Order Extending Temporary Conditional Exemption for Nationally Recognized Statistical Rating Organizations From Requirements of Rule 17g-5 Under the Securities Exchange Act of 1934 and Request for Comment, 70984-70986 [2013-28464]

Download as PDF emcdonald on DSK67QTVN1PROD with NOTICES 70984 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices purchase a security in any Affiliated Underwriting. 7. The Board of a Fund, including a majority of the non-interested Board members, will adopt procedures reasonably designed to monitor any purchases of securities by the Fund in an Affiliated Underwriting, once an investment by a Fund of Funds in the securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, including any purchases made directly from an Underwriting Affiliate. The Board will review these purchases periodically, but no less frequently than annually, to determine whether the purchases were influenced by the investment by the Fund of Funds in the Fund. The Board will consider, among other things: (i) whether the purchases were consistent with the investment objectives and policies of the Fund; (ii) how the performance of securities purchased in an Affiliated Underwriting compares to the performance of comparable securities purchased during a comparable period of time in underwritings other than Affiliated Underwritings or to a benchmark such as a comparable market index; and (iii) whether the amount of securities purchased by the Fund in Affiliated Underwritings and the amount purchased directly from an Underwriting Affiliate have changed significantly from prior years. The Board will take any appropriate actions based on its review, including, if appropriate, the institution of procedures designed to ensure that purchases of securities in Affiliated Underwritings are in the best interest of shareholders of the Fund. 8. Each Fund will maintain and preserve permanently in an easily accessible place a written copy of the procedures described in the preceding condition, and any modifications to such procedures, and will maintain and preserve for a period of not less than six years from the end of the fiscal year in which any purchase in an Affiliated Underwriting occurred, the first two years in an easily accessible place, a written record of each purchase of securities in Affiliated Underwritings once an investment by a Fund of Funds in the securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, setting forth from whom the securities were acquired, the identity of the underwriting syndicate’s members, the terms of the purchase, and the information or materials upon which the Board’s determinations were made. 9. Before investing in a Fund in excess of the limit in section 12(d)(1)(A), a Fund of Funds and the applicable Trust will execute a FOF VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 Participation Agreement stating, without limitation, that their respective boards of directors or trustees and their investment advisers, or trustee and Sponsor, as applicable, understand the terms and conditions of the order, and agree to fulfill their responsibilities under the order. At the time of its investment in Shares of a Fund in excess of the limit in section 12(d)(1)(A)(i), a Fund of Funds will notify the Fund of the investment. At such time, the Fund of Funds will also transmit to the Fund a list of the names of each Fund of Funds Affiliate and Underwriting Affiliate. The Fund of Funds will notify the Fund of any changes to the list of the names as soon as reasonably practicable after a change occurs. The Fund and the Fund of Funds will maintain and preserve a copy of the order, the FOF Participation Agreement, and the list with any updated information for the duration of the investment and for a period of not less than six years thereafter, the first two years in an easily accessible place. 10. Before approving any advisory contract under section 15 of the Act, the board of directors or trustees of each Investing Management Company including a majority of the disinterested directors or trustees, will find that the advisory fees charged under such contract are based on services provided that will be in addition to, rather than duplicative of, the services provided under the advisory contract(s) of any Fund in which the Investing Management Company may invest. These findings and their basis will be fully recorded in the minute books of the appropriate Investing Management Company. 11. Any sales charges and/or service fees charged with respect to shares of a Fund of Funds will not exceed the limits applicable to a fund of funds as set forth in NASD Conduct Rule 2830. 12. No Fund will acquire securities of an investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in section 12(d)(1)(A) of the Act, except to the extent the Fund acquires securities of another investment company pursuant to exemptive relief from the Commission permitting the Fund to acquire securities of one or more investment companies for shortterm cash management purposes. For the Commission, by the Division of Investment Management, under delegated authority. