Order Extending Conditional Temporary Exemption for Nationally Recognized Statistical Rating Organizations From Requirements of Rule 17g-5(A)(3) Under the Securities Exchange Act of 1934, 56309-56311 [2017-25646]
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Federal Register / Vol. 82, No. 227 / Tuesday, November 28, 2017 / Notices
shareholders under rule 30e–1 under
the Investment Company Act, and (2)
file with the Commission a copy of
every periodic or interim report or
similar communication containing
financial statements that is transmitted
by or on behalf of such fund to any class
of such fund’s security holders and that
is not required to be filed with the
Commission under (1), not later than 10
days after the transmission to security
holders. The purpose of the collection of
information required by rule 30b2–1 is
to meet the disclosure requirements of
the Investment Company Act and
certification requirements of the
Sarbanes-Oxley Act of 2002 (Pub. L.
107–204, 116 Stat. 745 (2002)) and to
provide investors with information
necessary to evaluate an interest in the
fund.
The Commission estimates that there
are 2,401 funds, with a total of
approximately 11,555 portfolios, that
are governed by the rule. For purposes
of this analysis, the burden associated
with the requirements of rule 30b2–1
has been included in the collection of
information requirements of rule 30e–1
and Form N–CSR, rather than the rule.
The Commission has, however,
requested a one hour burden for
administrative purposes.
The collection of information under
rule 30b2–1 is mandatory. The
information provided under rule 30b2–
1 is not kept confidential. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid OMB control
number.
The public may view the background
documentation for this information
collection at the following Web site,
www.reginfo.gov. Comments should be
directed to: (i) Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503,
or by sending an email to: Shagufta_
Ahmed@omb.eop.gov; and (ii) Pamela
Dyson, Director/Chief Information
Officer, Securities and Exchange
Commission, c/o Remi Pavlik-Simon,
100 F Street NE., Washington, DC 20549
or send an email to: PRA_Mailbox@
sec.gov. Comments must be submitted to
OMB within 30 days of this notice.
Dated: November 22, 2017.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–25642 Filed 11–27–17; 8:45 am]
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82144; File No. S7–04–09]
Order Extending Conditional
Temporary Exemption for Nationally
Recognized Statistical Rating
Organizations From Requirements of
Rule 17g–5(A)(3) Under the Securities
Exchange Act of 1934
November 22, 2017.
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 The conditional
temporary exemption was extended
until December 2, 2011, and
subsequently further extended until
December 2, 2017.4 The Commission is
extending the conditional temporary
exemption exempting NRSROs from
complying with Rule 17g–5(a)(3) with
respect to rating covered transactions
until the earlier of (i) December 2, 2019,
or (ii) the compliance date set forth in
any final rule that may be adopted by
the Commission that provides for a
similar exemption.
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. 34–76183 (Oct.
16, 2015), 80 FR 64031 (Oct. 22, 2015); see also
Exchange Act Release No. 34–73649 (Nov. 19,
2014), 79 FR 70261 (Nov. 25, 2014), Exchange Act
Release No. 34–70919 (Nov. 22, 2013), 78 FR 70984
(Nov. 27, 2013), Exchange Act Release No. 34–
68286 (Nov. 26, 2012), 77 FR 71201(Nov. 29, 2012),
Exchange Act Release No. 65765 (Nov. 16, 2011),
76 FR 72227 (Nov. 22, 2011), and Exchange Act
Release No. 63363 (Nov. 23, 2010), 75 FR 73137
(Nov. 29, 2010) (collectively, the ‘‘Extension
Orders’’).
2 See
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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.5
Paragraph (a) of Rule 17g–5 6 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 7 and Rule 17g–1 8) 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 9). Paragraph (c) of Rule
17g–5 specifically prohibits eight 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 November 2009, the Commission
adopted paragraph (a)(3) of 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.10 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) 11 unless it
has taken the steps prescribed in
paragraphs (a)(1) and (2) of Rule 17g–5
(discussed above) and the steps
prescribed in paragraph (a)(3) of Rule
5 17
CFR 240.17g–5(b) and (c).
CFR 240.17g–5(a).
7 15 U.S.C. 78o–7(a)(1)(B)(vi).
8 17 CFR 240.17g–1.
