
Commission also understands that some
third-party venders aggregate the
information provided by the trustees
and servicers in a manner that permits
independent credit analysis by NRSROs
and investors. The Commission
understands that some market
participants argue that the trustees and
servicers restrict access to the
information to investors and hired
NRSROs and that the third-party
venders do not provide sufficient
information.
The Commission believes it would be
helpful to solicit comments from market
participants and others as to whether
measures should be taken by the
Commission to enhance the ability of
non-hired NRSROs to determine credit
ratings for structured finance debt
instruments that were issued before the
compliance date of the amendments to
Rule 17g–5 being adopted in the
Companion Release.
For these reasons, the Commission is
asking a series of questions below
designed to elicit comments from
market participants and others about
whether currently there is sufficient
information (or access to such
information) to permit an NRSRO to
determine unsolicited credit ratings for
structured finance debt instruments
issued prior to the compliance date of
the amendments to Rule 17g–5 being
adopted today.
Persons making submissions are
asked to provide detailed explanations
and analyses and cite relevant studies.
• Do market participants and others
believe the ability of NRSROs to access
information about structured finance
debt instruments issued before the
compliance date for the Rule 17a–5
131 See
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amendments (‘‘compliance date’’) is
restricted in such a manner as to
preclude or seriously discourage
NRSROs from determining credit ratings
if they have not been hired by the
arranger? Do the issuers, trustees and
servicers that control access to this
information preclude a non-hired
NRSRO from accessing the information
or impose barriers that discourage a
non-hired NRSRO from accessing it?
• Do market participants and others
believe the information disclosed by
structured finance issuers, trustees, and
servicers or by third-party venders is
insufficient to determine unsolicited
credit ratings for structured finance debt
instruments issued before the
compliance date?
• What specific measures, if any,
should be taken to secure the disclosure
of information by issuers, trustees or
servicers of structured finance products
issued before the compliance date or the
NRSROs that were hired to rate those
structured finance products to enable
NRSROs that were not hired to
determine and monitor a credit rating
where the debt instrument was issued
prior the compliance date?
• Do market participants and others
believe if the information provided to
the hired NRSRO to determine and
monitor a credit rating for a structured
finance product issued before the
compliance date was made available to
another NRSRO, the non-hired NRSRO
would be able to determine a
meaningful unsolicited credit using that
information alone?
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VII. General Request for Comment
The Commission invites interested
persons to submit written comments on
any aspect of the proposed
amendments, in addition to the specific
requests for comments. Further, the
Commission invites comment on other
matters that might have an effect on the
proposal contained in the release,
including any competitive impact.
VIII. Paperwork Reduction Act
Certain provisions of the proposed
amendments to Rule 17g–3 and the
Instructions to Exhibit 6 to Form
NRSRO, as well as the new proposed
Rule 17g–7 contain a ‘‘collection of
information’’ within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’). The Commission is submitting
the proposed amendments and the
proposed new collection to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with the PRA. An
agency may not conduct or sponsor, and
a person is not required to comply with,
a collection of information unless it
displays a currently valid control
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number. The titles for the collections of
information are:
(1) Rule 17g–3, Annual reports to be
furnished by nationally recognized
statistical rating organizations (OMB
Control Number 3235–0626);
(2) Rule 17g–1, Application for
registration as a nationally recognized
statistical rating organization; Form
NRSRO and the Instructions for Form
NRSRO (OMB Control Number 3235–
0625); and
(3) Rule 17g–7, Reports to be made
public by nationally recognized
statistical rating organizations about
persons that paid the nationally
recognized statistical rating organization
for the issuance or maintenance of a
credit rating (a proposed new collection
of information).
A. Collections of Information Under the
Proposed Rule Amendments
The Commission is proposing for
comment rule amendments to prescribe
additional requirements for NRSROs.
The proposed amendments to Rule 17g–
3 would require an NRSRO to submit an
additional annual report to the
Commission. The proposed
amendments to Rule 17g–3 would
require an NRSRO to furnish a new
unaudited report describing the steps
taken by the NRSRO’s designated
compliance officer during the fiscal year
to administer the policies and
procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
Act (prevention of misuse of material
nonpublic information and management
of conflicts of interest), and to ensure
compliance with the securities laws and
rules and regulations thereunder.132 The
proposed amendment to Rule 17g–3 also
would require that the report include a
description of any compliance reviews
of the activities of the NRSRO; the
number of material compliance matters
identified during each review of the
activities of the NRSRO and a brief
description of each such matter; a
description of any remediation
measures implemented to address
material compliance matters identified
during the reviews of the activities of
the NRSRO; and a description of the
persons within the NRSRO who were
advised of the results of the reviews.133
In addition, proposed amendments to
the Instructions to Exhibit 6 to Form
NRSRO would require an applicant/
NRSRO to furnish the Commission with
information regarding the revenues an
132 See
proposed Rule 17g–3(a)(7).
proposed Rule 17g–3(a)(7)(ii). The
proposed report also would be certified by the
designated compliance officer. See proposed Rule
17g–3(b)(2).
133 See
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NRSRO receives from major clients and
from services other than determining
credit ratings. Finally, proposed Rule
17g–7 would require an NRSRO, on an
annual basis, to make publicly available
on its Internet Web site a consolidated
report that shows certain information
with respect to each person that paid
the NRSRO to issue or maintain a credit
rating. First, the NRSRO must include
the percent of the net revenue
attributable to the person earned by the
NRSRO for that fiscal year for providing
services and products other than credit
rating services. Second, the NRSRO
must include the relative standing of the
person in terms of the person’s
contribution to the net revenue of the
NRSRO for the fiscal year. Third, the
NRSRO must include all outstanding
credit ratings paid for by the person.134
B. Proposed Use of Information
The collections of information in the
proposed amendments to Rule 17g–3 to
add an additional unaudited report to
describe the steps taken by the
designated compliance officer during
the fiscal year to administer certain
policies and procedures and to ensure
compliance with securities laws and
rules and regulations would improve
the integrity of the ratings process by
establishing a discipline under which
the NRSRO’s designated compliance
officer would need to report to the
Commission the steps taken by the
compliance officer to fulfill the officer’s
statutory responsibilities. The act of
reporting these steps is designed to
promote the active engagement of the
designated compliance officer in
reviewing an NRSRO’s compliance with
internal policies and procedures. The
proposed report also could strengthen
the Commission’s oversight of NRSROs
by highlighting possible problem areas
in an NRSRO’s rating processes and
providing an additional tool for the
Commission to monitor how the
NRSRO’s designated compliance officer
is fulfilling the responsibilities
prescribed in Section 15E(j) of the
Exchange Act. In addition, with respect
to the proposed amendments to Rule
17g–3, the identification of the persons
within the NRSRO advised of the results
of the review could also promote the
appropriate escalation of compliance
issues to the management of the
NRSRO.
Further, the collections of information
in the proposed amendments to Exhibit
6 to the Instructions to Form NRSRO
would allow users of credit ratings to
more effectively evaluate the integrity of
the NRSRO’s credit ratings themselves
134 See
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and whether they believe the NRSRO is
effectively managing its conflicts of
interests otherwise identified in Exhibit
6. The collection of information in
proposed new Rule 17g–7 would
provide users of credit ratings with
information about the potential conflicts
of interest that arise when an NRSRO is
paid to determine a credit rating for a
specific obligor, security, or money
market instrument.
Finally, the collections of information
in the proposed amendments also are
designed to further assist the
Commission in effectively monitoring,
through its examination function,
whether an NRSRO is conducting its
activities in accordance with Section
15E of the Exchange Act 135 and the
rules thereunder.
C. Respondents
In adopting the original rules under
the Rating Agency Act, as well as
additional rules in February 2009, the
Commission estimated that
approximately 30 credit rating agencies
would be registered as NRSROs.136 The
Commission believes that this estimate
continues to be appropriate for
identifying the number of respondents
for purposes of the amendments and the
proposed new rule. Since the original
rules under the Rating Agency Act
became effective in June 2007, ten credit
rating agencies have registered with the
Commission as NRSROs.137 The rules
regarding the registration have been in
effect for just over two years;
consequently, the Commission expects
additional entities will register.
The Commission generally requests
comment on all aspects of these
estimates for the number of
respondents. In addition, the
Commission requests specific comment
on the following items related to these
estimates.
• For purposes of the PRA should the
Commission continue to use the
estimate that 30 credit rating agencies
will register as NRSROs?
• Alternatively, should the
Commission raise or lower that number,
given that ten credit rating agencies
have registered with the Commission as
NRSROs in the two years that the
NRSRO registration program has been in
effect? If so, what should the number
be? Commenters should explain how
they arrived at the estimate and identify
135 15
U.S.C. 78o–7.
June 2007 Adopting Release, 72 FR at
136 See
33607.
137 A.M. Best Company, Inc.; DBRS Ltd.; Fitch;
Japan Credit Rating Agency, Ltd.; Moody’s; Rating
and Investment Information, Inc.; S&P; LACE
Financial Corp.; Egan-Jones Rating Company; and
Realpoint LLC.
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any sources of industry information
used in arriving at the estimate.
Commenters should provide specific
data and analysis to support any
comments they submit with respect to
these estimates with respect to the
number of respondents.
D. Total Annual Recordkeeping and
Reporting Burden
As discussed in further detail below,
the Commission estimates the total
recordkeeping burden resulting from the
proposed rule amendments and
proposed new rule would be
approximately 2,760 hours 138 on an
annual basis and 4,650 hours 139 on a
one-time basis.
The total annual and one-time hour
burden estimates described below are
averages across all types of NRSROs
expected to be affected by the proposed
rule amendments. The size and
complexity of NRSROs range from small
entities to entities that are part of
complex global organizations employing
thousands of credit analysts.
Consequently, the burden hour
estimates represent the average time
across all NRSROs. The Commission
further notes that, given the significant
variance in size between the largest
NRSROs and the smallest NRSROs, the
burden estimates, as averages across all
NRSROs, are skewed higher because the
largest firms currently predominate in
the industry.
1. Proposed Amendments to Rule
17g–3
Rule 17g–3 requires an NRSRO to
furnish certain reports to the
Commission on an annual basis,
including audited financial statements,
as well as other annual reports.140 The
Commission is proposing to amend Rule
17g–3 to require an NRSRO to furnish
the Commission with an additional
unaudited report containing a
description of the steps taken by the
designated compliance officer during
the fiscal year to administer the policies
and procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
Act (management of conflicts of interest
and prevention of the misuse of material
nonpublic information); and ensure
compliance with the securities laws and
rules and regulations thereunder,
including those promulgated by the
Commission pursuant to Section 15E of
the Exchange Act.141
138 900
+ 60 + 1,800 = 2,760.
+ 3,900 = 4,650.
140 17 CFR 240.17g–3.
141 See proposed Rule 17g–3(a)(7)(ii).
139 750
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Proposed new paragraph (a)(7)(ii) of
Rule 17g–3 also would provide that the
report must include: (1) A description of
any compliance reviews of the activities
of the NRSRO; (2) the number of
material compliance matters identified
during each review of the activities of
the NRSRO and a brief description of
each such matter; (3) a description of
any remediation measures implemented
to address material compliance matters
identified during the reviews of the
activities of the NRSRO; and (4) a
description of the persons within the
NRSRO who were advised of the results
of the reviews.
The total annual burden currently
approved by OMB for Rule 17g–3 is
7,000 hours.142 The current annual hour
burden estimate to prepare and file the
annual reports under Rule 17g–3 is 200
hours per respondent, including the
audited financial statements under Rule
17g–3(a)(1).143 With respect to the
proposed amendment, the Commission
estimates, based on staff experience,
that the amount of time it would take to
prepare a report describing the steps
taken by the designated compliance
officer during the fiscal year to
administer the policies and procedures
that are required to be established
pursuant to paragraphs (g) and (h) of
Section 15E of the Exchange Act
(management of conflicts of interest and
prevention of the misuse of material
nonpublic information); and to ensure
compliance with the securities laws and
rules and regulations thereunder, would
be approximately 30 hours per year for
a total annual hour burden of 900
hours.144
The Commission based this estimate,
in part, on the fact that the areas
covered by the proposed amendment to
Rule 17g–3 overlap with the duties
already required of the NRSRO’s
designated compliance officer pursuant
to Section 15E(j) of the Exchange Act.
The Commission preliminarily believes
that the estimated hour burden under
the proposed amendment to Rule 17a–
3 would include the time it would take
to compile information to draft the
report and the preparation and filing of
the report itself. In addition, this onetime hour burden estimate also includes
the time it would take to identify and
describe material compliance matters,
142 See February 2009 Adopting Release, 74 FR at
6473.
143 See February 2009 Adopting Release, 74 FR at
6472. The Commission based this proposed
estimate, in part, on the average number of annual
hours (200 hours) divided by the number of annual
reports required to be prepared under current Rule
17g–3(a)(1)–(6): 200 annual hours/6 reports = 33.33
hours (rounded to 30 hours).
144 30 hours × 30 NRSROs = 900 hours.
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any remediation and the persons
advised of the results of the reviews.
Consequently, the Commission also
based this estimate, in part, on the
average estimated number of hours it
would currently take an NRSRO to
complete one annual report under
current Rule 17g–3 (i.e., approximately
30 hours).145
Given the potentially sensitive nature
of the proposed report, the Commission
also preliminarily believes that an
NRSRO would likely engage outside
counsel to assist it in the process of
drafting and reviewing the proposed
report under Rule 17g–3. The
Commission estimates that the time an
outside attorney would spend on this
work would depend on the size and
complexity of the NRSRO. The
Commission estimates that, on average,
an outside counsel would spend
approximately 20 hours assisting an
NRSRO and its designated compliance
officer in drafting and reviewing the
proposed report on a one-time basis for
an aggregate burden to the industry of
600 hours.146 Based on industry
sources, the Commission estimates that
the cost of an outside counsel would be
approximately $400 per hour. For these
reasons, the Commission estimates that
the average one-time cost to an NRSRO
would be approximately $8,000 147 and
the one-time cost to the industry would
be approximately $240,000.148
The Commission generally requests
comment on all aspects of the burden
estimates for the proposed amendments
to Rule 17g–3. Commenters should
provide specific data and analysis to
support any comments they submit with
respect to these burden estimates. In
addition, the Commission requests
specific comment on the following
items related to these estimates.
• To what extent would NRSROs rely
on outside counsel with respect to the
preparation, drafting and review of the
proposed report?
2. Amendments to Form NRSRO
The Commission is proposing to
amend the Instructions to Exhibit 6 to
Form NRSRO to require an applicant/
NRSRO to furnish the Commission with
information regarding the revenues an
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145 15
U.S.C. 78o–7(j). Under this provision of the
statute, an NRSRO must ‘‘designate an individual
responsible for administering the policies and
procedures that are required to be established
pursuant to [Sections 15E(g) and (h) of the
Exchange Act (15 U.S.C. 78o–7(g) and (h))], and for
ensuring compliance with the securities laws and
rules and regulations thereunder, including those
promulgated by the Commission pursuant to
[Section 15E of the Exchange Act].’’ Id.
146 30 NRSROs × 20 hours = 600 hours.
147 $400 per hour × 20 hours = $8,000.
148 $8,000 × 30 NRSROs = $240,000.
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NRSRO receives from major clients and
from services other than determining
credit ratings.
As stated above, the Commission
proposes amending the instructions for
Exhibit 6 to augment the information
about conflicts of interest disclosed in
Form NRSRO. The Commission
prescribed the information currently
required in Exhibit 6 to implement
Section 15E(a)(1)(B)(vi) of the Exchange
Act, which requires that an application
for registration contain information
regarding any conflict of interest
relating to the issuance of credit ratings
by the applicant/NRSRO.149 The
proposed amendments to Form NRSRO
would change the instructions for the
Form to require that NRSROs provide
specific disclosure of certain
percentages of its revenue related to its
large customers and services it provides,
other than the issuance of credit ratings,
in Exhibit 6 to the Form. The
Commission preliminarily believes that
an NRSRO would generate the financial
information and complete the proposed
new additional disclosures required by
Exhibit 6 to Form NRSRO using internal
records and current NRSRO personnel.
The total annual burden currently
approved by OMB for Rule 17g–1 and
Form NRSRO is 6,400 hours.150 Based
on staff experience, the Commission
estimates that the average time
necessary for an applicant or NRSRO to
gather the information for the first time
in order to complete the additional
disclosures that would be required by
the proposed amendments to Exhibit 6
to Form NRSRO would be 25 hours per
NRSRO, which would be a one-time
hour burden to the industry of 750
hours.151 The Commission preliminarily
believes, based on staff experience, that
the average time it would take an
NRSRO to complete the additional
disclosures that would be required by
the proposed amendments would be
comparable to the current estimate of 25
hours that it would take an NRSRO to
complete an amendment to a Form
NRSRO.152 The Commission
149 15
U.S.C. 78o–7(a)(1)(B)(vi).
annual hours + [13,000 one-time hours
annualized over the three year approval period/3]
= 6,433 hours = rounded to 6,400 hours.
151 30 NRSROs × 25 hours = 750 hours. The
Commission also notes that the currently approved
PRA collection for Rule 17g–1 and Form NRSRO
includes an estimate that an outside counsel would
spend approximately 40 hours assisting a credit
rating agency in the process of completing and
furnishing a Form NRSRO to the Commission. June
2007 Adopting Release, 72 FR at 33608. The
Commission believes that any outside counsel
review of the amendments to Exhibit 6 to Form
NRSRO would de minimis and therefore the current
estimate remains accurate.
152 See June 2007 Adopting Release, at 72 FR
33609.
150 2,100
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preliminarily believes that these burden
estimates would be comparable because,
based on the staff’s experience with
Form NRSRO filings furnished to the
Commission over the past two years, the
Commission believes that time and
amount of information involved in filing
an amendment to part of the Form
NRSRO would be similar to the time
involved to update the Form NRSRO
with the proposed information to
Exhibit 6 to Form NRSRO.
In addition, the proposed
amendments to the Instructions to
Exhibit 6 would provide that after
registration, an NRSRO with a fiscal
year end of December 31 must update
the proposed additional disclosures in
Exhibit 6 information as part of its
annual certification. Rule 17g–1(f)
requires an NRSRO to furnish the
annual certification no later than 90
days after the calendar year.153 The
currently approved OMB annual hour
estimate to complete the annual
certification is 10 hours per NRSRO, for
a total aggregate annual hour burden to
the industry of 300 hours. The
Commission estimates that once an
NRSRO completes its first annual
certification with the additional
proposed disclosures required in the
Instructions to Exhibit 6 to Form
NRSRO that the completion of
subsequent annual certifications,
generally, would take less time because
the additional disclosures proposed to
be required would be furnished on a
regular basis (albeit yearly) and,
therefore, become more a matter of
routine over time. Consequently, the
Commission believes that the annual
certifications with the proposed
additional discloses would take more
time to complete in the first year the
rule would become effective, than it
would take to complete in subsequent
years.
Therefore, based on staff experience,
the Commission estimates that with the
additional disclosures proposed to be
contained in Instructions to Exhibit 6 to
Form NRSRO, the annual hour burden
for each NRSRO to complete the annual
certification would increase 2 hours per
year, from 10 to 12 hours, for a total
153 17 CFR 240.17g–4(f). The Commission also
notes that if an NRSRO has an annual year end
other than December 31st, the proposed additional
instructions Exhibit 6 to Form NRSRO would
require that the NRSRO file an Update of
Registration no later than 90 days following the end
of the NRSRO’s fiscal year. The Commission
believes that the annual hour burden for this
proposed collection of information is encompassed
within the time it would take an NRSRO to file an
amendment to the Form NRSRO which has been
estimated to be a 25 annual hour burden per year.