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–28424 Filed 11–26–13; 8:45 am] BILLING CODE 8011–01–P PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70919; File No. S7–04–09] Order Extending Temporary Conditional Exemption for Nationally Recognized Statistical Rating Organizations From Requirements of Rule 17g–5 Under the Securities Exchange Act of 1934 and Request for Comment November 22, 2013. I. Introduction On May 19, 2010, the Securities and Exchange Commission (‘‘Commission’’) conditionally exempted, with respect to certain credit ratings and until December 2, 2010, nationally recognized statistical rating organizations (‘‘NRSROs’’) from certain requirements in Rule 17g–5(a)(3) 1 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’), which had a compliance date of June 2, 2010.2 Pursuant to the Order, an NRSRO is not required to comply with Rule 17g– 5(a)(3) until December 2, 2010 with respect to credit ratings where: (1) the issuer of the structured finance product is a non-U.S. person; and (2) the NRSRO has a reasonable basis to conclude that the structured finance product will be offered and sold upon issuance, and that any arranger linked to the structured finance product will effect transactions of the structured finance product after issuance, only in transactions that occur outside the U.S. (‘‘covered transactions’’).3 On November 23, 2010, the Commission extended the conditional temporary exemption until December 2, 2011.4 On November 16, 2011, the Commission extended the conditional temporary exemption until December 2, 2012.5 On November 26, 2012, the Commission extended the conditional temporary exemption until December 2, 2013.6 The Commission is extending the temporary conditional exemption exempting NRSROs from complying with Rule 17g–5(a)(3) with respect to rating covered transactions until December 2, 2014. 1 See 17 CFR 240.17g–5(a)(3). Exchange Act Release No. 62120 (May 19, 2010), 75 FR 28825 (May 24, 2010) (‘‘Order’’). 3 See id. at 28827–28 (setting forth conditions of relief). 4 See Exchange Act Release No. 63363 (Nov. 23, 2010), 75 FR 73137 (Nov. 29, 2010) (‘‘First Extension Order’’). 5 See Exchange Act Release No. 65765 (Nov. 16, 2011), 76 FR 72227 (Nov. 22, 2011) (‘‘Second Extension Order’’). 6 See Exchange Act Release No. 34–68286 (Nov. 26, 2012), 77 FR 71201 (Nov. 29, 2012) (‘‘Third Extension Order’’). 2 See E:\FR\FM\27NON1.SGM 27NON1 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices II. Background Rule 17g–5 identifies, in paragraphs (b) and (c) of the rule, a series of conflicts of interest arising from the business of determining credit ratings.7 Paragraph (a) of Rule 17g–5 8 prohibits an NRSRO from issuing or maintaining a credit rating if it is subject to the conflicts of interest identified in paragraph (b) of Rule 17g–5 unless the NRSRO has taken the steps prescribed in paragraph (a)(1) (i.e., disclosed the type of conflict of interest in Exhibit 6 to Form NRSRO in accordance with Section 15E(a)(1)(B)(vi) of the Exchange Act 9 and Rule 17g–1) 10 and paragraph (a)(2) (i.e., established and is maintaining and enforcing written policies and procedures to address and manage conflicts of interest in accordance with Section 15E(h) of the Exchange Act).11 Paragraph (c) of Rule 17g–5 specifically prohibits seven types of conflicts of interest. Consequently, an NRSRO is prohibited from issuing or maintaining a credit rating when it is subject to these conflicts regardless of whether it had disclosed them and established procedures reasonably designed to address them. In December 2009, the Commission adopted subparagraph (a)(3) to Rule 17g–5. This provision requires an NRSRO that is hired by an arranger to determine an initial credit rating for a structured finance product to take certain steps designed to allow an NRSRO that is not hired by the arranger to nonetheless determine an initial credit rating—and subsequently monitor that credit rating—for the structured finance product.12 In particular, under Rule 17g–5(a)(3), an NRSRO is prohibited from issuing or maintaining a credit rating when it is subject to the conflict of interest identified in paragraph (b)(9) of Rule 17g–5 (i.e., being hired by an arranger to determine a credit rating for a structured finance product) 13 unless it has taken the steps prescribed in paragraphs (a)(1) and (2) of Rule 17g–5 (discussed above) and the steps prescribed in new paragraph (a)(3) 7 17 CFR 240.17g–5(b) and (c). CFR 240.17g–5(a). 9 15 U.S.C. 78o–7(a)(1)(B)(vi). 10 17 CFR 240.17g–1. 11 15 U.S.C. 78o–7(h). 12 See 17 CFR 240.17g–5(a)(3); see also Exchange Act Release No. 61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009) (‘‘Adopting Release’’) at 63844–45. 13 Paragraph (b)(9) of Rule 17g–5 identifies the following conflict of interest: issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction that was paid for by the issuer, sponsor, or underwriter of the security or money market instrument. 17 CFR 240.17g–5(b)(9). emcdonald on DSK67QTVN1PROD with NOTICES 8 17 VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 of Rule 17g–5.14 Rule 17g–5(a)(3), among other things, requires that the NRSRO must: • Maintain on a password-protected Internet Web site a list of each structured finance product for which it currently is in the process of determining an initial credit rating in chronological order and identifying the type of structured finance product, the name of the issuer, the date the rating process was initiated, and the Internet Web site address where the arranger represents the information provided to the hired NRSRO can be accessed by other NRSROs; • Provide free and unlimited access to such password-protected Internet Web site during the applicable calendar year to any NRSRO that provides it with a copy of the certification described in paragraph (e) of Rule 17g–5 that covers that calendar year; 15 and • Obtain from the arranger a written representation that can reasonably be relied upon that the arranger will, among other things, disclose on a password-protected Internet Web site the information it provides to the hired NRSRO to determine the initial credit rating (and monitor that credit rating) and provide access to the Web site to an NRSRO that provides it with a copy of the certification described in paragraph (e) of Rule 17g–5.16 14 17 CFR 240.17g–5(a)(3). (e) of Rule 17g–5 requires that an NRSRO seeking to access the hired NRSRO’s Internet Web site during the applicable calendar year must furnish the Commission with the following certification: The undersigned hereby certifies that it will access the Internet Web sites described in 17 CFR 240.17g–5(a)(3) solely for the purpose of determining or monitoring credit ratings. Further, the undersigned