9 15 U.S.C. 78o–7(h).
10 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.
11 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 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).
6 17
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17g–5.12 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; 13 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–5.14
12 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: (1) 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 (2) 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.
14 In particular, under paragraph (a)(3)(iii) of Rule
17g–5, the arranger must represent to the hired
NRSRO that it will:
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The Commission stated in the
Adopting Release that 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.15 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.16 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.17 The
Commission stated that 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
(1) Maintain the information described in
paragraphs (a)(3)(iii)(C), (a)(3)(iii)(D), and
(a)(3)(iii)(E) 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; (2) 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: (i) 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 (ii) has not accessed information
pursuant to paragraph (a)(3) of Rule 17g–5 10 or
more times during the most recently ended calendar
year; (3) 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; (4) 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; and (5) post
on such password-protected Internet Web site,
promptly after receipt, any executed Form ABS Due
Diligence—15E containing information about the
security or money market instrument delivered by
a person employed to provide third-party due
diligence services with respect to the security or
money market instrument.
15 Adopting Release at 63844.
16 Id.
17 Id.
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credit ratings by NRSROs that are not
hired by arrangers.18 The Commission’s
goal in adopting the rule was to provide
users of credit ratings with more views
on the creditworthiness of structured
finance products.19 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.20 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.21
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 Exemption
In the Order, the Commission
requested comment generally, but also
on a number of specific issues.22 The
Commission received seven comment
letters in response to this solicitation of
comment.23 The commenters expressed
concern that the application of Rule
17g–5(a)(3) to transactions outside the
United States could, in the commenters’
view, among other things, disrupt local
securitization markets,24 inhibit the
ability of local firms to raise capital,25
and conflict with local laws.26 Several
commenters also requested that the
18 Id.
19 Id.
20 Id.
21 Id.
22 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 Tom Deutsch, Executive
Director, American Securitization Forum, and Chris
Dalton, Chief Executive Officer, Australian
Securitisation Forum, dated Oct. 27, 2010 (‘‘ASF/
AuSF Letter’’); Letter from Jack Rando, Director,
Capital Markets, Investment Industry Association of
Canada, dated Sep. 22, 2010 (‘‘IIAC Letter’’); Letter
from Chris 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’’).
24 See Japan FSA Letter; SFJ Letter; AFME Letter;
JCR Letter; AuSF Letter.
25 See AFME Letter; JCR Letter; AuSF Letter.
26 See Japan FSA Letter; AFME Letter; JCR Letter;
AuSF Letter; IIAC Letter.
23 Letter
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conditional temporary exemption be
extended or made permanent.27 The
Commission’s Extension Orders again
solicited public comment on issues
raised in connection with the
application of Rule 17g–5(a)(3) outside
the United States. Commenters
generally supported the exemption
regarding such application of the rule,
with some commenters requesting that
the exemption be made permanent.28
Given the continued concerns about
potential disruptions of local
securitization markets, the staff of the
Commission is considering
recommending that the Commission
propose an amendment to Rule 17g–
5(a)(3) that would provide for a
permanent exemption with respect to
credit ratings satisfying the conditions
of the exemption. In order to provide
time for the Commission to consider any
such a recommendation and to avoid
any disruption if the exemption were
allowed to expire, the Commission
believes that it is necessary and
appropriate in the public interest, and
consistent with the protection of
investors, to extend the conditional
temporary exemption until the earlier of
(i) December 2, 2019, or (ii) the
compliance date set forth in any final
rule that may be adopted by the
Commission that provides for a similar
exemption.
IV. Conclusion
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Accordingly,
It is hereby ordered, pursuant to
Section 36 of the Exchange Act, that a
nationally recognized statistical rating
organization is exempt 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
27 See Japan FSA Letter; SFJ Letter; AFME Letter;
JCR Letter; ASF/AuSF Letter.
28 Comment letters received in response to the
requests for comment regarding the application of
Rule 17g–5(a)(3) to transactions outside the United
States are available at https://www.sec.gov/
comments/s7-04-09/s70409.shtml. See, e.g., Letter
from Richard Hopkin, Managing Director & Head of
Fixed Income, Association for Financial Markets in
Europe, dated Nov. 1, 2017; Letter from Richard
Johns, Executive Director, Structured Finance
Industry Group, and Chris Dalton, Chief Executive
Officer, Australian Securitisation Forum, dated Jul.