The Commission estimates that an NRSRO will on
average file two amendments to Form NRSRO per
year.
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aggregate annual hour burden of 360
hours, resulting in an increase to the
estimated annual hour burden for Rule
17g–1 and Form NRSRO of 60 hours.154
The Commission preliminarily
believes that an applicant/NRSRO
would incur only limited internal costs
to modify its systems to generate and
disclose the proposed additional
disclosures in Exhibit 6 to Form NRSRO
because an applicant/NRSRO is already
required to generate similar financial
information in other parts of Form
NRSRO and certain financial reports
required under Rule 17g–3.
The Commission generally requests
comment on all aspects of these
proposed burden estimates for Rule
17g–1 and Form NRSRO, as proposed to
be amended. Commenters should
provide specific data and analysis to
support any comments they submit with
respect to these burden estimates.
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3. Proposed Rule 17g–7
The Commission is proposing new
Rule 17g–7, which would require an
NRSRO, on an annual basis, to make
publicly available on its Internet Web
site a consolidated report that would
contain certain information about the
revenues earned by the NRSRO for
providing products and services to any
obligor, issuer, underwriter, sponsor,
and subscriber that paid the NRSRO to
issue or maintain the credit rating. In
order to generate the report as required
by proposed paragraph (a)(1) of Rule
17g–7, the NRSRO would have to
perform two calculations and identify
any outstanding credit ratings at the end
of the fiscal year.
As proposed under new Rule 17g–7,
an NRSRO would be required to
perform a calculation to state the
percentage of net revenue earned by the
NRSRO from providing services to the
entity that is derived from services other
than credit ratings attributable to each
person that paid the NRSRO for the
issuance or maintenance of a credit
rating.
The second calculation that the
NRSRO would be required to perform to
generate the report once a year as
described in paragraph (a)(1)(i) of
proposed Rule 17g–7 would require the
NRSRO to derive and state the relative
154 12 hours × 30 NRSROs = 360 hours. The
Commission also based this estimate, in part, on the
time it would take an NRSRO to furnish a
withdrawal of registration on Form NRSRO of 1
hour. June 2007 Proposing Release, 72 FR at 33608–
33609. However, because the NRSRO would have
to update information for calculations with respect
to its revenues, the Commission believes it would
take an NRSRO longer than 1 hour. Therefore, the
Commission preliminarily believes that it would
take an NRSRO approximately 2 hours each year to
update the proposed information.
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standing of the entity as a contributor of
revenues to the NRSRO as compared to
other entities that contribute revenue to
the NRSRO. In particular, the NRSRO
would need to identify which of the
following cohorts of contributors to the
annual net revenue of the NRSRO the
entity is included in: top 10%, top 25%,
top 50%, bottom 50%, bottom 25%.
Finally, once a year an NRSRO would
also be required to identify all
outstanding credit ratings paid for by
the person, which the NRSRO must
identify by name of obligor, security, or
money market instrument and, as
applicable, CIK number, CUSIP, or ISIN.
The Commission also notes that
paragraph (a)(2) of proposed Rule
17g–7 would exempt an NRSRO from
publishing the reports if, as of the end
of the fiscal year, the NRSRO had no
credit ratings outstanding that the
NRSRO issued or maintained as a result
of a person paying the NRSRO for the
issuance or maintenance of the credit
ratings.155
For purposes of the PRA, based on
staff experience, the Commission
estimates that it would take an NRSRO
approximately 100 hours on a one-time
basis to develop the calculations
necessary to generate the percents
required under the report under
proposed Rule 17g–7; to populate the
proposed report with the required data;
and to develop and draft the form
report. Additionally, the Commission is
basing this one-time hour burden
estimate on the Commission’s
experience with, and burden estimates
for, Rules 17g–1 through 17g–6, given
that the NRSRO rules have been in
effect for over two years.156 More
specifically, the Commission notes that
the current one-time hour burden
estimates under the PRA for an NRSRO
to file a Form NRSRO is 400 hours, and
to file an amendment to Form NRSRO
is 25 hours.157
The Commission preliminarily
believes that the report to be required
under proposed Rule 17g–7 would be
more complex and comprehensive to
complete than a typical amendment to
155 For purposes of this collection of information,
the Commission has determined that it would
preliminarily use 30 respondents in calculating the
burden estimates. While some subscriber-based
NRSROs would be exempt from new Rule 17g–7,
the Commission has preliminarily determined to
include all 30 respondents because if a subscriberpaid NRSRO was specifically requested to issue a
rating, the NRSRO would no longer be exempt from
Rule 17g–7. Therefore, the Commission
preliminarily believes that this approach would
result in an appropriate PRA estimate for new Rule
17g–7.
156 See generally, June 2007 Adopting Release.
157 June 2007 Adopting Release, 72 FR at 33609;
see also February 2009 Adopting Release, 74 FR at
6470.
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Form NRSRO because the new proposed
rule would require an NRSRO to
calculate percents for every person that
paid the NRSRO for the issuance or
maintenance of a credit rating. In
contrast, however, the Commission
preliminarily does not believe that the
one-time hour burden to comply with
the new Rule 17g–7 would be as
extensive and time consuming as the
time necessary to complete the initial
Form NRSRO. Therefore, the
Commission preliminarily believes that
the estimate of a one-time burden of 100
hours per respondent is conservative
and reasonable given the significant
variance in size between the largest
NRSROs and the smallest NRSROs.
Thus, based on staff experience, the
Commission preliminarily estimates
that the aggregate initial one-time hour
burden to complete the report required
by proposed Rule 17g–7 would be 3,000
hours for 30 NRSROs.158
In addition to the one-time hour
burden, proposed new Rule 17g–7 also
would result in an annual hour burden
for an NRSRO to generate the percents
required under the proposed report and
to populate the proposed report with the
required data once a year. The
Commission notes that an NRSRO
would have already developed the
equations necessary to generate the
percents in order to comply with the
new Rule 17g–7 in the first year.
Additionally, the Commission believes
that once an NRSRO complies with Rule
17g–7 in the first year, that preparation
of the new annual report would become
more routine. Therefore, based on staff
experience, the Commission estimates
that it would take an NRSRO
approximately 50 hours per year to
generate the percents required under the
proposed report, as well as to generate
the report itself.159 Thus, the
Commission preliminarily estimates
that this would result in a total annual
hour burden of 1,500 hours for 30
NRSROs.160
Proposed Rule 17g–7 also would
require an NRSRO to make publicly
available on its Internet Web site the
report required under paragraph
hours × 30 NRSROs = 3,000 hours.
Commission based this estimate, in part,
on the number of estimated hours it would take an
NRSRO to file an amendment to Form NRSRO of
25 hours. The Commission, however, preliminarily
believes that it would take an NRSRO substantially
more time to generate the information once a year
to complete the proposed report under proposed
Rule 17g–7. Therefore, the Commission
preliminarily estimates that the average time
necessary to complete the report under proposed
Rule 17g–7 would be more comparable to the time
it would take an NRSRO to file 2 amendments to
Form NRSRO, or 50 hours (2 × 25 hours).
160 50 hours × 30 NRSROs = 1,500 hours.
158 100
159 The
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(a)(1).161 The Commission estimates that
it would take an NRSRO approximately
30 hours to disclose the initial
information in its Web site for a total
one-time burden of 900 hours,162 and
thereafter 10 hours per year to disclose
updated information for a total annual
burden of 300 hours.163 This one-time
hour burden is estimated in part based
on the current one-time and annual
burden hours for an NRSRO to publicly
disclose its Form NRSRO.164
Accordingly, the Commission estimates
that implementation of proposed new
Rule 17g–7 would result in a total onetime hour burden of 3,900 165 hours and
a total annual hour burden of 1,800
hours.166
The Commission also believes that an
NRSRO may need to purchase and/or
modify its software and operating
systems in order to generate and publish
the information proposed to be required
in the report in proposed new Rule 17g–
7. The Commission estimates that the
cost of any software incurred in
connection with its systems
modifications would vary based on the
size and complexity of the NRSRO. The
Commission estimates that some
NRSROs would not need such software
because they may already have such
systems in place to generate the
proposed report, or given their small
size, other NRSROs may find the
purchase of additional software
unnecessary. The Commission
preliminarily believes that an NRSRO
would be able to generate and compile
the information for the reports using the
NRSRO’s own personnel. Therefore,
based on staff experience, the
Commission estimates that the average
cost of software across all NRSROs
would be approximately $4,000 per
firm, with an aggregate one-time cost to
the industry of $120,000.167
The Commission generally requests
comment on all aspects of these burden
estimates for proposed Rule 17g–7. In
addition, the Commission requests
161 See
proposed Rule 17g–7(a)(1).
hours × 30 NRSROs = 900 hours.
163 30 NRSROs × 10 hours = 300 hours.
164 June 2007 Adopting Release, 71 FR at 33609.
165 3,000 hours + 900 hours = 3,900 total hours
for one-time burden.
166 1,500 hours + 300 hours = 1,800 total annual
hours.
167 $4,000 × 30 NRSROs = $120,000. As a means
of comparison, the Commission notes that the
average cost of recordkeeping software across all
NRSROs under Rule 17g–2 is estimated to be $1,800
per respondent. See February 2009 Adopting
Release, 74 FR, at 6472. The Commission
preliminarily believes that the one-time cost of
purchasing software in order to comply with
proposed new Rule 17g–7 would be greater than
$1,800 because the proposed rule would require the
publication of two new reports not previously
required by any rule.
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162 30
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specific comment on the following
items related to these burden estimates:
• Would there be additional systems
costs or other costs involved in
developing this collection of
information?
• Given that paragraph (a)(2) of
proposed Rule 17g–7 would exempt an
NRSRO from publishing the reports if,
as of the end of the fiscal year, the
NRSRO had no credit ratings
outstanding that the NRSRO issued or
maintained as a result of a person
paying the NRSRO for the issuance or
maintenance of the credit ratings,
should the Commission revise the
number of respondents for this
proposed new collection of information?
If so, what should the number be?
Commenters should provide specific
data and analysis to support any
comments they submit with respect to
these estimates.
E. Collection of Information Is
Mandatory
The collection of information
obligations imposed by the proposed
rule amendments and the proposed new
rule would be mandatory for credit
rating agencies that are registered with
the Commission as NRSROs. Such
registration is voluntary.168
F. Confidentiality
The information collected under the
proposed amendments to Rule 17g–3
would be generated from the internal
records of the NRSRO and would be
furnished to the Commission on a
confidential basis, to the extent
permitted by law.169 The proposed
disclosures that would be required
under Exhibit 6 to Form NRSRO and
proposed Rule 17g–7 would be public.
G. Record Retention Period
The records required under the
proposed amendments to Rules 17g–3
and 17g–7, as well as Exhibit 6 to Form
NRSRO would need to be retained by
the NRSRO for at least three years.170
H. Request for Comment
The Commission requests pursuant to
44 U.S.C. 3306(c)(2)(B) comment on the
proposed collections of information in
order to: (1) Evaluate whether the
proposed collection of information is
necessary for the proper performance of
the functions of the Commission,
168 See
Section 15E of the Exchange Act (15
U.S.C. 78o–7).
169 15 U.S.C. 78o–7(k). An NRSRO can request
that the Commission keep this information
confidential. See Section 24 of the Exchange Act (15
U.S.C. 78x), 17 CFR 240.24b–2, 17 CFR 200.80 and
17 CFR 200.83.
170 17 CFR 240.17g–2(c).
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63891
including whether the information
would have practical utility; (2) evaluate
the accuracy of the Commission’s
estimates of the burden of the proposed
collections of information; (3) determine
whether there are ways to enhance the
quality, utility, and clarity of the
information to be collected; (4) evaluate
whether there are ways to minimize the
burden of the collection of information
on those who respond, including
through the use of automated collection
techniques or other forms of information
technology; and (5) evaluate whether
the proposed rule amendments would
have any effects on any other collection
of information not previously identified
in this section.
Persons who desire to submit
comments on the collection of
information requirements should direct
their comments to the OMB, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
send a copy of their comments to
Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090, and refer to File No. S7–
28–09. OMB is required to make a
decision concerning the collections of
information between 30 and 60 days
after publication of this document in the
Federal Register; therefore, comments
to OMB are best assured of having full
effect if OMB receives them within 30
days of this publication. Requests for
the materials submitted to OMB by the
Commission with regard to these
collections of information should be in
writing, refer to File No. S7–28–09, and
be submitted to the Securities and
Exchange Commission, Records
Management Office, 100 F Street, NE.,
Washington, DC 20549.
IX. Costs and Benefits of the Proposed
Rules
The Commission is sensitive to the
costs and benefits that result from its
rules. The Commission has identified
certain costs and benefits of the
proposed rule amendments and
proposed new rule and requests
comment on all aspects of this costbenefit analysis, including identification
and assessment of any costs and benefits
not discussed in the analysis.171 The
171 For the purposes of this cost/benefit analysis,
the Commission is using salary data from the
Securities Industry and Financial Markets
Association (‘‘SIFMA’’) Report on Management and
Professional Earnings in the Securities Industry
2008, which provides base salary and bonus
information for middle-management and
professional positions within the securities
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Commission seeks comment and data on
the value of the benefits identified. The
Commission also seeks comments on
the accuracy of its cost estimates in each
section of this cost-benefit analysis, and
requests those commenters to provide
data, including identification of
statistics relied on by commenters to
reach conclusions on cost estimates.
Finally, the Commission seeks estimates
and views regarding these costs and
benefits for particular types of market
participants, as well as any other costs
or benefits that may result from these
proposed rule amendments and the new
proposed rule.
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A. Benefits
The purposes of the Rating Agency
Act, as stated in the accompanying
Senate Report, are to improve ratings
quality for the protection of investors
and in the public interest by fostering
accountability, transparency, and
competition in the credit rating
industry.172 As the Senate Report states,
the Rating Agency Act establishes
‘‘fundamental reform and improvement
of the designation process’’ with the
goal that ‘‘eliminating the artificial
barrier to entry will enhance
competition and provide investors with
more choices, higher quality ratings,
and lower costs.’’ 173
The Commission is proposing to
amend Rule 17g–3 to require an NRSRO
to furnish the Commission with an
additional unaudited report containing
a description of the steps taken by the
designated compliance officer during
the fiscal year to administer the policies
and procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
Act (management of conflicts of interest
and prevention of the misuse of material
nonpublic information); and ensure
compliance with the securities laws and
rules and regulations thereunder,
including those promulgated by the
Commission pursuant to Section 15E of
the Exchange Act.
industry. The Commission believes that the salaries
for these securities industry positions would be
comparable to the salaries of similar positions in
the credit rating industry. The salary costs derived
from the report and referenced in this cost benefit
section are modified to account for an 1,800-hour
work year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
The Commission used comparable estimates in
adopting final rules implementing the Rating
Agency Act in 2007 and additional rules in 2009,
requested comments on such estimates, and
received no comments in response to these
requests. See June 2007 Adopting Release, note 576,
and February 2009 Adopting Release, note 179.
Hereinafter, references to data derived from the
report as modified in the manner described above
will be cited as ‘‘SIFMA 2008 Report as Modified.’’
172 See ‘‘Senate Report,’’ p. 2.
173 Id., p. 7.
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The Commission’s staff understands
that the designated compliance officer
of some NRSROs may, in some cases,
not be fulfilling the compliance officer’s
statutorily mandated duties, as
prescribed by Section 15E(j) of the
Exchange Act.174 Further, during
examinations in 2008 of three of the
largest NRSROs, Commission staff also
identified issues with respect to each
NRSRO’s policies and procedures and
improvements that could be made.175 In
light of these concerns and the
importance of an effective NRSRO
compliance program, the Commission is
proposing to amend Rule 17g–3 by
adding paragraph (a)(7), which would
require an NRSRO to furnish to the
Commission an additional unaudited
annual report.
The amendments to proposed new
paragraph (a)(7) of Rule 17g–3 would
also provide that the report must
include: (1) A description of any
compliance reviews of the activities of
the NRSRO; (2) the number of material
compliance matters identified during
each review of the activities of the
NRSRO and a brief description of each
such finding; (3) a description of any
remediation measures implemented to
address material compliance matters
identified during the reviews of the
activities of the NRSRO; and (4) a
description of the persons within the
NRSRO who were advised of the results
of the reviews.176
The Commission believes that the
proposed amendment to Rule 17g–3
would further address concerns about
the integrity of the ratings process by
establishing a discipline under which
the NRSRO’s designated compliance
officer would need to report to the
Commission the steps taken by the
compliance officer to fulfill the officer’s
responsibilities as set forth in Section
15E(j) of the Exchange Act. The act of
reporting these steps is designed to
promote the active engagement of the
designated compliance officer in
reviewing an NRSRO’s compliance with
internal policies and procedures. The
reports also could strengthen the
Commission’s oversight of NRSROs by
highlighting possible problem areas in
an NRSRO’s rating processes and
providing an additional tool for the
Commission to monitor how the
NRSRO’s designated compliance officer
is fulfilling the responsibilities
174 15
U.S.C. 78o–7(j).
generally, Summary Report of Issues
Identified in the Commission Staff’s Examinations
of Select Credit Rating Agencies (July 8, 2008). The
report is available on the Commission’s Internet
Web site, located at https://www.sec.gov/news/
studies/2008/craexamination070808.pdf.
176 See proposed Rule 17g–3(a)(7)(ii).
175 See
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prescribed in Section 15E of the
Exchange Act. For example, if an
NRSRO reports an unusual level of
significant compliance exceptions in a
particular area, the Commission
examination staff could focus their next
review of the NRSRO in that particular
area. Alternatively, if a report indicates
no problems, but a subsequent staff
examination reveals significant
compliance exceptions, this could be
brought to the attention of the NRSRO’s
management to be used to assess
whether the designated compliance
officer is adequately fulfilling the
officer’s statutory duties.
As stated above, the proposed
amendment to Rule 17g–3 also would
set forth specific items to be included in
the proposed new report under Rule
17g–3(a)(7). The first item the
Commission is proposing be included in
the report is a description of any
compliance reviews of the activities of
the NRSRO.177 The Commission intends
that the designated compliance officer
would describe all such reviews
conducted during the most recently
ended fiscal year. This would provide
the Commission with an understanding
of the scope of the designated
compliance officer’s reviews of the
NRSRO’s activities. The second item the
Commission is proposing be included in
the report is the number of material
compliance matters identified during
each review of the activities of the
NRSRO and a brief description of each
such finding. The Commission
preliminarily intends a ‘‘material
compliance matter’’ to be the discovery
that the NRSRO or a person within the
NRSRO had violated the securities
laws 178 or the rules thereunder or the
policies, procedures, or methodologies
established, maintained and enforced by
the NRSRO to, for example, determine
credit ratings, prevent the misuse of
material non-public information,
manage conflicts of interest, and comply
with the Commission’s NRSRO rules.179
The proposed requirement to report a
material compliance matter would be
designed to alert the Commission to
matters identified by the designated
compliance officer that could raise
questions about the integrity of the
NRSRO’s activities and operations. It
also could assist the Commission’s
oversight of NRSROs to the extent a
reported material compliance matter is
one that could arise in other NRSROs
because, for example, it relates to a new
177 See
proposed Rule 17g–3(a)(7)(ii)(A).
term ‘‘securities laws’’ is defined in
Section 3(a)(47) of the Exchange Act.
179 See e.g., 17 CFR 270.38a–1(e)(2); see also
supra note 37.
178 The
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type of debt instrument that is being
rated by more than one NRSRO or
involves interactions with an issuer that
hired several NRSROs to rate its
securities.