certifies that it will keep the information it accesses pursuant to 17 CFR 240.17g–5(a)(3) confidential and treat it as material nonpublic information subject to its written policies and procedures established, maintained, and enforced pursuant to section 15E(g)(1) of the Act (15 U.S.C. 78o–7(g)(1)) and 17 CFR 240.17g–4. Further, the undersigned certifies that it will determine and maintain credit ratings for at least 10% of the issued securities and money market instruments for which it accesses information pursuant to 17 CFR 240.17g–5(a)(3)(iii), if it accesses such information for 10 or more issued securities or money market instruments in the calendar year covered by the certification. Further, the undersigned certifies one of the following as applicable: in the most recent calendar year during which it accessed information pursuant to 17 CFR 240.17g–5(a)(3), the undersigned accessed information for [Insert Number] issued securities and money market instruments through Internet Web sites described in 17 CFR 240.17g–5(a)(3) and determined and maintained credit ratings for [Insert Number] of such securities and money market instruments; or the undersigned previously has not accessed information pursuant to 17 CFR 240.17g–5(a)(3) 10 or more times during the most recently ended calendar year. 16 In particular, under paragraph (a)(3)(iii) of Rule 17g–5, the arranger must represent to the hired NRSRO that it will: maintain the information 15 Paragraph PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 70985 The Commission stated in the Adopting Release that subparagraph Rule 17g–5(a)(3) is designed to address conflicts of interest and improve the quality of credit ratings for structured finance products by making it possible for more NRSROs to rate structured finance products.17 For example, the Commission noted that when an NRSRO is hired to rate a structured finance product, some of the information it relies on to determine the rating is generally not made public.18 As a result, structured finance products frequently are issued with ratings from only the one or two NRSROs that have been hired by the arranger, with the attendant conflict of interest that creates.19 The Commission stated that subparagraph Rule 17g–5(a)(3) was designed to increase the number of credit ratings extant for a given structured finance product and, in particular, to promote the issuance of credit ratings by NRSROs that are not hired by arrangers.20 The Commission’s goal in adopting the rule was to provide users of credit ratings with more views on the creditworthiness of structured finance described in paragraphs (a)(3)(iii)(C) and (a)(3)(iii)(D) of Rule 17g–5 available at an identified password-protected Internet Web site that presents the information in a manner indicating which information currently should be relied on to determine or monitor the credit rating; provide access to such password-protected Internet Web site during the applicable calendar year to any NRSRO that provides it with a copy of the certification described in paragraph (e) of Rule 17g–5 that covers that calendar year, provided that such certification indicates that the nationally recognized statistical rating organization providing the certification either: determined and maintained credit ratings for at least 10% of the issued securities and money market instruments for which it accessed information pursuant to paragraph (a)(3)(iii) of Rule 17g–5 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 has not accessed information pursuant to paragraph (a)(3) of Rule 17g–5 10 or more times during the most recently ended calendar year; post on such password-protected Internet Web site all information the arranger provides to the NRSRO, or contracts with a third party to provide to the NRSRO, for the purpose of determining the initial credit rating for the security or money market instrument, including information about the characteristics of the assets underlying or referenced by the security or money market instrument, and the legal structure of the security or money market instrument, at the same time such information is provided to the NRSRO; and post on such password-protected Internet Web site all information the arranger provides to the NRSRO, or contracts with a third party to provide to the NRSRO, for the purpose of undertaking credit rating surveillance on the security or money market instrument, including information about the characteristics and performance of the assets underlying or referenced by the security or money market instrument at the same time such information is provided to the NRSRO. 17 Adopting Release at 63844. 18 Id. 19 Id. 20 Id. E:\FR\FM\27NON1.SGM 27NON1 70986 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices products.21 In addition, the Commission stated that Rule 17g–5(a)(3) was designed to reduce the ability of arrangers to obtain better than warranted ratings by exerting influence over NRSROs hired to determine credit ratings for structured finance products.22 Specifically, by opening up the rating process to more NRSROs, the Commission intended to 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.23 Rule 17g–5(a)(3) became effective on February 2, 2010, and the compliance date for Rule 17g–5(a)(3) was June 2, 2010. III. Extension of Conditional Temporary Extension made permanent.29 The First Extension Order again solicited public comment on issues raised in connection with the extra-territorial application of Rule 17g– 5(a)(3).30 One commenter requested that the Order be made permanent, citing many of the same reasons set forth in prior comment letters.31 The Second Extension Order again solicited public comment on issues raised in connection with the extra-territorial application of Rule 17g–5(a)(3).32 Commenters supported the exemption regarding the extra-territorial application of the Rule,33 with one of those commenters again requesting that the Order be