[Federal Register Volume 76, Number 110 (Wednesday, June 8, 2011)]
[Proposed Rules]
[Pages 33420-33563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-12659]
[[Page 33419]]
Vol. 76
Wednesday,
No. 110
June 8, 2011
Part II
Securities and Exchange Commission
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17 CFR Parts 232, 240, 249, et al.
Nationally Recognized Statistical Rating Organizations; Proposed Rule
Federal Register / Vol. 76, No. 110 / Wednesday, June 8, 2011 /
Proposed Rules
[[Page 33420]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 232, 240, 249, and 249b
[Release No. 34-64514; File No. S7-18-11]
RIN 3235-AL15
Nationally Recognized Statistical Rating Organizations
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ``Dodd-Frank Act'') and to enhance
oversight, the Securities and Exchange Commission (``Commission'') is
proposing amendments to existing rules and new rules that would apply
to credit rating agencies registered with the Commission as nationally
recognized statistical rating organizations (``NRSROs''). In addition,
in accordance with the Dodd-Frank Act, the Commission is proposing a
new rule and form that would apply to providers of third-party due
diligence services for asset-backed securities. Finally, the Commission
is proposing amendments to existing rules and a new rule that would
implement a requirement added by the Dodd-Frank Act that issuers and
underwriters of asset-backed securities make publicly available the
findings and conclusions of any third-party due diligence report
obtained by the issuer or underwriter. The Commission is requesting
comment on the proposed rule amendments and new rules.
DATES: Comments should be received on or before August 8, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-18-11 on the subject line; or
Use the Federal eRulemaking Portal (http://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 S7-18-11. This file number
should be included on the subject line if e-mail is used. To help the
Commission 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 (http://www.sec.gov/rules.shtml).
Comments are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549. 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
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; Raymond A. Lombardo, Branch Chief, at (202) 551-5755;
Rose Russo Wells, Senior Counsel, at (202) 551-5527; Joseph I.
Levinson, Special Counsel, at (202) 551-5598; or Timothy C. Fox,
Special Counsel, at (202) 551-5687; Division of Trading and Markets;
or, with respect to the proposals for issuers and underwriters of
asset-backed securities, Eduardo A. Aleman, Special Counsel, Division
of Corporation Finance at (202) 551-3430; Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission, with respect to NRSROs, is
proposing amendments to rules 17 CFR 232.101 (``Rule 101 of Regulation
S-T''), 17 CFR 232.201 (``Rule 201 of Regulation S-T''), 17 CFR
240.17g-1 (``Rule 17g-1''), 17 CFR 240.17g-2 (``Rule 17g-2''), 17 CFR
240.17g-3 (``Rule 17g-3''), 17 CFR 240.17g-5 (``Rule 17g-5''), 17 CFR
240.17g-6 (``Rule 17g-6''), 17 CFR 240.17g-7 (``Rule 17g-7''), 17 CFR
249b.300 (``Form NRSRO''), and proposing new rules 17 CFR 240.17g-8
(``Rule 17g-8'') and 17 CFR 240.17g-9 (``Rule 17g-9'').
In addition, the Commission, with respect to providers of third-
party due diligence services for asset-backed securities, is proposing
new rules 17 CFR 240.17g-10 (``Rule 17g-10'') and 17 CFR 249b.400
(``Form ABS Due Diligence-15E'').
Finally, the Commission, with respect to issuers and underwriters
of asset-backed securities, is proposing amendments to 17 CFR 232.314
(``Rule 314 of Regulation S-T'') and 17 CFR 249.1400 (``Form ABS
15G''), and proposing new rule 17 CFR 240.15Ga-2 (``Rule 15Ga-2'').