The third item the Commission is
proposing be included in the report is
a description of any remediation
measures implemented to address
material compliance matters identified
during the reviews of the activities of
the NRSRO.180 The reporting of these
measures could assist the Commission
in evaluating the risk of such reoccurrences. It also could provide the
Commission with potential ‘‘best
practices’’ for mitigating the risk of
future material compliance matters,
which could assist the Commission in
its overall supervision of NRSROs.
Finally, the fourth item the Commission
is proposing be included in the report
is a description of the persons within
the NRSRO who were advised of the
results of the reviews. The information
with respect to those persons who were
advised of the results of reviews is
designed to provide the Commission
with an understanding of how the
NRSRO responds to material
compliance matters and the role and
structure of the compliance program
within the NRSRO. For example, it
would indicate whether the compliance
officer reported the matters to the
NRSRO’s board or senior management
or only to the business unit that
underwent the compliance review. This
is designed to promote the appropriate
escalation of compliance issues to the
management of the NRSRO. The
Commission also believes that this
proposed information would be a useful
tool for examiners to improve the focus
of examination resources of a particular
NRSRO on practices related to material
compliance matters reported and the
possible selection of NRSROs for
examination.
In summary, as stated above, the
amendments to Rule 17g–3 related to
the new unaudited annual report related
to the NRSRO’s compliance function
could serve to improve the NRSRO’s
compliance function. This improved
compliance function, in turn, could
improve the integrity of NRSROs’
ratings processes.
The Commission also believes that the
proposed new report would facilitate
improvements to an NRSRO’s
compliance program in light of the
concerns that the designated
compliance officer of some NRSROs
may, in some cases, not be fulfilling the
compliance officer’s statutorily
mandated duties as prescribed in
180 See
proposed Rule 17g–3(a)(7)(ii)(C).
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Section 15E(j) of the Exchange Act. The
proposed rule amendments also would
further enhance the Commission’s
oversight of NRSROs by providing the
Commission staff an additional resource
with which to evaluate the performance
of the designated compliance officers in
carrying out their statutory
responsibilities prescribed in Section
15E(j) of the Exchange Act. In addition
to improving the quality of credit
ratings, increased oversight of NRSROs
could increase the accountability of an
NRSRO to its subscribers, investors, and
other persons who rely on the
credibility and objectivity of a credit
rating in making an investment
decision.
Finally, the Commission believes that
the proposed amendments to Rule
17g–3 would complement the
Commission’s examination program for
NRSROs, and that the proposed
amendments would enhance the
Commission’s ability to protect
investors. The requirement to furnish
the Commission with an annual report
related to an NRSRO’s compliance
program would serve to help facilitate
the examination staff’s efforts to
conduct each NRSRO examination in an
organized and efficient manner and thus
to allocate resources to maximize
investor protection. The Commission
notes that the proposed report would be
one of numerous factors the
Commission’s exam staff may use to
determine the focus of a particular
exam.
The proposed amendments to the
Instructions to Exhibit 6 to Form
NRSRO would require an applicant/
NRSRO to furnish the Commission with
information regarding the revenues an
NRSRO receives from major clients and
from services other than determining
credit ratings. The proposed new
information is designed to assist users of
NRSRO credit ratings in assessing the
potential magnitude of the conflicts of
interest inherent in a given NRSRO’s
business operations. In particular, by
disclosing information about revenues
received from major clients and other
services, users of credit ratings would
have access to more information about
conflicts of interest that may exist when
the NRSRO is being paid to determine
credit ratings and is offering other
services to persons who pay for ratings.
The Commission believes these
enhanced disclosures would allow users
of credit ratings to more effectively
assess the conflicts of interest affecting
an NRSRO. Although the disclosures an
NRSRO provides on the Form NRSRO,
including the proposed additional
disclosures to Exhibit 6 to Form NRSRO
cannot substitute for an investor’s due
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diligence in evaluating a credit rating
and the integrity of an NRSRO, the
Commission believes the proposed
amendment to Exhibit 6 to Form
NRSRO would aid investors by
providing additional publicly accessible
information about an NRSRO.
The first proposed new disclosure in
Exhibit 6 would require that an
applicant/NRSRO disclose the
percentage of total net revenue
attributable to the 20 largest users of
credit rating services of the applicant/
NRSRO. The Commission preliminarily
believes this disclosure would assist
investors and other users of credit
ratings by providing them with an
understanding of the degree to which
revenues earned by the NRSRO come
from a concentrated base of customers.
This could be useful in understanding
the conflicts inherent in the NRSRO’s
business given that an increase in
concentration would result in an
increase in the potential risk that the
customers could use their contribution
to the NRSRO’s revenues to influence
the objectivity of its credit ratings.
Making the degree of this concentration
transparent would allow investors and
market participants to take this potential
risk into account when considering the
accuracy and reliability of the NRSRO’s
credit ratings. This, in turn, could
improve the integrity of NRSROs.
Increased confidence in the integrity of
NRSROs and the credit ratings they
issue could promote participation in the
securities markets. In addition, the
Commission believes that the proposed
disclosures would allow investors and
market participants to more effectively
compare the concentrations across all
NRSROs.
The second proposed new disclosure
would require the applicant/NRSRO to
disclose the percentage of total revenue
attributable to other services and
products of the applicant/NRSRO. The
Commission preliminarily believes this
information would be useful to
investors and other users of credit
ratings because it would provide scale
to the amount of revenues an NRSRO
earns from providing services other than
credit ratings. An NRSRO that obtains
substantial revenues from other services
may be inclined to favor a client that
purchases those other services when
determining credit ratings solicited by
the client. Consequently, creating
greater transparency about the revenues
generated from other services could
assist investors and other users of credit
ratings in assessing the potential risks to
the NRSRO’s objectivity.
Proposed Rule 17g–7 would require
an NRSRO to make publicly available
on its Internet Web site a consolidated
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report, which would need to be updated
annually, containing information about
the revenues earned by the NRSRO as a
result of providing services and
products to persons that paid the
NRSRO to issue or maintain a credit
rating. The Commission preliminarily
believes that proposed Rule 17g–7
would provide users of credit ratings
with information about the potential
risk that arises when an NRSRO is paid
to determine a credit rating for a specific
obligor, security, or money market
instrument—the risk that the revenue
generated from the person paying the
NRSRO to determine a credit rating
could influence the NRSRO’s objectivity
if the NRSRO feels the need to curry
favor from that person with a
corresponding negative impact on the
quality and accuracy of the credit rating.
Simply put, it could cause the credit
rating agency to determine a higher than
warranted credit rating, which, as a
result, does not accurately reflect the
NRSRO’s true view of the level of credit
risk inherent in the obligor, security, or
money market instrument. Providing
users of credit ratings with the
information on revenue generated from
other services provided to the person
paying the NRSRO for the issuance or
maintenance of the credit rating and on
the relative standing of the entity as a
contributor of revenue to the NRSRO
would enable them to better assess the
degree that a particular rating may be
subject to this risk.
In addition, proposed Rule 17g–7
could have the benefit of helping to
mitigate the potential ability an obligor,
issuer, underwriter, sponsor, and
subscriber as a large consumer of the
services and products of the NRSRO
from using its status to exert undue
influence on the NRSRO. Specifically,
by making the potential conflict more
transparent to the marketplace, users of
credit ratings, market participants, and
others could assess how credit ratings
solicited by large revenue providers are
handled by the NRSRO, particularly
with respect to NRSROs that make their
ratings publicly available for free.
As stated above, the Commission also
believes that the reports that would be
required to be published by proposed
Rule 17g–7 would create greater
transparency about the revenues
generated from other services and could
assist investors and other users of credit
ratings in assessing the potential risks to
the NRSRO’s objectivity by providing
investors and other users of credit
ratings with information to assess the
degree of risk that a credit rating may be
compromised by the undue influence of
the person that paid for the issuance or
maintenance of the credit rating. The
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Commission generally requests
comment on all aspects of the proposed
new rule. In addition, the Commission
requests specific comment on the
following items related to these benefits.
• Are there metrics available to
quantify these benefits and any other
benefits the commenter may identify,
including the identification of sources
of empirical data that could be used for
such metrics?
• With respect to Rule 17g–7, to what
use do users of credit ratings anticipate
putting the proposed disclosures? To
what extent, if any, might these
disclosures create misimpressions as to
the existence of potential conflicts? Are
the proposed disclosures in proposed
Rule 17g–7 granular enough to be of
value to users of credit ratings?
Commenters should provide specific
data and analysis to support any
comments they submit with respect to
the benefits discussed above and any
other benefits identified by the
commenters.
B. Costs
The Commission recognizes that there
are potential costs that would result if
the Commission adopts the proposed
rule amendments to Rule 17g–3,181
Exhibit 6 to Form NRSRO and proposed
new Rule 17g–7. The Commission
preliminarily believes that potential
costs incurred by an NRSRO to comply
with the proposed rule amendments to
a given NRSRO would depend on its
size and the complexity of its business
activities. The size and complexity of
NRSROs vary significantly. Therefore,
the cost could vary significantly across
NRSROs. The Commission is providing
estimates of the average cost per NRSRO
taking into consideration the variance in
size and complexity of NRSROs. Any
costs incurred would also vary
depending on which classes of credit
ratings an NRSRO issues and how many
outstanding ratings it has in each class.
For these reasons, the cost estimates
represent the average cost across all
NRSROs.
1. Proposed Amendments to Rule
17g–3
Rule 17g–3 requires an NRSRO to
furnish audited annual financial
statements to the Commission,
including certain specified
schedules.182 The Commission is
proposing to amend Rule 17g–3 to
require an NRSRO to furnish the
Commission with an additional
unaudited report containing a
description of the steps taken by the
181 See
182 17
PO 00000
proposed Rule 17g–3(a)(7).
CFR 240.17g–3.
designated compliance officer during
the fiscal year to administer the policies
and procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
Act; and ensure compliance with the
securities laws and rules and
regulations thereunder, including those
promulgated by the Commission
pursuant to Section 15E of the Exchange
Act. The proposed amendments to Rule
17g–3 also would provide that the
report must include: (1) A description of
any compliance reviews of the activities
of the NRSRO; (2) the number of
material compliance matters identified
during each review of the activities of
the NRSRO and a brief description of
each such matter; (3) a description of
any remediation measures implemented
to address material compliance matters
identified during the reviews of the
activities of the NRSRO; and (4) a
description of the persons within the
NRSRO who were advised of the results
of the reviews.183
The Commission believes that the
costs to NRSROs to comply with the
proposed amendment to Rule 17g–3
would vary depending on the size and
complexity of the NRSRO, as well as the
size of its compliance programs. Larger
NRSROs with comprehensive
compliance programs may already
periodically review portions of their
compliance programs. These larger
NRSROs may incur a cost associated
with transforming their periodic reviews
into more systematic reviews and
developing the report to be required
under Rule 17g–3. While smaller
NRSROs all have designated compliance
officers, the Commission preliminarily
believes, based on issues brought to the
staff’s attention, that some NRSROs may
have less robust compliance programs
than others. The Commission believes,
however, that the information to be
included in the proposed report under
the amendments to Rule 17g–3 for
smaller NRSROs would be less
extensive, because smaller NRSROs may
have less complex organizational
structures, fewer employees and fewer
sources of revenue than larger NRSROs
which may be part of a complex global
organization with thousands of
employees. Therefore, it may be less
costly than for larger NRSROs.
Further, the Commission notes that
the proposed report would explicitly
require the NRSRO to describe the steps
taken by the designated compliance
officer during the fiscal year to
administer the policies and procedures
that are required to be established
pursuant to paragraphs (g) and (h) of
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Section 15E of the Exchange Act; and
ensure compliance with the securities
laws and rules and regulations
thereunder. Since these are statutorily
mandated responsibilities of the
designated compliance officer under
Section 15E(j) of the Exchange Act, the
Commission notes that certain costs are
already being incurred by the NRSRO
and therefore are not direct costs of the
proposed amendments to Rule 17g–3.
The Commission has preliminarily
quantified certain costs with respect to
the amendments to Rule 17g–3 which
are discussed in detail below.
As discussed with respect to the PRA,
the Commission preliminarily believes
that the estimated hour burden under
the proposed amendments to Rule 17a–
3 would include the time it would take
to compile information to draft the
report and the preparation and filing of
the report itself. In addition, this onetime hour burden estimate also includes
the time it would take to identify and
describe material compliance matters,
any remediation and the persons
advised of the results of the reviews.
Consequently, the Commission also
based this estimate, in part, on the
average estimated number of hours it
would currently take an NRSRO to
complete one annual report under
current Rule 17g–3 (i.e., approximately
30 hours).184 Consequently, as
discussed above with respect to the
PRA, the Commission estimates that the
average amount of time across all
NRSROs to prepare the additional report
proposed to be required under the rule
would be approximately 900 hours 185 at
a total aggregate annual cost to the
industry of $232,200.186
Given the potentially sensitive nature
of the proposed report, the Commission
also preliminarily believes that an
NRSRO would likely engage outside
counsel to assist it in the process of
drafting and reviewing the proposed
report under Rule 17g–3 on a one-time
basis. The Commission estimates that
the time an outside attorney would
spend on this work would depend on
the size and complexity of the NRSRO.
Therefore, the Commission estimates
that, on average, an outside counsel
would spend approximately 20 hours
assisting an NRSRO and its designated
184 15 U.S.C. 78o–7(j). Under this provision of the
statute, an NRSRO must ‘‘designate an individual
responsible for administering the policies and
procedures that are required to be established
pursuant to [Sections 15E(g) and (h) of the
Exchange Act (15 U.S.C. 78o–7(g) and (h))], and for
ensuring compliance with the securities laws and
rules and regulations thereunder, including those
promulgated by the Commission pursuant to
[Section 15E of the Exchange Act].’’ Id.
185 30 hours × 30 NRSROs = 900 hours.
186 $7,740 × 30 NRSROs = $232,200.
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compliance officer in drafting and
reviewing the proposed report on a onetime basis for an aggregate burden to the
industry of 600 hours.187 Based on
industry sources, the Commission
estimates that the cost of an outside
counsel would be approximately $400
per hour. For these reasons, the
Commission estimates that the average
one-time cost to an NRSRO would be
approximately $8,000 188 and the onetime cost to the industry would be
approximately $240,000.189
The Commission generally requests
comment on all aspects of these cost
estimates for the proposed amendments
to Rule 17g–3. In addition, the
Commission requests specific comment
on the following items related to these
cost estimates:
• Would an NRSRO incur any
additional costs to employ an outside
counsel on an annual basis to review the
proposed 17g–3 report, rather than just
on a one-time basis?
• Would the cost incurred by an
NRSRO be less than those estimated
because the designated compliance
officer is already performing many of
the responsibilities required to be
described in the proposed report, as
well as drafting compliance reports?
• What other costs are NRSROs likely
to incur?
• Are the proposals likely to impose
costs on other market participants,
including persons who use credit
ratings to make investment decisions or
for regulatory purposes, and persons
who purchase services and products
from NRSROs?
Commenters should provide specific
data and analysis to support any
comments they submit with respect to
the costs discussed above and any other
costs identified by commenters.
2. Proposed Amendments to Form
NRSRO
The proposed amendments to the
Instructions to Exhibit 6 of Form
NRSRO would require an applicant/
NRSRO to furnish the Commission with
information regarding the revenues an
NRSRO receives from major clients and
from products and services other than
determining credit ratings. In particular,
the additional disclosures to Exhibit 6
would require an applicant/NRSRO to
provide the following disclosures, as
applicable:
• The percentage of the applicant/
NRSRO’s net revenue attributable to the
20 largest users of credit rating services
of the applicant/NRSRO; and
NRSROs × 20 hours = 600 hours.
per hour × 20 hours = $8,000.
189 $8,000 × 30 NRSROs = $240,000.
187 30
188 $400
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• The percentage of the applicant/
NRSRO’s revenue attributable to
services and products other than credit
rating services of the applicant/NRSRO.
The Commission believes that the
costs to NRSROs to comply with the
proposed amendment to Exhibit 6 to
Form NRSRO would vary depending on
the size and complexity of the NRSRO.
Larger NRSROs may have more
customers and complex revenue
streams, while smaller NRSROs may be
less complex in terms of sources of
revenue or numbers of customers.
Consequently, as discussed above with
respect to the PRA, the Commission
estimates that the average time
necessary for an applicant or NRSRO to
gather the information on a one-time
basis in order to complete the additional
disclosures proposed to be required by
the amendments to Exhibit 6 to Form
NRSRO would be one-time hour burden
to the industry of 750 hours.190 For
these reasons, the Commission estimates
that the average one-time cost to an
NRSRO would be $6,520 191 and the
total aggregate one-time cost to the
industry would be $195,600.192
In addition, with respect to the PRA,
the Commission estimated that the
average annual burden to complete an
annual certification under Rule 17g–1(f)
would increase 60 hours for all
NRSROs.193 For these reasons, the
Commission estimates that the average
annual cost with respect to the proposed
amendment to an NRSRO would be
$516 194 and the total aggregate annual
cost to the industry would be
$15,480.195
The Commission also notes that
included in the current estimated costs
for the Form NRSRO are the costs
related to the engagement of outside
counsel to assist in the process of
completing and submitting a Form
NRSRO.196 In the June 2007 Proposing
Release, the Commission estimated that
the amount of time an outside attorney
NRSROs × 25 hours = 750 hours.
Commission estimates that these
responsibilities would be split between a Financial
Reporting Manager (10 hours) and a Compliance
Manager (15 hours). The SIA Management Report
2008 indicates that the average hourly cost for a
Financial Reporting Manager is $265 and for a
Compliance Manager is $258. Therefore, the average
one-time cost would be $6,520 [(10 hours × $265
per hour) + (15 hours × $258 per hour)].
192 $6,520 × 30 NRSROs = $195,600.
193 2 hours × 30 NRSROs = 60 hours.
194 The Commission estimates that these
responsibilities would be performed by a
Compliance Manager. The SIA Management Report
2008 indicates that the average hourly cost for a
Compliance Manager is $258. Therefore, the average
annual cost to an NRSRO would be $516 (2 hours
× $258).
195 $516 × 30 NRSROs = $15,480.
196 June 2007 Adopting Release, 72 FR at 33614.
190 30
191 The
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will spend on this work will depend on
the size and complexity of the NRSRO.
Therefore, the Commission estimated
that, on average, an outside counsel will
spend approximately 40 hours assisting
an NRSRO in preparing its application
for registration. The Commission further
estimated that the average hourly cost
for an outside counsel will be
approximately $400 per hour. For these
reasons, the Commission estimated that
the average one-time cost to an NRSRO
will be $16,000 and the one-time cost to
the industry will be $480,000.197 With
respect to the proposed amendments to
Exhibit 6 to Form NRSRO, the
Commission estimates that the cost to
outside counsel to review a Form
NRSRO containing the additional
disclosures to Exhibit 6 to Form NRSRO
would already be included within the
original cost estimate for Rule 17g–1
and Form NRSRO 198 or that such costs
would be de minimis.199
As discussed above with respect to
the PRA, the Commission preliminarily
believes that an applicant/NRSRO
would incur only limited internal costs
to modify its systems to generate and
disclose the proposed additional
disclosures in Exhibit 6 to Form NRSRO
because an applicant/NRSRO is already
required to generate similar financial
information in other parts of Form
NRSRO and certain financial reports
required under Rule 17g–3.
The Commission generally requests
comment on all aspects of these cost
estimates for the proposed amendment
to Form NRSRO. In addition, the
Commission requests specific comment
on the following items related to these
cost estimates:
• Whether the proposals would
impose costs on other market
participants, including persons who use
credit ratings to make investment
decisions or for regulatory purposes,
and persons who purchase services and
products from NRSROs?
• Would the one-time cost to engage
an outside counsel to assist in the
preparation of the Form NRSRO
increase as a result of the amendments
to Exhibit 6 to Form NRSRO?