made permanent.34 The Third Extension Order again solicited public comment on issues raised in connection with the extra-territorial application of Rule 17g– 5(a)(3). No comments were received. Given the continued concerns about potential disruptions of local securitization markets, and because the Commission’s consideration of the issues raised will benefit from additional time to engage in further dialogue with interested parties and to monitor market and regulatory developments, the Commission believes extending the conditional temporary exemption until December 2, 2014 is necessary or appropriate in the public interest, and is consistent with the protection of investors. In the Order, the Commission requested comment generally, but also on a number of specific issues.24 The Commission received six comment letters in response to this solicitation of comment.25 The commenters expressed concern that the extraterritorial application of Rule 17g–5(a)(3) could, in the commenter’s view, among other things, disrupt local securitization markets,26 inhibit the ability of local firms to raise capital,27 and conflict with IV. Request for Comment local laws.28 Several commenters also requested that the conditional The Commission believes that it temporary exemption be extended or would be useful to continue to provide interested parties opportunity to 21 Id. comment. Comments may be submitted 22 Id. by any of the following methods: 23 Id. 24 See Order at 28828. from Masamichi Kono, Vice Commissioner for International Affairs, Financial Services Agency, Japan, dated Nov. 12, 2010 (‘‘Japan FSA Letter’’); Letter from Masaru Ono, Executive Director, Securitization Forum of Japan, dated Nov. 12, 2010 (‘‘SFJ Letter’’); Letter from Rick Watson, Managing Director, Association for Financial Markets in Europe/European Securitisation Forum, dated Nov. 11, 2010 (‘‘AFME Letter’’); Letter from Jack Rando, Director, Capital Markets, Investment Industry Association of Canada, dated Sep. 22, 2010 (‘‘IIAC Letter’’); Letter from Christopher Dalton, Chief Executive Officer, Australian Securitisation Forum, dated Jun. 27, 2010 (‘‘AuSF Letter’’); Letter from Takefumi Emori, Managing Director, Japan Credit Rating Agency, Ltd. (‘‘JCR’’), dated Jun. 25, 2010 (‘‘JCR Letter’’). 26 See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter; AuSF Letter. 27 See AFME Letter; JCR Letter; AuSF Letter. 28 See Japan FSA Letter; AFME Letter; JCR Letter; AuSF Letter; IIAC Letter. With respect to local laws, we note that the European Commission in recent months has issued a relevant proposal for amendments to the European Union Regulation on Credit Ratings. See ‘‘Regulation of the European Parliament and of the Counsel on amending Regulation (EC) No 1060/2009 on credit rating agencies’’ (available at https://ec.europa.eu/internal_ market/securities/docs/agencies/100602_proposal_ en.pdf). emcdonald on DSK67QTVN1PROD with NOTICES 25 Letter VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/exorders.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 04–09 on the subject line; or • Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments. 29 See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter. 30 See Letter from Tom Deutsch, Executive Director, American Securitization Forum, and Chris Dalton, Chief Executive Officer, Australian Securitization Forum, dated Aug. 9, 2011 (‘‘ASF/ AuSF Letter 1’’); Letter from Jack Rando, Director, Capital Markets, Investment Industry Association of Canada, dated Nov. 2, 2011 (‘‘IIAC Letter 2’’). 31 See ASF/AuSF Letter 1. 32 Letter from Chris Barnard to the Commission, dated Nov. 23, 2011 (‘‘Barnard Letter’’); Letter from Tom Deutsch, Executive Director, American Securitization Forum and Chris Dalton, Chief Executive Officer, Australian Securitisation Forum, dated Aug. 28, 2012 (‘‘ASF/AuSF Letter 2’’). 33 See Barnard Letter; ASF/AuSF Letter 2. 34 See ASF/AuSF Letter 2. PO 00000 Frm 00072 Fmt 4703 Sfmt 9990 Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F St. NE., Washington, DC 20549– 1090. All submissions should refer to File Number S7–04–09. This file number should be included on the subject line if email 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/ exorders.shtml). Comments are also available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F St. 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; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. V. Conclusion For the foregoing reasons, the Commission believes it would be necessary or appropriate in the public interest and consistent with the protection of investors to extend the conditional temporary exemption exempting NRSROs from complying with Rule 17g–5(a)(3) with respect to rating covered transactions until December 2, 2014. Accordingly, It is hereby ordered, pursuant to Section 36 of the Exchange Act, that a nationally recognized statistical rating organization is exempt until December 2, 2014 from the requirements in Rule 17g–5(a)(3) (17 CFR 240.17g–5(a)(3)) for credit ratings where: (1) The issuer of the security or money market instrument is not a U.S. person (as defined under Securities Act Rule 902(k)); and (2) The nationally recognized statistical rating organization has a reasonable basis to conclude that the structured finance product will be offered and sold upon issuance, and that any arranger linked to the structured finance product will effect transactions of the structured finance product after issuance, only in transactions that occur outside the U.S. By the Commission. Elizabeth M. Murphy, Secretary. [FR Doc. 2013–28464 Filed 11–26–13; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\27NON1.SGM 27NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 229 (Wednesday, November 27, 2013)]
[Notices]
[Pages 70984-70986]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28464]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70919; File No. S7-04-09]