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of the structured finance product after
issuance, only in transactions that occur
outside the U.S.,
Until the earlier of (i) December 2,
2019, or (ii) the compliance date set
forth in any final rule that may be
adopted by the Commission that
provides for a similar exemption.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017–25646 Filed 11–27–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82138; File No. SR–
NYSEArca–2017–88]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Approving a
Proposed Rule Change, as Modified by
Amendments No. 1 and 2, To List and
Trade Shares of the U.S. Equity
Cumulative Dividends Fund—Series
2027 and the U.S. Equity Ex-Dividend
Fund—Series 2027 Under NYSE Arca
Rule 8.200–E, Commentary .02
November 21, 2017.
I. Introduction
On August 8, 2017, NYSE Arca, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
list and trade shares (‘‘Shares’’) of the
U.S. Equity Cumulative Dividends
Fund—Series 2027 (‘‘Dividend Fund’’)
and the U.S. Equity Ex-Dividend
Fund—Series 2027 (‘‘Ex-Dividend
Fund,’’ each a ‘‘Fund,’’ and collectively
the ‘‘Funds’’) under NYSE Arca Equities
Rule 8.200, Commentary .02.3 The
proposed rule change was published for
comment in the Federal Register on
August 28, 2017.4 On November 14,
2017, the Exchange filed Amendment
No. 1 to the proposed rule change.5 On
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Commission notes that, on August 17, 2017,
the Commission approved a proposed rule change
that, among other things, created a single rulebook
of the Exchange. See Securities Exchange Act
Release No. 81419, 82 FR 40044 (Aug. 23, 2017)
(SR–NYSEArca–2017–40). As a result, NYSE Arca
Equities Rule 8.200 became NYSE Arca Rule 8.200–
E.
4 See Securities Exchange Act Release No. 81453
(Aug. 22, 2017), 82 FR 40816.
5 In Amendment No. 1 (‘‘Amendment No. 1’’),
which amended and replaced the proposed rule
change in its entirety, the Exchange: (1) Changed
the custodian of the Funds; (2) stated that the
Dividend Fund will seek investment results that,
2 17
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November 16, 2017, the Exchange filed
Amendment No. 2 to the proposed rule
change.6 The Commission has not
received any comments on the proposed
rule change. This order approves the
proposed rule change, as modified by
Amendments No.1 and 2 thereto.
II. The Exchange’s Description of the
Proposal 7
The Exchange proposes to list and
trade the Shares under NYSE Arca Rule
8.200–E, Commentary .02, which
governs the listing and trading of Trust
Issued Receipts.8 Each Fund will be a
before fees and expenses, correspond to the
performance of the Solactive U.S. Cumulative
Dividends Index Series 2027 over each calendar
year; (3) clarified that the value of the Dividend
Fund’s Shares will be affected by the ordinary cash
dividends that have been paid to date and general
expectations in the market regarding the future
levels of such dividends; (4) clarified that the
Dividend Fund’s exposure to dividend payments
made by S&P 500 constituent companies will be
based exclusively on its investments in annual S&P
500 dividend futures contracts; (5) clarified that
pricing may be an example of a market factor
pursuant to which the Dividend Fund may invest
in quarterly S&P 500 dividend futures contracts; (6)
clarified that the Ex-Dividend Fund will seek
investment results that, before fees and expenses,
correspond to the performance of the Solactive U.S.