• Would the proposed disclosures in
Exhibit 6 to Form NRSRO have any
effect on the willingness of persons to
pay for ratings as well as other credit
rating services? What are the risks that
investors and other users of credit
ratings would be confused as to the
197 Id.
198 Id.
199 The Commission believes that the review of
the additional disclosures would overlap with the
review of similar financial information already
required to be disclosed in Exhibits 10 and 12 in
Form NRSRO.
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significance of the revenue-based
conflicts of interest being disclosed as a
result of the proposed amendments to
Exhibit 6 to Form NRSRO?
Commenters should provide specific
data and analysis to support any
comments they submit with respect to
the costs discussed above and any other
costs identified by commenters.
3. Proposed Rule 17g–7
Proposed Rule 17g–7 would require
an NRSRO to make publicly available
on its Internet Web site a consolidated
report containing information about the
revenues earned by the NRSRO as a
result of providing services and
products to persons that paid the
NRSRO to issue or maintain a credit
rating. This report would need to be
updated annually. As discussed above
with respect to PRA, the Commission
estimates that it would take an NRSRO
approximately 100 hours to develop the
calculations necessary to generate the
percents required by the report under
proposed Rule 17g–7; to populate the
proposed report with the required data;
and to develop and draft the form
report. The Commission estimates that
the proposed new Rule 17g–7 would
impose a total one-time hour burden of
3,000 hours for 30 NRSROs to prepare
the report. The Commission estimates
that the average one-time cost to an
NRSRO would be $23,500 200 and the
total aggregate one-time cost for all
NRSROs would be $705,000.201
As discussed above with respect to
the PRA, the Commission also estimates
that after the first year it would take
NRSRO 50 hours per year to generate
the percents required under the
proposed report and to populate the
proposed report with the required data
once a year. Therefore, the Commission
estimates that the average annual cost to
an NRSRO would be $3,150 202 and the
total aggregate annual cost to the
200 The Commission estimates an NRSRO would
have a Senior Accountant and a Senior Programmer
working together to generate the initial calculations
and report and that the two senior officers would
divide the estimated 100 hours equally. The SIFMA
2008 Report as Modified indicates that the average
hourly cost for a Senior Accountant is $178 and that
the average hourly cost for a Senior Programmer is
$292. Therefore, the average one-time cost to an
NRSRO would be $23,500 (50 hours × $178) + (50
hours × $292).
201 30 NRSROs × $23,500 = $705,000.
202 The Commission estimates that after the
equations and initial report has been developed that
an NRSRO would have a Compliance Clerk perform
the necessary tasks to generate the annual report.
The SIFMA 2008 Office Salaries Report as Modified
indicates that the average hourly cost for a
Compliance Clerk is $63. Therefore, the average
yearly cost to an NRSRO would be $3,150 (50 hours
× $63).
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industry would be $94,500 to generate
the proposed report once a year.203
Proposed Rule 17g–7 would also
require an NRSRO to make publicly
available on its Internet Web site the
report required under paragraph (a)(1).
As discussed with respect to the PRA,
the Commission estimates that it would
take an NRSRO approximately 30 hours
to disclose the initial information in its
Web site for a total one-time burden of
900 hours, and thereafter 10 hours per
year to disclose updated information for
an annual hour burden of 300 hours.
The Commission estimates that an
NRSRO would incur an average onetime cost of $8,760 and an average
annual cost of $2,920.204 The total onetime cost to the industry would be
approximately $262,800 205 and the total
aggregate annual cost to the industry
would be approximately $87,600.206
Finally, the Commission also believes
that an NRSRO may need to purchase
and/or modify its software and
operating systems in order to generate
and publish the information required in
the proposed reports in proposed Rule
17g–7. As discussed in the PRA, the
Commission estimates that the cost of
any software would vary based on the
size and complexity of the NRSRO. The
Commission estimates that some
NRSROs would not need such software.
Therefore, the Commission estimates
that the average cost of software across
all NRSROs would be approximately
$120,000.207
The Commission generally requests
comment on all aspects of these cost
estimates for the proposed Rule 17g–7.
In addition, the Commission requests
specific comment on the following
items related to these cost estimates:
• Would these proposals impose costs
on other market participants, including
persons who use credit ratings to make
investment decisions or for regulatory
purposes, and persons who purchase
services and products from NRSROs?
• Would the proposed disclosures in
new Rule 17g–7 have any effect on the
willingness of persons to pay for ratings
and other credit rating services? What
are the risks that investors and other
users of credit ratings would be
confused as to the significance of the
information being disclosed as a result
of new Rule 17g–7?
× 30 NRSROs = $94,500.
Commission estimates that an NRSRO
will have a Senior Programmer perform this work.
The SIFMA 2008 Report as Modified indicates that
a Senior Programmer is $292. Therefore the average
one-time cost will be $8,760 (30 hours × $292) and
the average annual cost will be $2,920 (10 hours ×
$292).
205 $8,760 × 30 NRSROs = $262,800.
206 $2,920 × 30 NRSROs = $87,600.
207 $4,000 × 30 NRSROs = $120,000.
203 $3,150
204 The
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• Would there be costs in addition to
those identified above, such as costs
arising from systems changes and
restructuring business practices to
account for the new reporting
requirement?
• To what extent, if any, might
issuers shift to larger NRSROs in which
their revenue contribution would
contribute a lower percentage to the
NRSROs overall revenue to avoid being
in a particular tier?
Commenters should provide specific
data and analysis to support any
comments they submit with respect to
the costs discussed above and any other
costs identified by commenters.
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X. Consideration of Burden on
Competition and Promotion of
Efficiency, Competition, and Capital
Formation
Under Section 3(f) of the Exchange
Act,208 the Commission shall, when
engaging in rulemaking that requires the
Commission to consider or determine
whether an action is necessary or
appropriate in the public interest,
consider, in addition to the protection of
investors, whether the action will
promote efficiency, competition, and
capital formation. Section 23(a)(2) of the
Exchange Act 209 requires the
Commission to consider the
anticompetitive effects of any rules the
Commission adopts under the Exchange
Act. Section 23(a)(2) prohibits the
Commission from adopting any rule that
would impose a burden on competition
not necessary or appropriate in
furtherance of the purposes of the
Exchange Act. As discussed below, the
Commission’s preliminary view is that
the proposed rule amendments may
promote efficiency, competition, and
capital formation.
The Commission generally requests
comment on all aspects of this analysis
of the burden on competition and
promotion of efficiency, competition,
and capital formation.
Commenters should provide specific
data and analysis to support their views.
A. Rule 17g–3
The proposed amendment to Rule
17g–3 210 would require an NRSRO to
furnish the Commission with an
additional unaudited report containing
a description of the steps taken by the
designated compliance officer during
the fiscal year to administer the policies
and procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
U.S.C. 78c(f).
U.S.C. 78w(a)(2).
210 See proposed Rule 17g–3(a)(7).
209 15
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211 See
proposed Rule 17g–3(a)(7).
CFR 240.17g–3(a)(2)–(6). Under Rule 17g–
3, the only required audited report is the NRSRO’s
financial statements as of its most recent fiscal year.
17 CFR 240.17g–3(a)(1).
212 17
208 15
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Act; and ensure compliance with the
securities laws and rules and
regulations thereunder, including those
promulgated by the Commission
pursuant to Section 15E of the Exchange
Act.211
The amendments to Rule 17g–3 also
would provide that the proposed report
must include: (1) A description of any
compliance reviews of the activities of
the NRSRO; (2) the number of material
compliance matters identified during
each review of the activities of the
NRSRO and a brief description of each
such matter; (3) a description of any
remediation measures implemented to
address material compliance matters
identified during the reviews of the
activities of the NRSRO; and (4) a
description of the persons within the
NRSRO who were advised of the results
of the reviews. As stated above, the
proposed new report would be
unaudited, consistent with the other
unaudited reports currently required
under Rule 17g–3.212
The Commission believes that the
proposed amendments to Rule 17g–3
could indirectly increase efficiency in a
number of ways. The proposed
amendments to Rule 17g–3 may
improve the efficiency of the credit
ratings process by establishing a more
structured discipline under which the
NRSRO’s designated compliance officer
would need to report to the Commission
the steps taken to fulfill the officer’s
statutory responsibilities. The act of
reporting these steps is designed to
promote the active engagement of the
designated compliance officer in
reviewing an NRSRO’s compliance with
the securities laws and its own internal
policies and procedures.
The Commission also believes that
improved compliance as a result of the
proposed rule amendments may
increase efficiency in the credit ratings
process by focusing the NRSRO’s
designated compliance officer in
fulfilling his or her responsibilities
prescribed under Section 15E(j) of the
Exchange Act, as well as by facilitating
an NRSRO’s early intervention to
decrease the severity of compliance
violations which may occur. Because
the compliance officer would be
required to report these steps, the
proposed amendments may foster
improved compliance overall. This may,
in turn, promote greater efficiencies in
the credit rating process.
The Commission further believes that
these proposed amendments could
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promote more efficient allocation of
capital by investors to the extent that
the quality of credit ratings is improved.
Additionally, the Commission
believes that the proposed report could
promote efficient allocation of
Commission resources and time by
facilitating the Commission’s
examination staff efforts to conduct each
exam of an NRSRO in an organized and
efficient manner. These efficiencies will
help the Commission to better allocate
its own resources to maximize investor
protection.213
The Commission believes that the
proposed amendments to Rule 17g–3
could promote participation in the
securities markets, and, thereby,
promote capital formation and
competition among NRSROs by
increasing confidence in the integrity of
NRSROs and the credit ratings they
issue. Consequently, the Commission
also does not believe that the proposed
amendments to Rule 17g–3 would be a
burden on competition.
The proposed amendments to Rule
17g–3 could improve the integrity of the
ratings process by establishing a
discipline under which the NRSRO’s
designated compliance officer would
need to report to the Commission the
steps taken by the compliance officer to
fulfill the officer’s statutory
responsibilities. The act of reporting
these steps is designed to promote the
active engagement of the designated
compliance officer in reviewing an
NRSRO’s compliance with internal
policies and procedures. The proposed
report also could strengthen the
Commission’s oversight of NRSROs by
highlighting possible problem areas in
an NRSRO’s rating processes and
providing an additional tool for the
Commission to monitor how the
NRSRO’s designated compliance officer
is fulfilling the responsibilities
prescribed in Section 15E of the
Exchange Act. For example, if an
NRSRO reports an unusual level of
significant compliance exceptions in a
particular area, the Commission
examination staff could focus their next
review of the NRSRO in that particular
area. Alternatively, if a report indicates
no problems, but a subsequent staff
examination reveals significant
compliance exceptions, this could be
brought to the attention of the NRSRO’s
management to be used to assess
whether the designated compliance
213 The Commission also notes that other areas of
the Commissions rules and regulations also require
an annual report by a chief compliance officer with
respect to investment companies and investment
advisers. See generally, Rule 38a–1, 17 CFR
270.38a–1, and Rule 206(4)–7, 17 CFR 275.206(4)–
7.
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officer is adequately fulfilling the
officer’s statutory duties. Furthermore,
the identification of the persons within
the NRSRO advised of the results of the
review and remediation measures
implemented could also promote the
appropriate escalation of compliance
issues to the management of the
NRSRO.
Thus, enhancing the Commission’s
oversight and improving compliance of
the NRSROs could help in restoring
confidence in credit ratings issued by
NRSROs which, in turn, could promote
capital formation.
B. Amendments to Form NRSRO
The proposed amendments to the
Instructions to Exhibit 6 to Form
NRSRO are designed to provide more
information to users of credit ratings
with respect to an NRSRO’s conflicts of
interest. The Commission is proposing
to require an applicant/NRSRO to
furnish the Commission with
information regarding the revenues an
NRSRO receives from major clients and
from services other than determining
credit ratings. In particular, the
additional disclosures to Exhibit 6 to
Form NRSRO would require an
applicant/NRSRO to provide the
following disclosures, as applicable:
• The percentage of the applicant/
NRSRO’s net revenue attributable to the
20 largest users of credit rating services
of the applicant/NRSRO; and
• The percentage of the applicant/
NRSRO’s revenue attributable to
services and products other than credit
rating services of the applicant/NRSRO.
By assisting investors and other users
of credit ratings in assessing the
potential magnitude of the conflicts of
interest inherent in a given NRSRO’s
business operations, the proposed
additional disclosures to Exhibit 6 to
Form NRSRO may promote more
efficient investment analyses and
decisions by these investors and users.
The proposed additional disclosures
are designed to provide the marketplace
with additional information for
comparing NRSROs and, therefore,
provide users of credit ratings with
more useful metrics with which to
compare these NRSROs. In particular,
by disclosing information about
revenues received from major clients
and for other services, users of credit
ratings would be given more
information about the potential
dimensions of the conflict of being paid
to determine credit ratings and offering
other services to persons who pay for
ratings. Increased disclosure of these
conflicts would make the incentives of
the NRSROs more transparent to the
marketplace and, thereby, highlight
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those firms that may have fewer or less
significant conflicts of interest. These
proposed disclosures would allow
investors and other users of credit
ratings to compare concentrations of
revenue across all NRSROs, thus
promoting efficiency for investors and
other users of credit ratings in
evaluating NRSROs and a particular
credit rating in making an investment
decision.
The Commission further believes that
these proposed amendments could
promote more efficient allocation of
capital by investors to the extent that
the quality of credit ratings is improved.
These proposed disclosures are also
designed to increase competition and
promote capital formation by restoring
confidence in the NRSROs credit
ratings, which are an integral part of the
capital formation process.
By proposing to provide more
information about an NRSRO’s conflicts
of interest, investors and users of credit
ratings will be better able to evaluate the
integrity of an NRSRO and the credit
ratings that it issues. This enhanced
information, in turn, may promote
greater competition among NRSROs for
the business of those users and
investors. Consequently, the
Commission does not believe that the
proposed disclosures would be a burden
on competition among NRSROs.
Moreover, because users of credit
ratings would have greater confidence
in the integrity of the NRSROs as well
as the credit ratings that they issue, such
increased confidence could promote
investor participation in the securities
markets, and, thereby, promote capital
formation.
C. Rule 17g–7
The Commission also is proposing to
adopt a new rule—Rule 17g–7—which
would require an NRSRO to make
publicly available on its Internet Web
site a consolidated report containing
information about the revenues earned
by the NRSRO as a result of providing
services and products to persons that
paid the NRSRO to issue or maintain a
credit rating. This report would need to
be updated annually. Specifically,
proposed Rule 17g–7 would require the
NRSRO to include in the report: (1) The
percent of the net revenue attributable
to the person that paid the NRSRO that
were earned by the NRSRO during the
most recently ended fiscal year from
providing services and products other
than credit rating services to the person;
(2) the relative standing of the person in
terms of the person’s contribution to the
NRSRO’s net revenue as compared with
other persons that contributed to the
NRSRO’s net revenues; and (3) the
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identity of all outstanding credit ratings
issued by the NRSRO and paid for by
the person.
The Commission preliminarily
believes that proposed Rule 17g–7
would provide users of credit ratings
with information about the potential
risk that arises when an NRSRO is paid
to determine a credit rating for a specific
obligor, security, or money market
instrument. Namely, the risk that the
revenue generated from the person
soliciting the NRSRO to determine a
credit rating could influence the
NRSRO’s objectivity in an effort to favor
with that person with a corresponding
negative impact on the quality and
accuracy of the credit rating.
By assisting investors and other users
of credit ratings in analyzing the nature
and degree of potential conflicts,
proposed Rule 17g–7 may promote more
efficient investment analyses and
decisions by these investors and users.
The proposed additional disclosures
are designed to provide the marketplace
with additional information for
comparing NRSROs and, therefore,
provide users of credit ratings with
more useful metrics with which to
compare these NRSROs. The
Commission believes that the enhanced
disclosure requirements of proposed
Rule 17g–7 may enable investors and
other users of credit ratings to better
assess when and to what degree a
NRSRO’s objectivity may be
compromised. Increased disclosures
also will make the incentives of the
NRSROs more transparent to the
marketplace. Based on this information,
investors and users of credit ratings
issued by an NRSRO may make more
informed investment decisions when
considering credit ratings, which could
promote efficiency.
The Commission further believes that
these proposed amendments could
promote more efficient allocation of
capital by investors to the extent that
the quality of credit ratings is improved.
These proposed disclosures, like the
proposed additional disclosures to Form
NRSRO, are designed to increase
competition and promote capital
formation by restoring confidence in the
credit ratings. By providing more
information about the nature and extent
of potential revenue-based conflicts,
investors and users of credit ratings will
be better able to evaluate the integrity of
an NRSRO and the credit ratings that it
issues and assess whether its objectivity
may be compromised. This enhanced
information, in turn, may promote
greater competition among NRSROs for
the business of those users and
investors.
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A risk, however, exists with respect to
proposed Rule 17g–7 that competition
may be negatively impacted to the
extent that issuers shift to larger
NRSROs in which their revenue
contribution will likely make up a
smaller percentage of revenue to avoid
any potential ‘‘stigma’’ associated with
being perceived as a large client of an
NRSRO.
Moreover, because users of credit
ratings would have greater confidence
in the integrity of the NRSROs as well
as the credit ratings that they issue, such
increased confidence could promote
investor participation in the securities
markets, and, thereby, promote capital
formation.
XI. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ 214 the Commission
must advise OMB whether a proposed
regulation constitutes a major rule.
Under SBREFA, a rule is ‘‘major’’ if it
has resulted in, or is likely to result in:
• An annual effect on the economy of
$100 million or more;
• A major increase in costs or prices
for consumers or individual industries;
or
• A significant adverse effect on
competition, investment, or innovation.
If a rule is ‘‘major,’’ its effectiveness
will generally be delayed for 60 days
pending Congressional review. The
Commission requests comment on the
potential impact of the proposed rule
amendments on the economy on an
annual basis. Commenters are requested
to provide empirical data and other
factual support for their view to the
extent possible.
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XII. Initial Regulatory Flexibility
Analysis
The Commission has prepared the
following Initial Regulatory Flexibility
Analysis (‘‘IRFA’’), in accordance with
the provisions of the Regulatory
Flexibility Act,215 regarding the
proposed rule amendments to Rule 17g–
3 and Form NRSRO under the Exchange
Act and proposed new Rule 17g–7.
A. Reasons for the Proposed Action
The proposed amendments and
proposed new rule would prescribe
additional requirements for NRSROs to
address concerns raised about the role
of credit rating agencies in the recent
credit market turmoil. The proposed
amendments and proposed new rule
214 Pub. L. 104–121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C.
and as a note to 5 U.S.C. 601).
215 5 U.S.C. 603.
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would enhance and strengthen the rules
the Commission to implement specific
provisions of the Rating Agency Act.216
The Rating Agency Act defines the term
‘‘nationally recognized statistical rating
organization’’ as a credit rating agency
registered with the Commission,
provides authority for the Commission
to implement registration,
recordkeeping, financial reporting, and
oversight rules with respect to registered
credit rating agencies.
As discussed in detail above, the
proposed amendments seek to further
the substantive goals of the
Commission’s current oversight program
for NRSROs, including, increasing
transparency and disclosure,
diminishing conflicts, and strengthening
oversight more generally.217
The Commission believes that the
proposed amendments to Rule 17g–3
would improve the integrity of the
ratings process by establishing a
discipline under which the NRSRO’s
designated compliance officer would
need to report to the Commission the
steps taken by the compliance officer to
fulfill the officer’s statutory
responsibilities.218 The act of reporting
these steps is designed to promote the
active engagement of the designated
compliance officer in reviewing an
NRSRO’s compliance with internal
policies and procedures. The proposed
report also could strengthen the
Commission’s oversight of NRSROs by
highlighting possible problem areas in
an NRSRO’s rating processes and
providing an additional tool for the
Commission to monitor how the
NRSRO’s designated compliance officer
is fulfilling the responsibilities
prescribed in Section 15E of the
Exchange Act. Furthermore, the
identification of the persons within the
NRSRO advised of the results of the
review and remediation measures
implemented could also promote the
appropriate escalation of compliance
issues to the management of the
NRSRO.