Order Extending Temporary Conditional Exemption for Nationally 
Recognized Statistical Rating Organizations From Requirements of Rule 
17g-5 Under the Securities Exchange Act of 1934 and Request for Comment

November 22, 2013.

I. Introduction

    On May 19, 2010, the Securities and Exchange Commission 
(``Commission'') conditionally exempted, with respect to certain credit 
ratings and until December 2, 2010, nationally recognized statistical 
rating organizations (``NRSROs'') from certain requirements in Rule 
17g-5(a)(3) \1\ under the Securities Exchange Act of 1934 (``Exchange 
Act''), which had a compliance date of June 2, 2010.\2\ Pursuant to the 
Order, an NRSRO is not required to comply with Rule 17g-5(a)(3) until 
December 2, 2010 with respect to credit ratings where: (1) the issuer 
of the structured finance product is a non-U.S. person; and (2) the 
NRSRO has a reasonable basis to conclude that the structured finance 
product will be offered and sold upon issuance, and that any arranger 
linked to the structured finance product will effect transactions of 
the structured finance product after issuance, only in transactions 
that occur outside the U.S. (``covered transactions'').\3\ On November 
23, 2010, the Commission extended the conditional temporary exemption 
until December 2, 2011.\4\ On November 16, 2011, the Commission 
extended the conditional temporary exemption until December 2, 2012.\5\ 
On November 26, 2012, the Commission extended the conditional temporary 
exemption until December 2, 2013.\6\ The Commission is extending the 
temporary conditional exemption exempting NRSROs from complying with 
Rule 17g-5(a)(3) with respect to rating covered transactions until 
December 2, 2014.
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    \1\ See 17 CFR 240.17g-5(a)(3).
    \2\ See Exchange Act Release No. 62120 (May 19, 2010), 75 FR 
28825 (May 24, 2010) (``Order'').
    \3\ See id. at 28827-28 (setting forth conditions of relief).
    \4\ See Exchange Act Release No. 63363 (Nov. 23, 2010), 75 FR 
73137 (Nov. 29, 2010) (``First Extension Order'').
    \5\ See Exchange Act Release No. 65765 (Nov. 16, 2011), 76 FR 
72227 (Nov. 22, 2011) (``Second Extension Order'').
    \6\ See Exchange Act Release No. 34-68286 (Nov. 26, 2012), 77 FR 
71201 (Nov. 29, 2012) (``Third Extension Order'').

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[[Page 70985]]