Equity Ex-Dividends Index—Series 2027 so as to
provide shareholders with returns that are
equivalent to the performance of 0.5 shares of
SPDR® S&P 500® ETF less the value of current and
future expected ordinary cash dividends to be paid
on the S&P 500 constituent companies over the
term of the Ex-Dividend Fund; (7) stated that the
quarterly S&P 500 Index futures contracts are traded
on the Chicago Mercantile Exchange (‘‘CME’’); (8)
clarified that the Ex-Dividend Fund intends to track
the performance of the Solactive Ex-Dividend Index
by selling annual S&P dividend futures contracts;
(9) represented that the Trust (defined herein) will
issue and sell Shares of a Fund in one or more block
size aggregations of 50,000 shares; (10) represented
that an updated indicative fund value’’ (‘‘IFV’’) will
be calculated and disseminated by a third party
service provider in accordance with the rules of the
Exchange, and the IFV will be calculated by using
the prior day’s closing net asset value (‘‘NAV’’) per
Share of a Fund as a base and updating that value
throughout the trading day to reflect changes in the
most recently reported trade prices for instruments
traded by a Fund; and (11) made other technical
changes. Because Amendment No. 1 made the
clarifying changes and representations summarized
above and does not raise unique or novel regulatory
issues. Amendment No. 1 is not subject to notice
and comment.
6 In Amendment No. 2, which is a partial
amendment, the Exchange updated the proposed
rule change to reflect that the Registration
Statement has been filed with the Commission.
Because Amendment No. 2 simply deletes
information regarding the draft registration
statement and provides information related to the
filed Registration Statement and does not raise
unique or novel regulatory issues, Amendment No.
2 is not subject to notice and comment.
7 Additional information regarding the Funds, the
Trust, and the Shares can be found in Amendments
No. 1 and 2 and the Registration Statement. See
supra notes 5 and 6 and infra note 9.
8 Commentary .02 to NYSE Arca Rule 8.200–E
applies to Trust Issued Receipts that invest in
‘‘Financial Instruments.’’ The term ‘‘Financial
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]]>Agencies
[Federal Register Volume 82, Number 227 (Tuesday, November 28, 2017)]
[Notices]
[Pages 56309-56311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25646]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82144; File No. S7-04-09]
Order Extending Conditional Temporary Exemption for Nationally
Recognized Statistical Rating Organizations From Requirements of Rule
17g-5(A)(3) Under the Securities Exchange Act of 1934
November 22, 2017.
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\ The
conditional temporary exemption was extended until December 2, 2011,
and subsequently further extended until December 2, 2017.\4\ The
Commission is extending the conditional temporary exemption exempting
NRSROs from complying with Rule 17g-5(a)(3) with respect to rating
covered transactions until the earlier of (i) December 2, 2019, or (ii)
the compliance date set forth in any final rule that may be adopted by
the Commission that provides for a similar exemption.
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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. 34-76183 (Oct. 16, 2015), 80 FR
64031 (Oct. 22, 2015); see also Exchange Act Release No. 34-73649
(Nov. 19, 2014), 79 FR 70261 (Nov. 25, 2014), Exchange Act Release
No. 34-70919 (Nov. 22, 2013), 78 FR 70984 (Nov. 27, 2013), Exchange
Act Release No. 34-68286 (Nov. 26, 2012), 77 FR 71201(Nov. 29,
2012), Exchange Act Release No. 65765 (Nov. 16, 2011), 76 FR 72227
(Nov. 22, 2011), and Exchange Act Release No. 63363 (Nov. 23, 2010),
75 FR 73137 (Nov. 29, 2010) (collectively, the ``Extension
Orders'').
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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.\5\ Paragraph (a) of Rule 17g-5 \6\
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 \7\ and Rule 17g-1 \8\) 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 \9\). Paragraph (c) of Rule
17g-5 specifically prohibits eight 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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\5\ 17 CFR 240.17g-5(b) and (c).
\6\ 17 CFR 240.17g-5(a).
\7\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
\8\ 17 CFR 240.17g-1.
\9\ 15 U.S.C. 78o-7(h).
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In November 2009, the Commission adopted paragraph (a)(3) of 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.\10\ 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) \11\ unless it has taken the
steps prescribed in paragraphs (a)(1) and (2) of Rule 17g-5 (discussed
above) and the steps prescribed in paragraph (a)(3) of Rule
[[Page 56310]]
17g-5.\12\ Rule 17g-5(a)(3), among other things, requires that the
NRSRO must:
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\10\ 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.
\11\ 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 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).