The Commission believes that the
proposed amendments to Exhibit 6 to
the Instructions to Form NRSRO would
allow users of credit ratings to more
effectively evaluate the integrity of the
NRSRO’s credit ratings themselves and
whether they believe the NRSRO is
effectively managing its conflicts of
216 Pub. L. 109–291 (2006); see also Exchange Act
Release No. 55857 (June 5, 2007), 72 FR 33564,
33609 (June 18, 2007).
217 See Report of the Senate Committee on
Banking, Housing, and Urban Affairs to Accompany
S. 3850, Credit Rating Agency Reform Act of 2006,
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept.
6, 2006) (‘‘Senate Report’’), p. 2.
218 See proposed Rule 17g–3(a)(7) and (b)(2).
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interests otherwise identified in Exhibit
6. Finally, the purpose of proposed new
Rule 17g–7 is to provide users of credit
ratings with information about the
potential risk that arises when an
NRSRO is paid to determine a credit
rating for a specific obligor, security, or
money market instrument.
B. Objectives
The objectives of the Rating Agency
Act are ‘‘to improve ratings quality for
the protection of investors and in the
public interest by fostering
accountability, transparency, and
competition in the credit rating
industry.’’ 219 The proposed
amendments and proposed new rule are
designed to further enhance these
objectives and assist the Commission in
monitoring whether an NRSRO
complies with the provisions of the
Rating Agency Act and rules
thereunder, fulfilling the Commission’s
statutory mandate to adopt rules to
implement the NRSRO regulatory
program, and provide information
regarding NRSROs to the public and to
users of credit ratings.
The objective of the proposed
amendment to Rule 17g–3 is to improve
the integrity of the ratings process and
enhance accountability by requiring the
designated compliance officer to
annually report on actions taken to
fulfill the officer’s statutory
responsibilities. The requirement to
provide the Commission with such a
report would, the Commission believes,
help establish or reinforce a discipline
and rigor in the compliance officer’s
performance of his or her duties. It also
is designed to strengthen the
Commission’s oversight of NRSROs by
highlighting possible problem areas in
an NRSRO’s rating processes and
providing an additional tool for the
Commission to determine whether the
NRSRO’s designated compliance officer
is fulfilling the responsibilities
prescribed in Section 15E of the
Exchange Act.220 In addition, this
information is designed to assist the
Commission staff in its examination of
NRSROs. Furthermore, the
identification of the persons within the
NRSRO advised of the results of the
review and remediation measures
implemented could also promote the
appropriate escalation of compliance
issues to the management of the
NRSRO.
The proposed amendments to the
Exhibit 6 Instructions to Form NRSRO
that would require additional
disclosures are designed to increase
219 See
220 15
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transparency by allowing users of credit
ratings to more effectively evaluate the
integrity of an NRSRO’s credit ratings
and analyze whether the NRSRO is
effectively managing its conflicts of
interest.
Finally, proposed new Rule 17g–7 is
designed to increase transparency as
well as enhance disclosures with
respect to an NRSRO’s management of
its conflicts of interest by providing
users of credit ratings with information
about the potential risk of undue
influence that arises when an NRSRO is
paid to determine a credit rating for a
specific obligor, security, or money
market instrument.
C. Legal Basis
Pursuant to the Exchange Act 221 and,
particularly, Sections 15E and 17(a) of
the Exchange Act, the Commission is
proposing amendments to Rule 17g–3
and Exhibit 6 to Form NRSRO, as well
as proposing new Rule 17g–7.222
D. Small Entities Subject to the Rule
Paragraph (a) of Rule 0–10 provides
that for purposes of the Regulatory
Flexibility Act, a small entity ‘‘[w]hen
used with reference to an ‘issuer’ or a
‘person’ other than an investment
company’’ means ‘‘an ‘issuer’ or ‘person’
that, on the last day of its most recent
fiscal year, had total assets of $5 million
or less.’’ 223 The Commission believes
that an NRSRO with total assets of $5
million or less would qualify as a
‘‘small’’ entity for purposes of the
Regulatory Flexibility Act. Currently,
there are two NRSROs that are classified
as ‘‘small’’ entities for purposes of the
Regulatory Flexibility Act.224
E. Reporting, Recordkeeping, and Other
Compliance Requirements
The proposal would amend Rule
17g–3 to require an NRSRO to furnish
the Commission with an additional
unaudited annual report containing a
description of the steps taken by the
designated compliance officer during
the fiscal year to administer the policies
and procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
Act; and ensure compliance with the
221 15
U.S.C. 78a et seq.
U.S.C. 78o–7.
223 17 CFR 240.0–10(a).
224 See 17 CFR 240.0–10(a). Two of the 10 credit
rating agencies currently registered as NRSROs
would be considered ‘‘small’’ entities for purposes
of the Regulatory Flexibility Act. The Commission
previously sought comment on the number of small
entities that may be affected by other proposed rule
amendments to the Commission’s NRSRO rules.
The Commission received no comments in response
to those requests. See generally, February 2009
Adopting Release, at 74 FR 6481.
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securities laws and rules and
regulations thereunder, including those
promulgated by the Commission
pursuant to Section 15E of the Exchange
Act.225
The amendments to proposed new
paragraph (a)(7) of Rule 17g–3 would
also provide that the report must
include: (1) A description of any
compliance reviews of the activities of
the NRSRO; (2) the number of material
compliance matters identified during
each review of the activities of the
NRSRO and a brief description of each
such matter; (3) a description of any
remediation measures implemented to
address material compliance matters
identified during the reviews of the
activities of the NRSRO; and (4) a
description of the persons within the
NRSRO who were advised of the results
of the reviews.226
The Commission believes that the
costs to NRSROs to comply with the
proposed amendment to Rule 17g–3
would vary depending on the size and
complexity of the NRSRO, as well as the
size of its compliance programs. Larger
NRSROs with comprehensive
compliance programs may already
periodically review portions of their
compliance programs. These larger
NRSROs may incur a cost associated
with transforming their periodic reviews
into a more systematic review and
developing a form of report. While
smaller NRSROs all have designated
compliance officers, the Commission
preliminarily believes, based on issues
brought to the staff’s attention, that
some NRSROs may have less robust
compliance programs than others
NRSRO’s. The Commission believes that
the information to be included in the
proposed report for smaller NRSROs
would be less extensive, because
smaller NRSRO’s may have less
complex organizational structures,
fewer employees and fewer sources of
revenue than larger NRSROs which may
be part of a complex global organization
with thousands of employees.
Therefore, it may be less costly than for
larger NRSROs. Finally, the proposed
new report under Rule 17g–3 would
need to be retained by NRSROs for three
years under Rule 17g–2.
The Commission is proposing to
amend the Instructions to Exhibit 6 to
Form NRSRO to require an applicant/
NRSRO to furnish the Commission with
information regarding the revenues an
NRSRO receives from major clients and
from services other than determining
credit ratings. In particular, the
amendments to Exhibit 6 would require
225 See
226 See
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proposed Rule 17g–3(a)(7)(ii).
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an applicant/NRSRO to provide the
following disclosures, as applicable:
• The percentage of the applicant/
NRSRO’s net revenue attributable to the
20 largest users of credit rating services
of the applicant/NRSRO; and
• The percentage of the applicant/
NRSRO’s revenue attributable to
services and products other than credit
rating services of the applicant/NRSRO.
In order to comply with the proposed
amendments to Exhibit 6 to Form
NRSRO, an applicant/NRSRO would
need to compile the information in
order to complete the additional
disclosures. The Commission believes
that the burdens imposed by the
proposed rule amendments would vary
based on the size and complexity of
each applicant/NRSRO. The
Commission believes that the potential
impact of the amendments to Exhibit 6
to Form NRSRO on small NRSROs
should not be significant because these
entities would have fewer clients and
less revenue and therefore lower costs to
produce the additional disclosures
under the amendments to Exhibit 6 to
Form NRSRO.
The Commission is also proposing
new Rule 17g–7, which would require
an NRSRO to make publicly available
on its Internet Web site a consolidated
report containing information about the
revenues earned by the NRSRO as a
result of providing services and
products to persons that paid the
NRSRO to issue or maintain a credit
rating. This report would need to be
updated annually. In order to comply
with new Rule 17g–7, each NRSRO
would need to develop the calculations
necessary to generate the percents
required under the report; to populate
the proposed report with the required
data; and to develop and draft the form
report. The Commission believes that
the burdens imposed by new Rule
17g–7 would vary based on the size and
complexity of each applicant/NRSRO.
The Commission believes that the
potential impact of the proposed Rule
17g–7 on small NRSROs should not be
significant because these entities would
have fewer clients and less revenue and
therefore lower costs to produce the
consolidated report required by
proposed new Rule 17g–7. The
consolidated report would need to be
retained for three years in accordance
with Rule 17g–2.
F. Duplicative, Overlapping, or
Conflicting Federal Rules
The Commission believes that there
are no Federal rules that duplicate,
overlap, or conflict with the proposed
rule amendments and the proposed new
rule.
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G. Significant Alternatives
Text of Proposed Rules
Pursuant to Section 3(a) of the
Regulatory Flexibility Act,227 the
Commission must consider certain types
of alternatives, including: (1) The
establishment of differing compliance or
reporting requirements or timetables
that take into account the resources
available to small entities; (2) the
clarification, consolidation, or
simplification of compliance and
reporting requirements under the rule
for small entities; (3) the use of
performance rather than design
standards; and (4) an exemption from
coverage of the rule, or any part of the
rule, for small entities.
The Commission considered whether
it is necessary or appropriate to
establish different compliance or
reporting requirements or timetables; or
clarify, consolidate, or simplify
compliance and reporting requirements
under the rule for small entities.
Because the proposed rule amendments
are designed to improve the overall
quality of ratings and enhance the
Commission’s oversight, the
Commission preliminarily believes that
small entities should be covered by the
rule. The Commission also preliminarily
believes that the proposed rule
amendments and proposed new rule are
flexible and simple enough to allow
small NRSROs to comply without the
need for the establishment of differing
compliance or reporting requirements
for small entities.
List of Subjects in 17 CFR Parts 240 and
249b
Brokers, Reporting and recordkeeping
requirements, Securities.
In accordance with the foregoing, the
Commission hereby proposes that Title
17, Chapter II of the Code of Federal
Regulation be amended as follows.
H. Request for Comments
The Commission encourages written
comments on matters discussed in this
IRFA. In particular, the Commission
seeks comment on the number of small
entities that would be affected by the
proposed rule amendments and the
proposed new rule, and whether the
effect on small entities would be
economically significant. Commenters
are asked to describe the nature of any
effect and to provide empirical data to
support their views.
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XIII. Statutory Authority
The Commission is proposing
amendments to Rule 17g–3 and the
Instructions to Form NRSRO and new
Rule 17g–7, pursuant to the authority
conferred by the Exchange Act,
including Sections 15E and 17(a).228
227 5
U.S.C. 603(c).
U.S.C. 78o–7 and 78q.
228 15
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PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
continues to read, in part, as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–
20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4,
80b–11, and 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
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2. Section 240.17g–3 is amended by:
a. Adding a new paragraph (a)(7); and
b. Revising paragraph (b).
The additions and revisions read as
follows:
§ 240.17g–3 Annual financial reports to be
furnished by nationally recognized
statistical rating organizations.
(a) * * *
(7)(i) An unaudited report containing
a description of the steps taken by the
designated compliance officer during
the fiscal year to:
(A) Administer the policies and
procedures that are required to be
established pursuant to paragraphs (g)
and (h) of Section 15E of the Exchange
Act (15 U.S.C. 78o–7(g) and (h)); and
(B) Ensure compliance with the
securities laws and rules and
regulations thereunder, including those
promulgated by the Commission
pursuant to Section 15E of the Exchange
Act.
(ii) The report required pursuant to
paragraph (a)(7)(i) of this section must
include:
(A) A description of any compliance
reviews of the activities of the
nationally recognized statistical rating
organization;
(B) The number of material
compliance matters identified during
each review of the activities of the
nationally recognized statistical rating
organization and a brief description of
each such matter;
(C) A description of any remediation
measures implemented to address
material compliance matters identified
during the reviews of the activities of
the nationally recognized statistical
rating organization; and
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(D) A description of the persons
within the nationally recognized
statistical rating organization who were
advised of the results of the reviews.
*
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*
(b) The nationally recognized
statistical rating organization must:
(1) Attach to the financial reports
furnished pursuant to paragraphs (a)(1)
through (a)(6) of this section a signed
statement by a duly authorized person
associated with the nationally
recognized statistical rating organization
stating that the person has responsibility
for the financial reports and, to the best
knowledge of the person, the financial
reports fairly present, in all material
respects, the financial condition, results
of operations, cash flows, revenues,
analyst compensation, and credit rating
actions of the nationally recognized
statistical rating organization for the
period presented; and
(2) Attach to the report furnished
pursuant to paragraph (a)(7) of this
section a signed statement by the
designated compliance officer of the
nationally recognized statistical rating
organization stating that the person has
responsibility for the report and, to the
best knowledge of the designated
compliance officer, the report fairly
presents, in all material respects, steps
taken by the designated compliance
officer for the period presented.
*
*
*
*
*
3. Section 240.17g–7 is added to read
as follows:
§ 240.17g–7 Reports to be made public by
nationally recognized statistical rating
organizations about persons that paid the
nationally recognized statistical rating
organization for the issuance or
maintenance of a credit rating.
(a)(1) A nationally recognized
statistical rating organization must
annually, not later than 90 calendar
days after the end of its fiscal year (as
indicated on its current Form NRSRO),
make publicly available on its Internet
Web site a consolidated report that
shows, with respect to each person that
paid the nationally recognized statistical
rating organization to issue or maintain
a credit rating that was outstanding as
of the end of the fiscal year, the
following information:
(i) The percent of the net revenue
attributable to the person earned by the
nationally recognized statistical rating
organization for that fiscal year from
providing services and products other
than credit rating services to the person,
which the nationally recognized
statistical rating organization must
calculate in accordance with paragraph
(a)(3)(i) of this section;
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(ii) The relative standing of the person
in terms of the person’s contribution to
the net revenue of the nationally
recognized statistical rating organization
for the fiscal year, which the nationally
recognized statistical rating organization
must determine in accordance with
paragraph (a)(3)(ii) of this section; and
(iii) All outstanding credit ratings
paid for by the person, which the
nationally recognized statistical rating
organization must determine in
accordance with paragraph (a)(3)(iii) of
this section.
(2) A nationally recognized statistical
rating organization is not required to
make publicly available on its Internet
Web site the report required by
paragraph (a)(1) of this section or
include with the publication of a credit
rating the statement required by
paragraph (b) of this section if, as of the
end of the fiscal year, there are no credit
ratings outstanding that the nationally
recognized statistical rating organization
issued or maintained as a result of a
person paying the nationally recognized
statistical rating organization for the
issuance or maintenance of such credit
ratings.
(3)(i) The nationally recognized
statistical rating organization must
calculate the percent of the net revenue
attributable to the person earned by the
nationally recognized statistical rating
organization for the fiscal year from
providing services and products other
than credit rating services to the person
as follows:
(A) Calculate the net revenue
attributable to the person earned by the
nationally recognized statistical rating
organization for the fiscal year from
providing services and products other
than credit rating services to the person;
(B) Calculate the net revenue
attributable to the person earned by the
nationally recognized statistical rating
organization for the fiscal year from
providing all services and products,
including credit rating services, to the
person; and
(C) Divide the amount calculated
pursuant to paragraph (a)(3)(i)(A) of this
section by the amount calculated
pursuant to paragraph (a)(3)(i)(B) of this
section and convert that quotient to a
percent.
(ii) The nationally recognized
statistical rating organization must
determine the relative standing of the
person in terms of the person’s
contribution to the net revenue of the
nationally recognized statistical rating
organization for the fiscal year as
follows:
(A) For each person from whom the
nationally recognized statistical rating
organization earned net revenue during
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the fiscal year, calculate the net revenue
attributable to the person earned by the
nationally recognized statistical rating
organization for the fiscal year from
providing all services and products,
including credit rating services, to the
person;
(B) Make a list that sorts the persons
subject to the calculation in paragraph
(a)(3)(ii)(A) of this section in order from
largest to smallest in terms of the
amount of net revenue attributable to
the person, as determined pursuant to
that paragraph; and
(C) Divide the list generated pursuant
to paragraph (a)(3)(ii)(B) of this section
into the following categories: Top 10%,
top 25%, top 50%, bottom 50%, and
bottom 25% and determine which
category contains the person.
(iii) Identify by name of obligor,
security, or money market instrument
and, as applicable, CIK number, CUSIP,
or ISIN each outstanding credit rating
generated as a result of the person
paying the nationally recognized
statistical rating organization for the
issuance or maintenance of the credit
rating and attribute the outstanding
credit rating to the person.
(b) A nationally recognized statistical
rating organization must prominently
include the following statement
indicating where on its Internet Web
site the consolidated report required
pursuant to paragraph (a)(1) of this
section is located each time the
nationally recognized statistical rating
organization publishes a credit rating or
credit ratings in a research report, press
release, announcement, database,
Internet Web site page, compendium, or
any other written communication that
makes the credit rating publicly
available for free or a reasonable fee:
‘‘Revenue information about persons
that paid the nationally statistical rating
organization for the issuance or
maintenance of a credit rating is
available at: [insert address to Internet
Web site].’’
(c) For purposes of this section:
(1) The term credit rating services
means any of the following: Rating an
obligor (regardless of whether the
obligor or any other person paid for the
credit rating); rating an issuer’s
securities or money market instruments
(regardless of whether the issuer,
underwriter, or any other person paid
for the credit rating); and providing
credit ratings, credit ratings data, or
credit ratings analysis to a subscriber.
(2) The term net revenue means
revenue earned for any type of service
or product provided to a person,
regardless of whether related to credit
rating services, and net of any rebates
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and allowances paid or owed to the
person.
PART 249b—FURTHER FORMS,
SECURITIES EXCHANGE ACT OF 1934
4. The authority citation for part 249b
continues to read in part as follows:
Authority: 15 U.S.C. 78a et seq., unless
otherwise noted;
*
*
§ 249b.300
*
*
*
[Amended]
5. Form NRSRO (referenced in
§ 249b.300) is amended by revising
Exhibit 6 in Item 9 to read as follows:
Note: The text of Form NRSRO does not
and this amendment will not appear in the
Code of Federal Regulations.
Form NRSRO
*
*
*
*
*
9. Exhibits * * *
*
*
*
*
*
Exhibit 6. Information concerning
conflicts of interest or potential conflicts
of interest relating to the issuance of
credit ratings by the credit rating
agency.
b Exhibit 6 is attached to and made
a part of this Form NRSRO.
*
*
*
*
*
6. Amend Form NRSRO Instructions
(referenced in § 249b.300) by:
a. Revising Instruction A.8.;
b. Adding a Note to the end of
Instruction F;
c. Removing the words ‘‘withdrawal
of registration’’ and adding in their
place the words ‘‘withdrawal from
registration’’ in the first sentence of
Instruction H, Item 5;
d. Revising Exhibit 6 in Instruction H,
Item 9;
e. Removing the words ‘‘(See
definition below)’’ from the first
sentence of Exhibit 8 in Instruction H,
Item 9;
f. Removing the word ‘‘person’’ and
adding in its place the words ‘‘user of
credit rating services’’ in the first
sentence in Exhibit 10, Instruction H,
Item 9, and removing the fifth sentence
in Exhibit 10, Instruction H, Item 9,
which includes the definitions of ‘‘net
revenue’’ and ‘‘credit rating services’’;
g. Redesignating Instruction F as
Instruction I; and
h. Revising newly redesignated
Instruction I.