II. Background

    Rule 17g-5 identifies, in paragraphs (b) and (c) of the rule, a 
series of conflicts of interest arising from the business of 
determining credit ratings.\7\ Paragraph (a) of Rule 17g-5 \8\ 
prohibits an NRSRO from issuing or maintaining a credit rating if it is 
subject to the conflicts of interest identified in paragraph (b) of 
Rule 17g-5 unless the NRSRO has taken the steps prescribed in paragraph 
(a)(1) (i.e., disclosed the type of conflict of interest in Exhibit 6 
to Form NRSRO in accordance with Section 15E(a)(1)(B)(vi) of the 
Exchange Act \9\ and Rule 17g-1) \10\ and paragraph (a)(2) (i.e., 
established and is maintaining and enforcing written policies and 
procedures to address and manage conflicts of interest in accordance 
with Section 15E(h) of the Exchange Act).\11\ Paragraph (c) of Rule 
17g-5 specifically prohibits seven types of conflicts of interest. 
Consequently, an NRSRO is prohibited from issuing or maintaining a 
credit rating when it is subject to these conflicts regardless of 
whether it had disclosed them and established procedures reasonably 
designed to address them.
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    \7\ 17 CFR 240.17g-5(b) and (c).
    \8\ 17 CFR 240.17g-5(a).
    \9\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \10\ 17 CFR 240.17g-1.
    \11\ 15 U.S.C. 78o-7(h).
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    In December 2009, the Commission adopted subparagraph (a)(3) to 
Rule 17g-5. This provision requires an NRSRO that is hired by an 
arranger to determine an initial credit rating for a structured finance 
product to take certain steps designed to allow an NRSRO that is not 
hired by the arranger to nonetheless determine an initial credit 
rating--and subsequently monitor that credit rating--for the structured 
finance product.\12\ In particular, under Rule 17g-5(a)(3), an NRSRO is 
prohibited from issuing or maintaining a credit rating when it is 
subject to the conflict of interest identified in paragraph (b)(9) of 
Rule 17g-5 (i.e., being hired by an arranger to determine a credit 
rating for a structured finance product) \13\ unless it has taken the 
steps prescribed in paragraphs (a)(1) and (2) of Rule 17g-5 (discussed 
above) and the steps prescribed in new paragraph (a)(3) of Rule 17g-
5.\14\ Rule 17g-5(a)(3), among other things, requires that the NRSRO 
must:
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    \12\ See 17 CFR 240.17g-5(a)(3); see also Exchange Act Release 
No. 61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009) (``Adopting 
Release'') at 63844-45.
    \13\ Paragraph (b)(9) of Rule 17g-5 identifies the following 
conflict of interest: issuing or maintaining a credit rating for a 
security or money market instrument issued by an asset pool or as 
part of any asset-backed or mortgage-backed securities transaction 
that was paid for by the issuer, sponsor, or underwriter of the 
security or money market instrument. 17 CFR 240.17g-5(b)(9).
    \14\ 17 CFR 240.17g-5(a)(3).
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     Maintain on a password-protected Internet Web site a list 
of each structured finance product for which it currently is in the 
process of determining an initial credit rating in chronological order 
and identifying the type of structured finance product, the name of the 
issuer, the date the rating process was initiated, and the Internet Web 
site address where the arranger represents the information provided to 
the hired NRSRO can be accessed by other NRSROs;
     Provide free and unlimited access to such password-
protected Internet Web site during the applicable calendar year to any 
NRSRO that provides it with a copy of the certification described in 
paragraph (e) of Rule 17g-5 that covers that calendar year; \15\ and
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    \15\ Paragraph (e) of Rule 17g-5 requires that an NRSRO seeking 
to access the hired NRSRO's Internet Web site during the applicable 
calendar year must furnish the Commission with the following 
certification: The undersigned hereby certifies that it will access 
the Internet Web sites described in 17 CFR 240.17g-5(a)(3) solely 
for the purpose of determining or monitoring credit ratings. 
Further, the undersigned certifies that it will keep the information 
it accesses pursuant to 17 CFR 240.17g-5(a)(3) confidential and 
treat it as material nonpublic information subject to its written 
policies and procedures established, maintained, and enforced 
pursuant to section 15E(g)(1) of the Act (15 U.S.C. 78o-7(g)(1)) and 
17 CFR 240.17g-4. Further, the undersigned certifies that it will 
determine and maintain credit ratings for at least 10% of the issued 
securities and money market instruments for which it accesses 
information pursuant to 17 CFR 240.17g-5(a)(3)(iii), if it accesses 
such information for 10 or more issued securities or money market 
instruments in the calendar year covered by the certification. 
Further, the undersigned certifies one of the following as 
applicable: in the most recent calendar year during which it 
accessed information pursuant to 17 CFR 240.17g-5(a)(3), the 
undersigned accessed information for [Insert Number] issued 
securities and money market instruments through Internet Web sites 
described in 17 CFR 240.17g-5(a)(3) and determined and maintained 
credit ratings for [Insert Number] of such securities and money 
market instruments; or the undersigned previously has not accessed 
information pursuant to 17 CFR 240.17g-5(a)(3) 10 or more times 
during the most recently ended calendar year.
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     Obtain from the arranger a written representation that can 
reasonably be relied upon that the arranger will, among other things, 
disclose on a password-protected Internet Web site the information it 
provides to the hired NRSRO to determine the initial credit rating (and 
monitor that credit rating) and provide access to the Web site to an 
NRSRO that provides it with a copy of the certification described in 
paragraph (e) of Rule 17g-5.\16\
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    \16\ In particular, under paragraph (a)(3)(iii) of Rule 17g-5, 
the arranger must represent to the hired NRSRO that it will: 
maintain the information described in paragraphs (a)(3)(iii)(C) and 
(a)(3)(iii)(D) of Rule 17g-5 available at an identified password-
protected Internet Web site that presents the information in a 
manner indicating which information currently should be relied on to 
determine or monitor the credit rating; provide access to such 
password-protected Internet Web site during the applicable calendar 
year to any NRSRO that provides it with a copy of the certification 
described in paragraph (e) of Rule 17g-5 that covers that calendar 
year, provided that such certification indicates that the nationally 
recognized statistical rating organization providing the 
certification either: determined and maintained credit ratings for 
at least 10% of the issued securities and money market instruments 
for which it accessed information pursuant to paragraph (a)(3)(iii) 
of Rule 17g-5 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 has not accessed 
information pursuant to paragraph (a)(3) of Rule 17g-5 10 or more 
times during the most recently ended calendar year; post on such 
password-protected Internet Web site all information the arranger 
provides to the NRSRO, or contracts with a third party to provide to 
the NRSRO, for the purpose of determining the initial credit rating 
for the security or money market instrument, including information 
about the characteristics of the assets underlying or referenced by 
the security or money market instrument, and the legal structure of 
the security or money market instrument, at the same time such 
information is provided to the NRSRO; and post on such password-
protected Internet Web site all information the arranger provides to 
the NRSRO, or contracts with a third party to provide to the NRSRO, 
for the purpose of undertaking credit rating surveillance on the 
security or money market instrument, including information about the 
characteristics and performance of the assets underlying or 
referenced by the security or money market instrument at the same 
time such information is provided to the NRSRO.
---------------------------------------------------------------------------