\12\ 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; \13\ and
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\13\ 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: (1) In the most recent calendar year during which it
accessed information pursuant to Sec. 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 (2) 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.\14\
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\14\ In particular, under paragraph (a)(3)(iii) of Rule 17g-5,
the arranger must represent to the hired NRSRO that it will:
(1) Maintain the information described in paragraphs
(a)(3)(iii)(C), (a)(3)(iii)(D), and (a)(3)(iii)(E) 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; (2) 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: (i)
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 (ii) has not accessed information pursuant to
paragraph (a)(3) of Rule 17g-5 10 or more times during the most
recently ended calendar year; (3) 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; (4) 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; and (5) post on such
password-protected Internet Web site, promptly after receipt, any
executed Form ABS Due Diligence--15E containing information about
the security or money market instrument delivered by a person
employed to provide third-party due diligence services with respect
to the security or money market instrument.
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The Commission stated in the Adopting Release that 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.\15\ 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.\16\ 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.\17\ The Commission stated that 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.\18\ The Commission's goal in adopting the rule was to
provide users of credit ratings with more views on the creditworthiness
of structured finance products.\19\ 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.\20\ 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.\21\
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\15\ Adopting Release at 63844.
\16\ Id.
\17\ Id.
\18\ Id.
\19\ Id.
\20\ Id.
\21\ Id.
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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 Exemption
In the Order, the Commission requested comment generally, but also
on a number of specific issues.\22\ The Commission received seven
comment letters in response to this solicitation of comment.\23\ The
commenters expressed concern that the application of Rule 17g-5(a)(3)
to transactions outside the United States could, in the commenters'
view, among other things, disrupt local securitization markets,\24\
inhibit the ability of local firms to raise capital,\25\ and conflict
with local laws.\26\ Several commenters also requested that the
[[Page 56311]]
conditional temporary exemption be extended or made permanent.\27\ The
Commission's Extension Orders again solicited public comment on issues
raised in connection with the application of Rule 17g-5(a)(3) outside
the United States. Commenters generally supported the exemption
regarding such application of the rule, with some commenters requesting
that the exemption be made permanent.\28\
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\22\ See Order at 28828.
\23\ 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 Tom Deutsch, Executive
Director, American Securitization Forum, and Chris Dalton, Chief
Executive Officer, Australian Securitisation Forum, dated Oct. 27,
2010 (``ASF/AuSF Letter''); Letter from Jack Rando, Director,
Capital Markets, Investment Industry Association of Canada, dated
Sep. 22, 2010 (``IIAC Letter''); Letter from Chris 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'').
\24\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter;
AuSF Letter.
\25\ See AFME Letter; JCR Letter; AuSF Letter.
\26\ See Japan FSA Letter; AFME Letter; JCR Letter; AuSF Letter;
IIAC Letter.
\27\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter;
ASF/AuSF Letter.
\28\ Comment letters received in response to the requests for
comment regarding the application of Rule 17g-5(a)(3) to
transactions outside the United States are available at https://www.sec.gov/comments/s7-04-09/s70409.shtml. See, e.g., Letter from
Richard Hopkin, Managing Director & Head of Fixed Income,
Association for Financial Markets in Europe, dated Nov. 1, 2017;
Letter from Richard Johns, Executive Director, Structured Finance
Industry Group, and Chris Dalton, Chief Executive Officer,
Australian Securitisation Forum, dated Jul. 19, 2017.
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Given the continued concerns about potential disruptions of local
securitization markets, the staff of the Commission is considering
recommending that the Commission propose an amendment to Rule 17g-
5(a)(3) that would provide for a permanent exemption with respect to
credit ratings satisfying the conditions of the exemption. In order to
provide time for the Commission to consider any such a recommendation
and to avoid any disruption if the exemption were allowed to expire,
the Commission believes that it is necessary and appropriate in the
public interest, and consistent with the protection of investors, to
extend the conditional temporary exemption until the earlier of (i)
December 2, 2019, or (ii) the compliance date set forth in any final
rule that may be adopted by the Commission that provides for a similar
exemption.
IV. Conclusion
Accordingly,
It is hereby ordered, pursuant to Section 36 of the Exchange Act,
that a nationally recognized statistical rating organization is exempt
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.,
Until the earlier of (i) December 2, 2019, or (ii) the compliance
date set forth in any final rule that may be adopted by the Commission
that provides for a similar exemption.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017-25646 Filed 11-27-17; 8:45 am]
BILLING CODE 8011-01-P