The revisions and addition read as
follows:
Note: The text of Form NRSRO does not
and this amendment will not appear in the
Code of Federal Regulations.
FORM NRSRO INSTRUCTIONS
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A. GENERAL INSTRUCTIONS
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8. ADDRESS—The mailing address
for Form NRSRO is: Division of Trading
and Markets, U.S. Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–7010.
*
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*
F. INSTRUCTIONS FOR ANNUAL
CERTIFICATIONS
*
*
*
*
*
Note to Instruction F: The annual financial
reports that an NRSRO must furnish to the
Commission pursuant to Section 15E(k) of
the Exchange Act and Exchange Act Rules
17g–3(a)(1) through (a)(6), as applicable,
should not be furnished as part of the Annual
Certification on Form NRSRO. If the fiscal
year end of the NRSRO is December 31,
however, the financial reports may be
furnished in the same mailing as the Annual
Certification. In accordance with Exchange
Act Rule 17g–3(b), the NRSRO must attach to
each report the certification required by the
Rule.
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H. INSTRUCTIONS FOR SPECIFIC
LINE ITEMS
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Item 9. Exhibits. * * *
*
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Exhibit 6. Provide in this Exhibit
information concerning conflicts of
interest or potential conflicts of interest
relating to the issuance of credit ratings
by the Applicant/NRSRO.
Part A. Identify the types of conflicts
of interest relating to the issuance of
credit ratings by the Applicant/NRSRO
that are material to the Applicant/
NRSRO. First, identify the conflicts
described in the list below that apply to
the Applicant/NRSRO. The Applicant/
NRSRO may use the descriptions below
to identify an applicable conflict of
interest and is not required to provide
any further details. Second, briefly
describe any other type of conflict of
interest relating to the issuance of credit
ratings by the Applicant/NRSRO that is
not covered in the descriptions below
that is material to the Applicant/NRSRO
(for example, one the Applicant/NRSRO
has established specific policies and
procedures to address):
• The Applicant/NRSRO is paid by
issuers or underwriters to determine
credit ratings with respect to securities
or money market instruments they issue
or underwrite.
• The Applicant/NRSRO is paid by
obligors to determine credit ratings of
the obligors.
• The Applicant/NRSRO is paid for
services in addition to determining
credit ratings by issuers, underwriters,
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or obligors that have paid the
Applicant/NRSRO to determine a credit
rating.
• The Applicant/NRSRO is paid by
persons for subscriptions to receive or
access the credit ratings of the
Applicant/NRSRO and/or for other
services offered by the Applicant/
NRSRO where such persons may use the
credit ratings of the Applicant/NRSRO
to comply with, and obtain benefits or
relief under, statutes and regulations
using the term ‘‘nationally recognized
statistical rating organization.’’
• The Applicant/NRSRO is paid by
persons for subscriptions to receive or
access the credit ratings of the
Applicant/NRSRO and/or for other
services offered by the Applicant/
NRSRO where such persons also may
own investments or have entered into
transactions that could be favorably or
adversely impacted by a credit rating
issued by the Applicant/NRSRO.
• The Applicant/NRSRO allows
persons within the Applicant/NRSRO
to:
Æ Directly own securities or money
market instruments of, or have other
direct ownership interests in, obligors or
issuers subject to a credit rating
determined by the Applicant/NRSRO.
Æ Have business relationships that are
more than arm’s length ordinary course
business relationships with obligors or
issuers subject to a credit rating
determined by the Applicant/NRSRO.
• A person associated with the
Applicant/NRSRO is a broker or dealer
engaged in the business of underwriting
securities or money market instruments
(identify the person).
• The Applicant/NRSRO has any
other material conflict of interest that
arises from the issuances of credit
ratings (briefly describe).
Part B. Provide the following
information concerning revenues of the
Applicant/NRSRO. An Applicant must
provide this information for the fiscal
year ending immediately before the date
of the Applicant’s initial application to
the Commission. An NRSRO with a
fiscal year end of December 31 must
provide this information as part of its
Annual Certification. Otherwise, an
NRSRO must provide this information
with an Update of Registration not later
than 90 days after the end of each fiscal
year.
(1) Provide the percentage of total net
revenue attributable to the 20 largest
users of credit rating services of the
Applicant/NRSRO by dividing:
Æ The total amount of net revenue
earned by the Applicant/NRSRO
attributable to the 20 largest users of
credit rating services of the Applicant/
NRSRO; by
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Æ The total amount of the four
classifications of revenue of the
Applicant as reported in Exhibit 12 to
Form NRSRO or the NRSRO as reported
in the financial report furnished to the
Commission under Exchange Act Rule
17g–3(a)(4).
Note to Part B(1) of Exhibit 6: The 20
largest users of credit rating services includes
issuers, subscribers, obligors, and
underwriters, and may not be the same as the
list of 20 largest issuers and subscribers
identified by the Applicant in Exhibit 10 to
Form NRSRO or by the NRSRO in the
financial report furnished to the Commission
under Exchange Act Rule 17g–3(a)(5).
(2) Provide the percentage of total net
revenue attributable to other services
and products of the Applicant/NRSRO
by dividing:
Æ The total amount of revenue earned
by the Applicant/NRSRO for ‘‘all other
services and products’’ of the Applicant
as reported in Exhibit 12 to Form
NRSRO or of the NRSRO as reported in
the financial report furnished to the
Commission under Exchange Act Rule
17g–3(a)(4); by
Æ The total amount of the four
classifications of revenue of the
Applicant as reported in Exhibit 12 to
Form NRSRO or of the NRSRO as
reported in the financial report
furnished to the Commission under
Exchange Act Rule 17g–3(a)(4).
*
*
*
*
*
Exhibit 10. Provide in this Exhibit a
list of the largest users of credit rating
services of the Applicant by the amount
of net revenue earned by the Applicant
attributable to the user of credit rating
services during the fiscal year ending
immediately before the date of the
initial application. First, determine and
list the 20 largest issuers and subscribers
in terms of net revenue. Next, add to the
list any obligor or underwriter that, in
terms of net revenue during the fiscal
year, equaled or exceeded the 20th
largest issuer or subscriber. In making
the list, rank the persons in terms of net
revenue from largest to smallest and
include the net revenue amount for each
person.
An NRSRO is not required to make
this Exhibit publicly available on its
Web site, or through another
comparable, readily accessible means
pursuant to Exchange Act Rule 17g–1(i).
An NRSRO may request that the
Commission keep this Exhibit
confidential by marking each page
‘‘Confidential Treatment’’ and
complying with Commission rules
governing confidential treatment (See 17
CFR 200.80 and 17 CFR 200.83). The
Commission will keep the information
and documents in the Exhibit
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confidential upon request to the extent
permitted by law.
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I. EXPLANATION OF TERMS
1. COMMISSION—The U.S.
Securities and Exchange Commission.
2. CREDIT RATING [Section 3(a)(60)
of the Exchange Act]—An assessment of
the creditworthiness of an obligor as an
entity or with respect to specific
securities or money market instruments.
3. CREDIT RATING AGENCY [Section
3(a)(61) of the Exchange Act]—Any
person:
• Engaged in the business of issuing
credit ratings on the Internet or through
another readily accessible means, for
free or for a reasonable fee, but does not
include a commercial credit reporting
company;
• Employing either a quantitative or
qualitative model, or both to determine
credit ratings; and
• Receiving fees from either issuers,
investors, other market participants, or
a combination thereof.
4. CREDIT RATING SERVICES—Any
of the following services:
• Rating an obligor (regardless of
whether the obligor or any other person
paid for the credit rating);
• Rating an issuer’s securities or
money market instruments (regardless
of whether the issuer, underwriter, or
any other person paid for the credit
rating); and
• Providing credit ratings, credit
ratings data, or credit ratings analysis to
a subscriber.
5. NATIONALLY RECOGNIZED
STATISTICAL RATING
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ORGANIZATION [Section 3(a)(62) of
the Exchange Act]—A credit rating
agency that:
• Has been in business as a credit
rating agency for at least the 3
consecutive years immediately
preceding the date of its application for
registration as an NRSRO;
• Issues credit ratings certified by
qualified institutional buyers in
accordance with Section 15(a)(1)(B)(ix)
of the Exchange Act with respect to:
Æ Financial institutions, brokers, or
dealers;
Æ Insurance companies;
Æ Corporate issuers;
Æ Issuers of asset-backed securities;
Æ Issuers of government securities,
municipal securities, or securities
issued by a foreign government; or
Æ A combination of one or more of
the above; and
• Is registered as an NRSRO.
6. NET REVENUE—revenue earned by
the Applicant/NRSRO for any type of
service or product provided to a person,
regardless of whether related to credit
rating services, and net of any rebates
and allowances the Applicant/NRSRO
paid or owes to the person.
7. PERSON—An individual,
partnership, corporation, trust,
company, limited liability company, or
other organization (including a
separately identifiable department or
division).
8. PERSON WITHIN AN APPLICANT/
NRSRO—The person furnishing Form
NRSRO identified in Item 1, any credit
rating affiliates identified in Item 3, and
any partner, officer, director, branch
manager, or employee of the person or
PO 00000
Frm 00039
Fmt 4701
Sfmt 4702
the credit rating affiliates (or any person
occupying a similar status or performing
similar functions).
9. SEPARATELY IDENTIFIABLE
DEPARTMENT OR DIVISION—A unit
of a corporation or company:
• That is under the direct supervision
of an officer or officers designated by
the board of directors of the corporation
as responsible for the day-to-day
conduct of the corporation’s credit
rating activities for one or more
affiliates, including the supervision of
all employees engaged in the
performance of such activities; and
• For which all of the records relating
to its credit rating activities are
separately created or maintained in or
extractable from such unit’s own
facilities or the facilities of the
corporation, and such records are so
maintained or otherwise accessible as to
permit independent examination and
enforcement by the Commission of the
Exchange Act and rules and regulations
promulgated thereunder.
10. QUALIFIED INSTITUTIONAL
BUYER [Section 3(a)(64) of the
Exchange Act]—An entity listed in 17
CFR 230.144A(a) that is not affiliated
with the credit rating agency.
*
*
*
*
*
By the Commission.
Dated: November 23, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–28497 Filed 12–3–09; 8:45 am]
BILLING CODE 8011–01–P
E:\FR\FM\04DEP2.SGM
04DEP2
]]>Agencies
[Federal Register Volume 74, Number 232 (Friday, December 4, 2009)]
[Proposed Rules]
[Pages 63866-63904]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-28497]
Federal Register / Vol. 74, No. 232 / Friday, December 4, 2009 /
Proposed Rules
[[Page 63866]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34-61051; File No. S7-28-09]
RIN 3235-AK14
Proposed Rules for Nationally Recognized Statistical Rating
Organizations
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Proposed rules.
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SUMMARY: The Commission is proposing rule amendments and a new rule
that would impose additional requirements on nationally recognized
statistical rating organizations (``NRSROs''). The proposed amendments
and rule would require an NRSRO: to furnish a new annual report
describing the steps taken by the firm's designated compliance officer
during the fiscal year with respect to compliance reviews,
identifications of material compliance matters, remediation measures
taken to address those matters, and identification of the persons
within the NRSRO advised of the results of the reviews; to disclose
additional information about sources of revenues on Form NRSRO; and to
make publicly available a consolidated report containing information
about revenues of the NRSRO attributable to persons paying the NRSRO
for the issuance or maintenance of a credit rating. The Commission is
proposing these rules, in conjunction with a separate release being
issued today adopting certain rule amendments, to further address
concerns about the integrity of the credit rating procedures and
methodologies at NRSROs. Finally, at this time, the Commission is
announcing that it is deferring consideration of action with respect to
a proposed rule that would have required an NRSRO to include, each time
it published a credit rating for a structured finance product, a report
describing how the credit ratings procedures and methodologies and
credit risk characteristics for structured finance products differ from
those of other types of rated instruments, or, alternatively, to use
distinct ratings symbols for structured finance products that
differentiated them from the credit ratings for other types of
financial instruments. The Commission is also soliciting comments
regarding alternative measures that could be taken to differentiate
NRSROs' structured finance credit ratings from the credit ratings they
issue for other types of financial instruments through, for example,
enhanced disclosures of information. The Commission also is soliciting
comment on whether the rule amendments being adopted today in a
separate release designed to remove impediments to determining and
monitoring non-issuer-paid credit ratings for structured finance
products should be extended to create a mechanism for determining non-
issuer-paid credit ratings for structured finance products that were
issued prior to the rule becoming effective (e.g., to allow for non-
issuer-paid credit ratings for structured finance products of the 2004-
2007 vintage). The Commission strongly encourages market participants
and all others to provide their views.
DATES: Comments should be received on or before February 2, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-28-09 on the subject line; or
Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-28-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (https://www.sec.gov/rules/proposed.shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at (202) 551-5525; Thomas K. McGowan, Deputy Associate
Director, at (202) 551-5521; Randall W. Roy, Assistant Director, at
(202) 551-5522; Joseph I. Levinson, Special Counsel, at (202) 551-5598;
Sheila Dombal Swartz, Special Counsel, at (202) 551-5545; Rose Russo
Wells, Special Counsel, at (202) 551-5527; Rebekah E. Goshorn,
Attorney, at (202) 551-5514; Marlon Q. Paz, Senior Counsel to the
Director, at (202) 551-5756; Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-7010.
SUPPLEMENTARY INFORMATION:
I. Background
On February 2, 2009, the Commission adopted amendments to its
existing rules governing the conduct of NRSROs under the Securities
Exchange Act of 1934 (``Exchange Act'').\1\ The Commission proposed
these rule amendments in June 2008 to further the purposes of the
Credit Rating Agency Reform Act of 2006 (``Rating Agency Act'') to
improve ratings quality for the protection of investors and in the
public interest by fostering accountability, transparency, and
competition in the credit rating industry.\2\ The amendments also were
designed to further address concerns about the integrity of the process
by which NRSROs rate structured finance products, particularly mortgage
related securities.\3\ Concurrent with the
[[Page 63867]]
adoption of those final rule amendments, the Commission proposed, in a
separate release, additional amendments to Rule 17g-2(d) and re-
proposed amendments to paragraphs (a) and (b) of Rule 17g-5 as well as
a new paragraph (e) to Rule 17g-5 and a conforming amendment to
Regulation FD.\4\ In separate releases, the Commission is adopting,
with revisions, the rule amendments proposed in the February 2009
Proposing Release,\5\ and proposing amendments to Regulation S-K, and
rules and forms under the Securities Act, the Exchange Act and the
Investment Company Act to require disclosure regarding credit ratings
that a registrant uses in connection with a registered offering.\6\ The
Commission also is adopting amendments to remove references to NRSROs
in certain Commission rules and forms and re-opening the comment period
to extend the time to comment on proposals to remove references to
NRSROs in other Commission rules.\7\
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\1\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, Exchange Act Release No. 59342
(February 2, 2009), 74 FR 6485 (February 9, 2009) (``February 2009
Adopting Release'').
\2\ Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212
(June 25, 2008) (``June 2008 Proposing Release''). The Commission
adopted the initial set of NRSRO rules in June 2007. See Oversight
of Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, Exchange Act Release No. 55857
(June 5, 2007), 72 FR 33564 (June 18, 2007) (``June 2007 Adopting
Release''). In July 2008, the Commission also proposed a series of
amendments to rules under the Exchange Act, Securities Act of 1933
(``Securities Act''), and Investment Company Act of 1940
(``Investment Company Act'') that would eliminate references to
ratings issued by NRSROs in certain rules and forms. See References
to Ratings of Nationally Recognized Statistical Rating
Organizations, Exchange Act Release No. 58070 (July 1, 2008), 73 FR
40088 (July 11, 2008); Securities Ratings, Securities Act Release
No. 8940 (July 1, 2008), 73 FR40106 (July 11, 2008); References to
Ratings of Nationally Recognized Statistical Rating Organizations,
Investment Company Act Release No. 28327 (July 1, 2008), 73 FR 40124
(July 11, 2008).
\3\ The term ``structured finance product'' as used throughout
this release refers broadly to any security or money market
instrument issued by an asset pool or as part of any asset-backed or
mortgage-backed securities transaction. This broad category of
financial instrument includes, but is not limited to, asset-backed
securities such as residential mortgage-backed securities (``RMBS'')
and to other types of structured debt instruments such as
collateralized debt obligations (``CDOs''), including synthetic and
hybrid CDOs, or collateralized loan obligations (``CLOs'').
\4\ See Re-proposed Rules for Nationally Recognized Statistical
Rating Organizations, Exchange Act Release No. 59343 (February 2,
2009), 74 FR 6456 (February 9, 2009) (``February 2009 Proposing
Release'').
\5\ Exchange Act Release No. 61050 (``Companion Release'').
\6\ Securities Act No. 9070 (October 7, 2009) 74 FR 53086
(October 15, 2009).
\7\ See Exchange Act Release No. 60789 (October 5, 2009), 74 FR
53258 (October 9, 2009) (adopting release to remove references to
NRSROs); see also Securities Act Release No. 9069 (October 5, 2009)
74 FR 53274 (October 9, 2009) (release to re-open for comment
proposals to remove references to NRSROs).
---------------------------------------------------------------------------
In this release, the Commission is proposing amendments to Rule
17g-3 to require an NRSRO to furnish a new unaudited annual report to
the Commission describing the steps taken by the NRSRO's designated
compliance officer \8\ during the fiscal year to fulfill the compliance
officer's responsibilities as set forth in Section 15E(j) of the
Exchange Act.\9\ That statutory provision requires an NRSRO to
designate an individual responsible for (1) administering the policies
and procedures that are required to be established pursuant to Sections
15E(g) and (h) of the Exchange Act; and (2) ensuring compliance with
securities laws and rules and regulations, including those promulgated
by the Commission pursuant to Section 15E of the Exchange Act.\10\
Pursuant to the proposed amendment to Rule 17g-3, an NRSRO would be
required to furnish a report to the Commission describing compliance
reviews undertaken by the compliance officer during the fiscal year,
material compliance matters identified during the reviews, measures
implemented to remediate the material compliance issues identified, and
persons within the NRSRO who were advised of the results of the
reviews.
---------------------------------------------------------------------------
\8\ See 15 U.S.C. 78o-7(j). Section 15E(j) of the Exchange Act
requires an NRSRO to ``designate an individual responsible for
administering the policies and procedures that are required to be
established pursuant to [Section 15E(g) and Section 15E(h) of the
Exchange Act], and for ensuring compliance with the securities laws
and rules and regulations thereunder, including those promulgated by
the Commission pursuant to [Section 15E of the Exchange Act].'' 15
U.S.C. 78o-7(j).
\9\ See 15 U.S.C. 78o-7(j).
\10\ Id.
---------------------------------------------------------------------------
In addition, the Commission is proposing in this release to amend
the Instructions to Exhibit 6 to Form NRSRO to require a credit rating
agency applying to be registered as an NRSRO or an NRSRO providing its
annual update to Form NRSRO to publicly disclose: (1) The percentage of
the net revenue of the applicant/NRSRO attributable to the 20 largest
users of credit rating services of the applicant/NRSRO; and (2) the
percentage of the revenue of the applicant/NRSRO attributable to
services and products other than credit rating services. The Commission
notes that the first proposed disclosure would be an aggregate in that
it would be the sum of the amount of net revenue attributed to the 20
largest users of credit rating services (i.e. not 20 separate net
revenue amounts). In conjunction with this proposed amendment to the
Instructions to Exhibit 6, the Commission is proposing to move the
definitions of certain terms currently included in the Instructions to
Exhibit 10 to the Explanation of Terms section of the Form NRSRO
Instructions in order to make those definitions applicable to Form
NRSRO as a whole.