    The Commission stated in the Adopting Release that subparagraph 
Rule 17g-5(a)(3) is designed to address conflicts of interest and 
improve the quality of credit ratings for structured finance products 
by making it possible for more NRSROs to rate structured finance 
products.\17\ For example, the Commission noted that when an NRSRO is 
hired to rate a structured finance product, some of the information it 
relies on to determine the rating is generally not made public.\18\ As 
a result, structured finance products frequently are issued with 
ratings from only the one or two NRSROs that have been hired by the 
arranger, with the attendant conflict of interest that creates.\19\ The 
Commission stated that subparagraph Rule 17g-5(a)(3) was designed to 
increase the number of credit ratings extant for a given structured 
finance product and, in particular, to promote the issuance of credit 
ratings by NRSROs that are not hired by arrangers.\20\ The Commission's 
goal in adopting the rule was to provide users of credit ratings with 
more views on the creditworthiness of structured finance

[[Page 70986]]

products.\21\ In addition, the Commission stated that Rule 17g-5(a)(3) 
was designed to reduce the ability of arrangers to obtain better than 
warranted ratings by exerting influence over NRSROs hired to determine 
credit ratings for structured finance products.\22\ Specifically, by 
opening up the rating process to more NRSROs, the Commission intended 
to 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.\23\
---------------------------------------------------------------------------

    \17\ Adopting Release at 63844.
    \18\ Id.
    \19\ Id.
    \20\ Id.
    \21\ Id.
    \22\ Id.
    \23\ Id.
---------------------------------------------------------------------------

    Rule 17g-5(a)(3) became effective on February 2, 2010, and the 
compliance date for Rule 17g-5(a)(3) was June 2, 2010.

III. Extension of Conditional Temporary Extension

    In the Order, the Commission requested comment generally, but also 
on a number of specific issues.\24\ The Commission received six comment 
letters in response to this solicitation of comment.\25\ The commenters 
expressed concern that the extraterritorial application of Rule 17g-
5(a)(3) could, in the commenter's view, among other things, disrupt 
local securitization markets,\26\ inhibit the ability of local firms to 
raise capital,\27\ and conflict with local laws.\28\ Several commenters 
also requested that the conditional temporary exemption be extended or 
made permanent.\29\ The First Extension Order again solicited public 
comment on issues raised in connection with the extra-territorial 
application of Rule 17g-5(a)(3).\30\ One commenter requested that the 
Order be made permanent, citing many of the same reasons set forth in 
prior comment letters.\31\ The Second Extension Order again solicited 
public comment on issues raised in connection with the extra-
territorial application of Rule 17g-5(a)(3).\32\ Commenters supported 
the exemption regarding the extra-territorial application of the 
Rule,\33\ with one of those commenters again requesting that the Order 
be made permanent.\34\ The Third Extension Order again solicited public 
comment on issues raised in connection with the extra-territorial 
application of Rule 17g-5(a)(3). No comments were received.
---------------------------------------------------------------------------