Finally, the Commission is proposing a new rule--Rule 17g-7--that
would require an NRSRO, on an annual basis, to make publicly available
on its Internet Web site a consolidated report that shows three items
of information with respect to each person that paid the NRSRO to issue
or maintain a credit rating. First, the NRSRO would be required to
disclose the percent of the net revenue attributable to the person that
were earned by the NRSRO for that fiscal year from providing services
and products other than credit rating services. Second, the NRSRO would
have to indicate the relative standing of the person in terms of the
person's contribution to the revenue of the NRSRO for the fiscal year
as compared with other persons who provided the NRSRO with revenue.
Third, the NRSRO would be required to identify all outstanding credit
ratings paid for by the person.
As discussed in detail below, the proposed amendments seek to
further advance the goals of the Commission's current oversight program
for NRSROs, including increasing transparency and disclosure, and
diminishing conflicts, as well as continuing to further the goals of
the Rating Agency Act ``to improve ratings quality for the protection
of investors and in the public interest by fostering accountability,
transparency, and competition in the credit rating agency industry.''
\11\
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\11\ See Report of the Senate Committee on Banking, Housing, and
Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform Act
of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6,
2006) (``Senate Report''), p. 2.
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The Commission believes that the proposed amendment to Rule 17g-3
to require NRSROs to furnish the Commission with an additional
unaudited annual report would further improve the integrity of the
ratings process and enhance accountability by requiring the designated
compliance officer to annually report on actions taken to fulfill the
officer's statutory responsibilities. While each NRSRO has a designated
compliance officer under Section 15E(j) of the Exchange Act, the
requirement to provide the Commission with such a report would, the
Commission believes, help establish or further reinforce a discipline
and rigor in the compliance officer's performance of his or her
duties.\12\ It also is designed to strengthen the Commission's existing
oversight of NRSROs by highlighting possible problem areas in an
NRSRO's rating processes and by providing an additional tool for the
Commission to determine whether the NRSRO's designated compliance
officer is fulfilling the responsibilities prescribed in Section 15E of
the Exchange Act.\13\ In addition, this information is designed to
assist the Commission staff in its examination of NRSROs. The proposed
amendments to the Exhibit 6 Instructions to Form NRSRO that would
require additional disclosures are designed to further increase
transparency by allowing users of credit ratings to more effectively
evaluate the integrity of an NRSRO's credit ratings and analyze whether
the NRSRO is effectively managing its conflicts of interests. Finally,
the Commission believes that proposed new Rule 17g-7
[[Page 63868]]
also would further increase transparency as well as enhance disclosures
with respect to an NRSRO's management of its conflicts of interest by
providing users of credit ratings with information about the potential
risk of undue influence that arises when an NRSRO is paid to determine
a credit rating for a specific obligor, security, or money market
instrument.
---------------------------------------------------------------------------
\12\ The Commission also notes that other areas of the
Commission's rules and regulations also require an annual report by
a chief compliance officer with respect to investment companies and
investment advisers. See generally, Rule 38a-1, 17 CFR 270.38a-1,
and Rule 206(4)-7, 17 CFR 275.206(4)-7.
\13\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------
In addition to the proposed rule amendments, the Commission is
announcing today that it is deferring the consideration of action with
regard to the rule proposed in the June 2008 Proposing Release that
would have required an NRSRO to include, each time it published a
credit rating for a structured finance product, a report describing how
the credit ratings procedures and methodologies and credit risk
characteristics for structured finance products differ from those of
other types of rated instruments, or, alternatively, to use distinct
ratings symbols for structured finance products that differentiated
them from the credit ratings for other types of financial instruments.
Instead, the Commission is soliciting comment regarding alternative
measures that could be taken to differentiate NRSROs' structured
finance credit ratings from the credit ratings they issue for other
types of financial instruments through, for example, enhanced
disclosures of information. The Commission also is soliciting comment
on whether the rule amendments being adopted today in the Companion
Release designed to remove impediments to determining and monitoring
non-issuer-paid credit ratings for structured finance products should
be extended to create a mechanism for determining non-issuer-paid
credit ratings for structured finance products that were issued prior
to the rule becoming effective (e.g., to allow for non-issuer-paid
credit ratings for structured finance products of the 2004-2007
vintage). Specifically, the Commission is soliciting comment on whether
the rule's goal could be furthered by applying its requirements or
similar requirements to structured finance products that were issued
prior to the compliance date of the rule as amended.
II. Proposed Amendment to Rule 17g-3
The Commission adopted Rule 17g-3 pursuant to authority in Section
15E(k) \14\ of the Exchange Act, which requires an NRSRO to furnish to
the Commission, on a confidential basis \15\ and at intervals
determined by the Commission, such financial statements and information
concerning its financial condition as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or for the
protection of investors. The statute also provides that the Commission
may, by rule, require that the financial statements be certified by an
independent public accountant.\16\ In addition, Section 17(a)(1) of the
Exchange Act \17\ requires an NRSRO to make and keep such records, and
make and disseminate such reports, as the Commission prescribes by rule
as necessary or appropriate in the public interest, for the protection
of investors, or otherwise in furtherance of the Exchange Act.\18\
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\14\ 15 U.S.C. 78o-7(k).
\15\ An NRSRO can request that the Commission keep this
information confidential. See Section 24 of the Exchange Act (15
U.S.C. 78x), 17 CFR 240.24b-2, 17 CFR 200.80 and 17 CFR 200.83.
\16\ Id.
\17\ 15 U.S.C. 78q(a)(1).
\18\ See Section 5 of the Rating Agency Act and 15 U.S.C.
78q(a)(1).
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Rule 17g-3 currently requires an NRSRO to furnish to the Commission
on an annual basis the following reports: audited financial statements;
unaudited consolidating financial statements of the parent of the
NRSRO, if applicable; an unaudited report concerning revenues by
category of revenue; an unaudited report concerning compensation of the
NRSRO's credit analysts; an unaudited report listing the largest
customers of the NRSRO; and an unaudited report on the number of credit
rating actions taken during the fiscal year in each class of credit
ratings for which the NRSRO is registered with the Commission.\19\ The
rule further requires an NRSRO to furnish the Commission these reports
within 90 days of the end of its fiscal year.\20\
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\19\ 17 CFR 240.17g-3(a)(1)-(6).
\20\ 17 CFR 240.17g-3(a).
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The Commission's staff understands that the designated compliance
officer of some NRSROs may, in some cases, not be fulfilling the
compliances officer's statutorily mandated duties, as prescribed by
Section 15E(j) of the Exchange Act.\21\ Further, during examinations in
2008 of three of the largest NRSRO's, Commission staff also identified
issues with respect to each NRSROs policies and procedures and
improvements that could be made.\22\ In light of these concerns and the
importance of an effective NRSRO compliance program, the Commission is
proposing to amend Rule 17g-3 by adding paragraph (a)(7), which would
require an NRSRO to furnish to the Commission an additional unaudited
annual report. This report would be furnished to the Commission, on a
confidential basis, consistent with the other reports required under
Rule 17g-3.\23\
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\21\ 15 U.S.C. 78o-7(j).
\22\ See generally, Summary Report of Issues Identified in the
Commission Staff's Examinations of Select Credit Rating Agencies
(July 8, 2008). The report is available on the Commission's Internet
Web site, located at https://www.sec.gov/news/studies/2008/craexamination070808.pdf.
\23\ See supra notes 14 and 15; see also June 2007 Adopting
Release, 72 FR at 33590, footnote 300 and June 2008 Proposing
Release, 73 FR 36234, footnote 143.
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Proposed new paragraph (a)(7)(i) of Rule 17g-3 would provide that
the new report must describe the steps taken by the NRSRO's designated
compliance officer during the fiscal year to: (1) Administer the
policies and procedures that are required to be established pursuant to
Sections 15E(g) and (h) of the Exchange Act; and (2) ensure compliance
with securities laws and rules and regulations, including those
promulgated by the Commission pursuant to Section 15E of the Exchange
Act.\24\ Proposed new paragraph (a)(7)(ii) of Rule 17g-3 would provide
that the new report must include: (1) A description of any compliance
reviews of the activities of the NRSRO; (2) the number of material
compliance matters identified during each review of the activities of
the NRSRO and a brief description of each such matter; (3) a
description of any remediation measures implemented to address material
compliance matters identified during the reviews of the activities of
the NRSRO; and (4) a description of the persons within the NRSRO who
were advised of the results of the reviews.\25\ Finally, the Commission
is proposing to amend paragraph (b) to Rule 17g-3 to require that the
proposed new report required under paragraph (a)(7) be accompanied by a
statement signed by the NRSRO's designated compliance officer stating
that the person has responsibility for the report and, to the best of
the knowledge of the designated compliance officer, the report fairly
[[Page 63869]]
presents, in all material respects, steps taken by the designated
compliance officer for the period presented.
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\24\ Section 15E(g) of the Exchange Act provides, in pertinent
part, that an NRSRO must establish, maintain, and enforce written
policies and procedures reasonably designed, taking into
consideration the nature of the business of such NRSRO, to prevent
the misuse of material, nonpublic information. 15 U.S.C. 78o-7(g).
Section 15E(h) of the Exchange Act, provides, in pertinent part,
that an NRSRO must establish, maintain, and enforce written policies
and procedures reasonably designed, taking into consideration the
nature of the business of such NRSRO and affiliated persons and
affiliated companies thereof, to address and manage any conflicts of
interest that can arise from such business. 15 U.S.C. 78o-7(h).
\25\ See proposed Rule 17g-3(a)(7)(ii).
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The proposed new report would be unaudited, consistent with the
other unaudited reports currently required under Rule 17g-3.\26\ As
discussed below, the Commission preliminarily believes that the
proposed amendment would improve the integrity of the credit ratings
process by establishing a more structured discipline under which the
NRSRO's designated compliance officer would need to report to the
Commission the steps taken to fulfill the officer's statutory
responsibilities. The act of reporting these steps is designed to
promote the active engagement of the designated compliance officer in
reviewing an NRSRO's compliance with the securities laws and its own
internal policies and procedures. The Commission preliminarily believes
that because the compliance officer would be required to report these
steps, the act of reporting should, in turn, foster improved
compliance. Furthermore, the requirement in the report to identify the
persons within the NRSRO advised of the results of the review could
also promote the appropriate escalation of compliance issues to the
management of the NRSRO.
---------------------------------------------------------------------------
\26\ 17 CFR 240.17g-3(a)(2)-(6). Under Rule 17g-3, the only
required audited report is the NRSRO's financial statements as of
its most recent fiscal year. 17 CFR 240.17g-3(a)(1).
---------------------------------------------------------------------------
The report also is designed to further strengthen the Commission's
oversight of NRSROs by highlighting possible problem areas in an
NRSRO's rating processes and providing an additional tool for the
Commission to determine whether the NRSRO's designated compliance
officer is fulfilling the responsibilities prescribed in Section 15E of
the Exchange Act.\27\ For example, if an NRSRO reports a large number
of material compliance matters in a particular area, the Commission
examination staff could focus on that particular area as part of their
next review of the NRSRO. Alternatively, if a report indicates no
problems, but a subsequent Commission staff examination reveals
material compliance matters, this could be brought to the attention of
the NRSRO's management for appropriate action.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------
The report is also designed to assist the Commission in its
oversight of NRSROs to the extent they reveal trends across NRSROs or
material compliance matters that could migrate from one NRSRO to other
NRSROs because, for example, they arise from rating similar products or
debt issued by a particular issuer that engages more than one NRSRO.
Finally, the Commission preliminarily believes that the proposed
report would also help facilitate the Commission's examination staff
efforts to conduct each exam of an NRSRO in an organized and efficient
manner and thus to allocate resources to maximize investor
protection.\28\ The Commission notes that the proposed report would not
be the sole factor the Commission's exam staff would use to determine
the particular focus of an exam, but would be one of many factors used
to make that determination.
---------------------------------------------------------------------------
\28\ The Commission also notes that other areas of the
Commission's rules and regulations also require an annual report by
a chief compliance officer with respect to investment companies and
investment advisers. See generally, Rule 38a-1, 17 CFR 270.38a-1,
and Rule 206(4)-7, 17 CFR 275.206(4)-7.
---------------------------------------------------------------------------
A. Proposed New Paragraph 17g-3(a)(7)(i)
As stated above, the proposed amendments to Rule 17g-3 would
require an NRSRO to provide the Commission with an unaudited annual
report describing the steps taken by the NRSRO's designated compliance
officer during the fiscal year.\29\ Specifically, the amendments would
add a new paragraph (a)(7)(i) to Rule 17g-3, which would require an
NRSRO to provide the Commission with a report describing the steps
taken by the NRSRO's designated compliance officer during the fiscal
year to:
---------------------------------------------------------------------------
\29\ See 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------
Administer the policies and procedures that are required
to be established pursuant to paragraphs (g) and (h) of Section 15E of
the Exchange Act (15 U.S.C. 78o-7(g) and (h)); \30\ and
---------------------------------------------------------------------------
\30\ See proposed Rule 17g-3(a)(7)(i)(A).
---------------------------------------------------------------------------
Ensure compliance with the securities laws and rules and
regulations thereunder, including those promulgated by the Commission
pursuant to Section 15E of the Exchange Act.\31\
---------------------------------------------------------------------------
\31\ See proposed Rule 17g-3(a)(7)(i)(B).
---------------------------------------------------------------------------
These are the areas of responsibility for the designated compliance
officer prescribed in Section 15E(j) of the Exchange Act.\32\ The
report would require a description of the steps taken by the compliance
officer during the most recently ended fiscal year to fulfill these
responsibilities. As noted above, the purpose of the report is to
impose a yearly discipline under which the compliance officer must
describe the steps taken to fulfill the officer's statutory
responsibilities. The Commission's goal in proposing this amendment is
to further enhance the compliance function within the NRSRO by
prescribing a process that promotes the active engagement of the
compliance officer in reviewing the NRSRO's compliance with internal
policies and procedures and with the securities laws and rules and
regulations.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------
The first area of responsibility of the compliance officer under
Section 15E(j) of the Exchange Act--to administer the policies and
procedures that are required pursuant to Sections 15E(g) and (h) of the
Exchange Act--is identified in proposed new paragraph (a)(7)(i)(A) of
Rule 17g-3. Sections 15E(g) and (h) of the Exchange Act require an
NRSRO to establish, maintain, and enforce written policies and
procedures reasonably designed, taking into consideration the nature of
the business of the NRSRO, to prevent the misuse of material nonpublic
information and to address and manage any conflicts of interest,
respectively.\33\ The Commission preliminarily believes that requiring
the designated compliance officer to describe the steps taken during
the fiscal year in this area of responsibility could, to the extent it
encourages the compliance officer to undertake more rigorous compliance
reviews, uncover compliance weaknesses with respect to the treatment of
material nonpublic information and the management of conflicts of
interest by the NRSRO. This would afford the NRSRO the opportunity to
consider whether corrective action is necessary to remediate such
weaknesses.
---------------------------------------------------------------------------
\33\ Id.
---------------------------------------------------------------------------
The second area of responsibility of the compliance officer under
Section 15E(j) of the Exchange Act--to ensure compliance with the
securities laws and rules and regulations thereunder, including those
promulgated by the Commission pursuant to Section 15E of the Exchange
Act--is identified in proposed new paragraph (a)(7)(i)(B) of Rule 17g-
3. The Commission preliminarily believes that requiring the designated
compliance officer to describe the steps taken during the fiscal year
to meet this responsibility could, to the extent it encourages the
compliance officer to undertake more rigorous compliance reviews,
assist the NRSRO in identifying areas where its activities may be in
contravention of securities laws and regulations and, therefore, allow
it to take appropriate action. The goal of the proposed compliance
report is to enhance the compliance function and potentially mitigate
compliance failures when they occur. The Commission preliminarily
[[Page 63870]]
believes that the proposed report the designated compliance officer
would be required to furnish may serve as an incentive to further
strengthen the NRSRO's existing compliance program.
The Commission notes that the size and scope of an NRSRO's existing
compliance program would vary depending on the size and complexity of
the NRSRO. Larger NRSROs with comprehensive compliance programs may
already periodically review portions of their compliance programs. In
contrast, smaller NRSROs may have less extensive compliance programs
because they have simpler organizational structures, fewer employees
and fewer sources of revenue than larger NRSROs, which may be part of a
complex global organization with thousands of employees. Therefore,
while the Commission believes that the proposed report would serve as
incentive to further strengthen each NRSRO's existing compliance
program, the extent of the effect of the proposed report on improving
an NRSRO's existing compliance program may vary from one NRSRO to
another.
B. Proposed New Paragraph 17g-3(a)(7)(ii)
The proposed amendment to Rule 17g-3 also would set forth specific
items to be included in the proposed new report under Rule 17g-3(a)(7).
In requiring the inclusion of certain information, the Commission does
not intend to dictate how a designated compliance officer should
fulfill the officer's responsibilities as set forth in the Rating
Agency Act. The Commission expects the designated compliance officer to
design and execute a compliance program taking into account: The
business of the NRSRO; the procedures and methodologies used by the
NRSRO to determine credit ratings; the NRSRO's size; the NRSRO's (and
its affiliates') conflicts of interest; and the complexity of the
NRSRO's operations. The Commission believes that the information that
would be required in the report is the type of information a compliance
program would generate regardless of the specific design of a
particular program.
More specifically, the amendments to Rule 17g-3 would include new
paragraph (a)(7)(ii), which would require that the report include:
A description of any compliance reviews of the activities
of the NRSRO;
The number of material compliance matters identified
during each review of the activities of the NRSRO and a brief
description of each such matter;
A description of any remediation measures implemented to
address material compliance matters identified during the reviews of
the activities of the NRSRO; and
A description of the persons within the NRSRO who were
advised of the results of the reviews.
The first item the Commission is proposing to require in the report
is a description of any compliance reviews of the activities of the
NRSRO.\34\ One of the functions of a typical compliance department is
to proactively review business activities to identify potential
regulatory, compliance, and reputational risks and to design ways to
minimize such risks.\35\ The Commission intends that the designated
compliance officer would describe all such reviews conducted during the
most recently ended fiscal year. Therefore, this description would
provide the Commission with an understanding of the scope of the
designated compliance officer's reviews of the NRSRO's activities and
possibly highlight any areas that were not reviewed.
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\34\ See proposed Rule 17g-3(a)(7)(ii)(A).
\35\ See e.g., White Paper on the Role of Compliance, Securities
Industry Association, Compliance and Legal Division (October 2005);
available at https://www.sifmacl.org/attachments/articles/8/Role%20of%20Compliance.pdf.
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The second item the Commission is proposing be included in the
report is the number of material compliance matters identified during
each review of the activities of the NRSRO and a brief description of
each such matter. The Commission preliminarily intends a ``material
compliance matter'' to mean a determination by the NRSRO or a person
within the NRSRO that there has been a violation of the securities laws
\36\ or the rules thereunder or a failure to adhere to the policies,
procedures, or methodologies established, maintained and enforced by
the NRSRO to, for example, determine credit ratings, prevent the misuse
of material nonpublic information, manage conflicts of interest, and
comply with the Commission's NRSRO rules.\37\ A material compliance
matter also would include a determination that there was a weakness in
the design or implementation of the policies and procedures of the
NRSRO.\38\ The proposed requirement to report a material compliance
matter would be designed to alert the Commission to issues identified
by the designated compliance officer that may raise questions about the
integrity of the NRSRO's activities and operations. It also could
assist the Commission's oversight of NRSROs to the extent a reported
material compliance matter is one that could arise in other NRSROs
because, for example, it relates to a new type of debt instrument that
is being rated by more than one NRSRO or involves potentially
inappropriate interactions with an issuer that hired several NRSROs to
rate its securities. Finally, the Commission preliminarily believes
that requiring the proposed report to include the number of material
compliance matters identified would provide Commission examiners with
an additional tool to assist them in identifying possible trends and
issues with respect to material compliance matters at an NRSRO after
the first year of reporting. For example, numerous material compliance
violations over a period of years could be indicative of possible lax
compliance at an NRSRO.
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\36\ The term ``securities laws'' is defined in Section 3(a)(47)
of the Exchange Act.
\37\ See e.g., 17 CFR 270.38a-1(e)(2). Rule 38a-1 prescribes
compliance procedures and practices for investment companies
registered with the Commission under the Investment Company Act of
1940. Paragraph (a)(4) of Rule 38a-1 requires the investment company
to designate an individual responsible for administering the fund's
policies and procedures to, among other things, prevent violation of
the Federal Securities Laws by the fund (the fund's ``chief
compliance officer''). Paragraph (a)(4)(iii) of Rule 38a-1 requires
the fund's chief compliance officer to provide a written report to
the fund's board, at least annually, that addresses, among other
things, each ``Material Compliance Matter'' that occurred since the
last report. Paragraph (e)(2) of Rule 38a-1 defines a ``Material
Compliance Matter'' to be, among other things, a violation of the
Federal Securities Law by the fund or its employees, a violation of
the policies and procedures of the fund, or a weakness in the
implementation or design of the policies and procedures of the fund.
\38\ Id.
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The third item the Commission is proposing be included in the
report is a description of any remediation measures implemented to
address material compliance matters identified during the reviews of
the activities of the NRSRO.\39\ The Commission preliminarily intends
``remediation measures'' to include changes made by the NRSRO in
response to the identification of a material compliance matter that are
designed to prevent the re-occurrence of a similar material compliance
matter. The reporting of these measures would assist the Commission in
evaluating the risk of re-occurrences. It also could shed a light on
potential ``best practices'' for mitigating the risk of future material
compliance matters. Further, it is designed to reinforce the discipline
of an NRSRO to review for potential material compliance matters and
take steps to address them when they occur.
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\39\ See proposed Rule 17g-3(a)(7)(ii)(C).
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The fourth item the Commission is proposing to include in the
report is a description of the persons within the NRSRO who were
advised of the results
[[Page 63871]]
of the reviews. The Commission intends that the description of the
persons who were advised of the results of the reviews at the NRSRO
would include only key personnel, i.e., those who have the authority to
act on the results of the reviews or direct others to act. The
Commission does not intend that the persons advised of the results of
the reviews would be so broad in scope as to include persons such as
administrative employees, for example, who may have typed a report
related to a material compliance matter.
The information with respect to those persons who were advised of
the results of reviews is designed to provide the Commission with an
understanding of how the NRSRO responds to material compliance matters
and the role and structure of the compliance program within the NRSRO.
For example, it would indicate whether the compliance officer reported
the matters to the NRSRO's board or senior management or only to the
business unit that underwent the compliance review. This is designed to
promote the appropriate escalation of compliance issues to the
management of the NRSRO. The Commission also believes that this
proposed information would be a useful tool for examiners to focus
examination resources on practices related to material compliance
matters reported and assist in making risk-based decisions on whether
to initiate an examination of a particular NRSRO. The Commission notes
that this information would only be one of many factors the
Commission's exam staff may use to determine the particular focus of an
exam.
C. Proposed Amendment to Paragraph 17g-3(b)
The Commission also is proposing to amend paragraph (b) of Rule
17g-3 to create two subparagraphs, Rule 17g-3(b)(1) and (b)(2).\40\
Subparagraph (b)(1) would carry forward, unchanged, the requirement in
current Rule 17g-3(b). The current text of Rule 17g-3(b) requires that
an NRSRO must attach to each financial report furnished pursuant to
paragraphs (a)(1) through (a)(6) of Rule 17g-3 a signed statement by a
duly authorized person associated with the NRSRO stating that the
person has responsibility for the financial report and, to the best
knowledge of the person, the financial report fairly presents, in all
material respects, the financial conditions, results of operations,
cash flows, revenues, analyst compensation, and credit rating actions
of the NRSRO for the period presented. This requirement does not
specify who within the NRSRO should have responsibility for the reports
and for providing the required signed statement.
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\40\ See proposed Rule 17g-3(b)(1) and (2).
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Proposed subparagraph (b)(2) would establish a similar requirement
for a signed statement to accompany the report under proposed new
paragraph (a)(7) to Rule 17g-3, but would specify that the designated
compliance officer is required to provide that statement. Specifically,
proposed paragraph (b)(2) of Rule 17g-3 would require that an NRSRO
attach to the report furnished pursuant to proposed paragraph (a)(7) of
Rule 17g-3 a signed statement by the designated compliance officer of
the NRSRO stating that the officer has responsibility for the report
and, to the best knowledge of the designated compliance officer, the
report fairly presents, in all material respects, the information in
paragraph (a)(7)(ii) of Rule 17g-3 for the period presented. The
Commission preliminarily believes that the designated compliance
officer should have responsibility for providing the statement since
the information to be submitted in the report is directly within that
individual's statutorily mandated responsibilities under Section 15E(j)
of the Exchange Act; namely, to administer the NRSRO's policies and
procedures and to ensure compliance with the securities laws and
regulations.
D. Summary of Amendments to Rule 17g-3 and Request for Comment
The Commission is proposing these amendments to Rule 17g-3 under
its authority to require an NRSRO to ``make and disseminate such
reports as the Commission, by rule, may prescribe as necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of [the Exchange Act].'' \41\
The Commission preliminarily believes these proposed amendments are
necessary or appropriate in the public interest, for the protection of
investors and in furtherance of the Exchange Act because they are
designed to further improve the quality of credit ratings and help
protect the integrity of the credit rating process by requiring that an
NRSRO describe the steps taken during the fiscal year by the designated
compliance officer to administer required policies and procedures and
to ensure compliance with the securities laws and regulations.
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\41\ See Section 17(a)(1) of the Exchange Act (15 U.S.C.
78q(a)(1)).
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The Commission preliminarily believes that requiring the designated
compliance officer to provide such a report would encourage a more
rigorous compliance program and, thereby, promote the identification of
compliance failures and weaknesses in the NRSRO's policies and
procedures. In addition, the reporting requirements may encourage an
NRSRO to promptly resolve compliance issues identified, and thereby
improve the quality and integrity of the NRSRO's credit ratings and
credit rating processes.\42\
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\42\ The Commission notes that this information would only be
one of many factors the Commission's exam staff may use to determine
the particular focus of an exam.
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The proposed rule amendments also would further enhance the
Commission's oversight of NRSROs by providing the Commission staff an
additional resource with which to evaluate the performance of the
designated compliance officers in carrying out their statutory
responsibilities prescribed in Section 15E(j) of the Exchange Act.
Finally, the proposed report would help identify areas within the NRSRO
that Commission staff examiners may want to include within the scope of
their examinations and that could be indicative of potentially broader
issues across NRSROs.
The Commission generally requests comment on all aspects of these
proposed amendments. In addition, the Commission requests comment on
the following questions related to the proposal:
Should the proposal require that the report be furnished
to the NRSRO's board or a body performing similar functions of a board
or to the NRSRO's senior management in addition to requiring that it be
furnished to the Commission or as an alternative to it being furnished
to the Commission? Could the requirement to furnish the report to the
Commission alter the way the compliance officer conducts compliance
reviews or reports the results of those reviews to others within the
NRSRO? Would the requirement that it be furnished to the Commission
potentially impact the designated compliance officer's incentive to
perform a comprehensive and in depth review of the NRSRO's activities,
policies, and procedures or to identify material compliance matters?
Would requiring the report instead be sent to the board, to a similar
body, or to senior management result in a more or less comprehensive
review?
Should the Commission require other items to be included
in the report in addition to those prescribed in proposed paragraph
(a)(7)(ii) of Rule 17g-3? Commenters believing this
[[Page 63872]]
would be beneficial should specifically identify the additional items
and describe how the additional information would be useful to the
Commission or to the NRSRO.
Should the Commission exclude any of the items currently
identified in proposed paragraph (a)(7)(ii) of Rule 17g-3? Commenters
believing this would be beneficial should specifically identify the
items to be deleted and describe why they would not be useful
information for the Commission or the NRSRO?
Should the Commission define the term ``material
compliance matter'' in Rule 17g-3? If so, what should the definition
be? Alternatively, is the interpretation of the term ``material
compliance matter'' set forth in the release sufficient and
appropriate? Should there be limitations on what constitutes a material
compliance matter? If so, what should these limitations be? For
example, are there securities laws violations that do not rise to the
level of concern that they would need to be reported? If so, should
such violations be reported if the number of occurrences passes a
certain threshold? How should the Commission evaluate what that
threshold would be (e.g. taking into account the number of occurrences
and the severity of the violation)?
As noted above, the Commission has proposed an
interpretation of the category of person that would trigger the
reporting requirement if such person were apprised of the finding of
the compliance officer. Is the proposed interpretation sufficiently
clear to indicate when the reporting requirement applies? For example,
should the rule specify that it is a decision maker, someone with
authority to implement remedial measures, or some other defined
category of person? How should that category be defined?
Should the Commission permit or require someone other than
the designated compliance officer certify the report? If so, which
person(s) should it be?
To what extent, if any, should the designated compliance
officer be able to rely on subcertifications? What purpose would the
subcertifications serve? In some cases, would the designated compliance
office not have all the relevant information in order to sign the
statement required by proposed Rule 17g-3(b)(2) without
subcertifications? If this is true, would this in some way negate any
of the objectives of the proposed amendments to Rule 17g-3?
What effect would the proposed requirement to furnish the
report to the Commission have on the designated compliance officer's
duties? How could any adverse effects be addressed?
Should the Commission as an alternative to the proposed
report from the compliance officer consider proposing a requirement
that an independent third party perform a review of the NRSRO's
adherence to its policies and procedures and its compliance with the
securities laws. Commenters who believe such a requirement would be
appropriate are asked to provide data with respect to the costs and
benefits associated with such a review.
III. Amendments to the Instructions to Form NRSRO
The Commission is proposing to amend the instructions for Exhibit 6
to Form NRSRO to require a credit rating agency in an application for
registration as an NRSRO or an NRSRO providing its annual update to
disclose: (1) The percentage of the net revenue of the applicant/NRSRO
attributable to the 20 largest users of credit rating services of the
applicant/NRSRO; and (2) the percentage of the net revenue of the
applicant/NRSRO attributable to other services and products of the
applicant/NRSRO. In conjunction with this proposed amendment to the
instructions to Exhibit 6, the Commission is proposing to move the
definitions of certain terms currently included in the instructions to
Exhibit 10 to the ``Explanation of Terms'' section of the Form NRSRO
Instructions in order to make those definitions applicable to Form
NRSRO as a whole.
A credit rating agency that seeks to register as an NRSRO must
furnish an application for registration to the Commission. Section
15E(a)(1)(A) of the Exchange Act provides that the credit rating agency
must furnish the application in a form prescribed by Commission
rule.\43\ After registration, the credit rating agency--now an NRSRO--
must publicly disclose most of the information in its application.\44\
Section 15E(b)(1) of the Exchange Act requires the NRSRO to promptly
amend the application if, after registration, any information or
document provided as part of the application becomes materially
inaccurate.\45\ Section 15E(b)(2) of the Exchange Act provides that the
information on credit ratings performance statistics required to be
disclosed in the application pursuant to Section 15E(a)(1)(B) of the
Exchange Act must be updated annually.\46\ In addition, Section
15E(b)(2) of the Exchange Act requires an NRSRO to furnish the
Commission with an amendment to its registration not later than 90 days
after the end of each calendar year (the ``annual certification'').\47\
This section further provides that the NRSRO must (1) certify that the
information and documents provided in the application for registration
continue to be accurate and (2) list any material change to the
information and documents during the previous calendar year.\48\
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\43\ 15 U.S.C. 78o-7(a)(1)(A).
\44\ 17 CFR 240.17g-1(i).
\45\ 15 U.S.C. 78o-7(b)(1).
\46\ Id.
\47\ 15 U.S.C. 78o-7(b)(2).
\48\ Id.
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With respect to the contents of the application, Section
15E(a)(1)(B) of the Exchange Act prescribes certain minimum information
the applicant must provide in the application. Furthermore, Section
15E(a)(1)(B)(x) of the Exchange Act provides that the Commission can
require any other information and documents as the Commission, by rule,
may prescribe as necessary or appropriate in the public interest or for
the protection of investors.\49\ In the Commission's initial rulemaking
implementing the Rating Agency Act--which established the registration
and oversight program for NRSROs--the Commission adopted Rule 17g-1 and
Form NRSRO and its accompanying instructions.\50\ In February 2009, the
Commission amended Form NRSRO to require additional disclosures.\51\
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\49\ 15 U.S.C. 78o-7(a)(1)(B).
\50\ See June 2007 Adopting Release, 72 FR at 33566-33582.
\51\ See February 2009 Adopting Release, 74 FR at 6457-6460.
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Rule 17g-1 prescribes, among other things, how a credit rating
agency must apply to be registered with the Commission as an NRSRO,
keep its information up-to-date after registration, and comply with the
statutory requirement to furnish the Commission with an annual
certification.\52\ In particular, all of these actions must be
accomplished by furnishing the Commission with a Form NRSRO. As
described below, Form NRSRO requires information about the credit
rating agency applying for registration and, after registration, about
the NRSRO, including the information required under 15E(a)(1)(B) of the
Exchange Act and additional information prescribed by the
Commission.\53\
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\52\ See 17 CFR 240.17g-1.
\53\ 15 U.S.C. 78o-7(a)(1)(B).
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Form NRSRO contains 8 line items and 13 exhibits. The line items
require information about the applicant/NRSRO such as its address;
corporate form; credit rating affiliates that would be, or
[[Page 63873]]
are, a part of its registration; the classes of credit ratings for
which it is seeking to be, or is, registered as an NRSRO; the number of
credit ratings it has issued in each class and the date it began
issuing credit ratings in each class; and whether it or a person
associated with it has committed or omitted any act, been convicted of
any crime, or is subject to any order or findings identified in Section
15(d) of the Exchange Act.\54\
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\54\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------
The 13 exhibits to Form NRSRO elicit the information required under
Sections 15E(a)(1)(B)(i) through (ix) of the Exchange Act and
additional information prescribed by the Commission.\55\ Exhibits 1
through 9 require certain information about the applicant/NRSRO,
including credit rating performance statistics, its methodologies and
procedures used to determine credit ratings, its policies and
procedures designed to prevent the misuse of material non-public
information, its organizational structure, its code of ethics, the
conflicts of interest inherent in its business operations, its policies
and procedures for managing those conflicts of interest, summary data
about the qualifications of its credit analysts, and the identity of
its chief compliance officer. An NRSRO must make Exhibits 1 through 9
publicly available after it is registered.
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\55\ 15 U.S.C. 78o-7(a)(1)(B)(i)-(x).
---------------------------------------------------------------------------
Exhibits 10 through 13 require financial information about the
applicant credit rating agency that the Commission evaluates in
deciding whether it can make the finding required under Section
15E(a)(2)(C)(ii) of the Exchange Act \56\ that the applicant fails to
maintain adequate financial and managerial resources to consistently
produce credit ratings with integrity and to materially comply with the
procedures and methodologies disclosed pursuant to Section 15E(a)(1)(B)
of the Exchange Act \57\ and established pursuant Sections 15E(g), (h),
(i) and (j) of the Exchange Act.\58\ These Exhibits are not required to
be publicly disclosed by the NRSRO after the applicant is granted
registration as an NRSRO. If registration is granted, the NRSRO is
required to furnish financial information to the Commission in an
annual report required by Rule 17g-3 that is similar to the information
required in Exhibits 10 through 13.\59\ The rules do not require that
the annual reports furnished to the Commission pursuant to Rule 17g-3
be made publicly available by the NRSRO.\60\
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\56\ 15 U.S.C. 78o-7(a)(2)(C)(ii).
\57\ 15 U.S.C. 78o-7(a)(1)(B).
\58\ 15 U.S.C. 78o-7(g), (h), (i) and (j).
\59\ See 17 CFR 240.17g-3 and 15 U.S.C. 78o-7(k).
\60\ See Rule 17g-3 and 15 U.S.C. 78o-7(k); see also June 2007
Adopting Release, 72 FR at 33590.
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The Commission is proposing amending the instructions for Exhibit 6
to augment the information about conflicts of interest currently
required to be disclosed in Form NRSRO. The Commission prescribed the
current requirements for Exhibit 6 to implement Section
15E(a)(1)(B)(vi) of the Exchange Act, which requires that an
application for registration contain information regarding any conflict
of interest relating to the issuance of credit ratings by the
applicant/NRSRO.\61\ The Exchange Act does not define or identify the
types of conflicts of interest that should be disclosed pursuant to
Section 15E(a)(1)(B)(vi) of the Exchange Act.\62\ The Commission, in
adopting Form NRSRO and its accompanying instructions, required that an
applicant/NRSRO provide in Exhibit 6 a list of the types of conflicts
of interest relating to its issuance of credit ratings.\63\ To assist
the applicant/NRSRO and promote consistent disclosures, the
instructions to the Exhibit contain a list of potential conflicts of
interest that may apply to an applicant/NRSRO based on its business
model and activities.\64\ The instructions further provide that the
applicant/NRSRO can use the descriptions provided in the instructions
to identify an applicable conflict of interest.\65\ An applicant/NRSRO
also can choose to provide its own description of the conflict or
provide further explanations to one of the descriptions in the
instructions.\66\ Finally, Exhibit 6 to Form NRSRO is one of the public
exhibits that the NRSRO is required to make readily accessible to the
public and to keep current through furnishing updated information on
Form NRSRO.\67\
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\61\ See 15 U.S.C. 78o-7(a)(1)(B)(vi); June 2007 Adopting
Release, 72 FR at 33577.
\62\ Id.
\63\ See Form NRSRO Instructions for Exhibit 6.
\64\ Id.
\65\ Id.
\66\ Id.
\67\ See Form NRSRO General Instructions.
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One purpose of the disclosure in Exhibit 6 is to alert users of
credit ratings to the potential conflicts of interest inherent in the
NRSRO's business model.\68\ The information also is designed to allow
users of credit ratings to assess an NRSRO's procedures for managing
conflicts by comparing the types of conflicts disclosed in Exhibit 6
with its procedures for managing conflicts of interest disclosed in
Exhibit 7.\69\
The disclosure also is designed to assist the Commission in
evaluating whether an NRSRO has sufficient financial and managerial
resources to comply with the procedures for managing conflicts of
interest required under Section 15E(h) of the Exchange Act.\70\ Being
informed of the conflicts of interest identified by the applicant/NRSRO
in Exhibit 6 to Form NRSRO assists the Commission in evaluating whether
the disclosed financial and managerial resources of the NRSRO appear to
be sufficient in light of the magnitude and extent of any
conflicts.\71\
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\68\ See June 2007 Adopting Release, 72 FR at 33577.
\69\ Id.
\70\ 15 U.S.C. 78o-7(h).
\71\ See Section 15E(a)(2)(C) of the Exchange Act (15 U.S.C.
780-7(a)(2)(C)); June 2007 Adopting Release, 72 FR at 33577.
------------------------------------