    \24\ See Order at 28828.
    \25\ Letter from Masamichi Kono, Vice Commissioner for 
International Affairs, Financial Services Agency, Japan, dated Nov. 
12, 2010 (``Japan FSA Letter''); Letter from Masaru Ono, Executive 
Director, Securitization Forum of Japan, dated Nov. 12, 2010 (``SFJ 
Letter''); Letter from Rick Watson, Managing Director, Association 
for Financial Markets in Europe/European Securitisation Forum, dated 
Nov. 11, 2010 (``AFME Letter''); Letter from Jack Rando, Director, 
Capital Markets, Investment Industry Association of Canada, dated 
Sep. 22, 2010 (``IIAC Letter''); Letter from Christopher Dalton, 
Chief Executive Officer, Australian Securitisation Forum, dated Jun. 
27, 2010 (``AuSF Letter''); Letter from Takefumi Emori, Managing 
Director, Japan Credit Rating Agency, Ltd. (``JCR''), dated Jun. 25, 
2010 (``JCR Letter'').
    \26\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter; 
AuSF Letter.
    \27\ See AFME Letter; JCR Letter; AuSF Letter.
    \28\ See Japan FSA Letter; AFME Letter; JCR Letter; AuSF Letter; 
IIAC Letter. With respect to local laws, we note that the European 
Commission in recent months has issued a relevant proposal for 
amendments to the European Union Regulation on Credit Ratings. See 
``Regulation of the European Parliament and of the Counsel on 
amending Regulation (EC) No 1060/2009 on credit rating agencies'' 
(available at https://ec.europa.eu/internal_market/securities/docs/agencies/100602_proposal_en.pdf).
    \29\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter.
    \30\ See Letter from Tom Deutsch, Executive Director, American 
Securitization Forum, and Chris Dalton, Chief Executive Officer, 
Australian Securitization Forum, dated Aug. 9, 2011 (``ASF/AuSF 
Letter 1''); Letter from Jack Rando, Director, Capital Markets, 
Investment Industry Association of Canada, dated Nov. 2, 2011 
(``IIAC Letter 2'').
    \31\ See ASF/AuSF Letter 1.
    \32\ Letter from Chris Barnard to the Commission, dated Nov. 23, 
2011 (``Barnard Letter''); Letter from Tom Deutsch, Executive 
Director, American Securitization Forum and Chris Dalton, Chief 
Executive Officer, Australian Securitisation Forum, dated Aug. 28, 
2012 (``ASF/AuSF Letter 2'').
    \33\ See Barnard Letter; ASF/AuSF Letter 2.
    \34\ See ASF/AuSF Letter 2.
---------------------------------------------------------------------------

    Given the continued concerns about potential disruptions of local 
securitization markets, and because the Commission's consideration of 
the issues raised will benefit from additional time to engage in 
further dialogue with interested parties and to monitor market and 
regulatory developments, the Commission believes extending the 
conditional temporary exemption until December 2, 2014 is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.

IV. Request for Comment

    The Commission believes that it would be useful to continue to 
provide interested parties opportunity to comment. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/exorders.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-04-09 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 St. NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-04-09. This file number 
should be included on the subject line if email 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/exorders.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F St. 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

V. Conclusion

    For the foregoing reasons, the Commission believes it would be 
necessary or appropriate in the public interest and consistent with the 
protection of investors to extend the conditional temporary exemption 
exempting NRSROs from complying with Rule 17g-5(a)(3) with respect to 
rating covered transactions until December 2, 2014.
    Accordingly,
    It is hereby ordered, pursuant to Section 36 of the Exchange Act, 
that a nationally recognized statistical rating organization is exempt 
until December 2, 2014 from the requirements in Rule 17g-5(a)(3) (17 
CFR 240.17g-5(a)(3)) for credit ratings where:
    (1) The issuer of the security or money market instrument is not a 
U.S. person (as defined under Securities Act Rule 902(k)); and
    (2) The nationally recognized statistical rating organization has a 
reasonable basis to conclude that the structured finance product will 
be offered and sold upon issuance, and that any arranger linked to the 
structured finance product will effect transactions of the structured 
finance product after issuance, only in transactions that occur outside 
the U.S.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-28464 Filed 11-26-13; 8:45 am]
BILLING CODE 8011-01-P

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