I. Background
Title IX, Subtitle C of the Dodd-Frank Act,\1\ ``Improvements to
the Regulation of Credit Rating Agencies,'' among other things,
establishes new self-executing requirements applicable to NRSROs,
requires certain studies,\2\ and requires that the Commission adopt
rules applicable to NRSROs in a number of areas.\3\ The NRSRO
provisions in the
[[Page 33421]]
Dodd-Frank Act augment the Credit Rating Agency Reform Act of 2006 (the
``Rating Agency Act of 2006''), which established a registration and
oversight program for NRSROs through self-executing provisions added to
the Exchange Act and implementing rules adopted by the Commission under
the Exchange Act as amended by the Rating Agency Act of 2006.\4\ Title
IX, Subtitle C of the Dodd-Frank Act also provides that the Commission
shall prescribe the format of a certification that providers of third-
party due diligence services would need to provide to each NRSRO
producing a credit rating for an asset-backed security to which the due
diligence services relate.\5\ Finally, Title IX, Subtitle C of the
Dodd-Frank Act establishes a new requirement for issuers and
underwriters of asset-backed securities to make publicly available the
findings and conclusions of any third-party due diligence report
obtained by the issuer or underwriter.\6\
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\1\ Public Law 111-203, 124 Stat. 1376, H.R. 4173 (July 21,
2010).
\2\ See Public Law 111-203 Sec. Sec. 939, 939D-939F. On
December 17, 2010, the Commission issued a request for comments to
inform a required study on standardizing credit ratings terminology.
See Credit Rating Standardization Study, Securities Exchange Act of
1934 (``Exchange Act'') Release No. 34-63573 (December 17, 2010). On
May 10, 2011, the Commission issued a request for comments to assist
it in carrying out a required study on, among other matters, the
feasibility of establishing a system in which a public or private
utility or a self-regulatory organization assigns NRSROs to
determine credit ratings for structured finance products. See
Solicitation of Comment to Assist in Study on Assigned Credit
Ratings, Exchange Act Release No. 64456 (May 10, 2011). The
Commission also is required to conduct a study of the independence
of NRSROs and how that independence affects the ratings issued by
NRSROs. The Comptroller General of the United States is required to
conduct a study on alternative means for compensating NRSROs in
order to create incentives to provide more accurate credit ratings
as well as a study on the feasibility and merits of creating an
independent professional organization for rating analysts employed
by NRSROs.
\3\ See Public Law 111-203 Sec. Sec. 931-939H. In addition,
Title IX, Subtitle D, ``Improvements to the Asset-Backed
Securitization Process,'' contains Section 943, which provides that
the Commission shall adopt rules, within 180 days, requiring an
NRSRO to include in any report accompanying a credit rating of an
asset-backed security a description of the representations,
warranties, and enforcement mechanisms available to investors and
how they differ from the representations, warranties, and
enforcement mechanisms in issuances of similar securities. See
Public Law 111-203 Sec. 943. On January 20, 2011, the Commission
adopted Rule 17g- 7 to implement Section 943. See Disclosure for
Asset-Backed Securities Required by Section 943 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Securities Act of
1933 (``Securities Act'') Release No. 9175 (Jan. 20, 2011), 76 FR
4489 (Jan. 26, 2011) and 17 CFR 240.17g-7. Prior to enactment of the
Dodd-Frank Act and the adoption of Rule 17g-7, the Commission
proposed a different rule to be codified at 17 CFR 240.17g-7. See
Proposed Rules for Nationally Recognized Statistical Rating
Organizations, Exchange Act Release No. 57967 (June 16, 2008), 73 FR
36212 (June 25, 2008). This proposed rule would have required an
NRSRO to publish a report containing certain information with the
publication of a credit rating for a structured finance product or,
as an alternative, use ratings symbols for structured finance
products that differentiate them from the credit ratings for other
types of debt securities. Id. In November 2009, the Commission
announced it was deferring consideration of action on the proposal
and separately proposed a different rule to be codified at 17 CFR
240.17g-7 that would have required an NRSRO to annually disclose
certain information. See Proposed Rules for Nationally Recognized
Statistical Rating Organizations Exchange Act Release No. 61051
(Nov. 23, 2009), 74 FR 63866 (Dec. 4, 2009). Although the Commission
adopted Rule 17g-7 on January 20, 2011 to implement Section 943 of
the Dodd-Frank Act, the November 23, 2009 proposal remains
outstanding.
\4\ See Public Law 109-291 (2006). The Rating Agency Act of
2006, among other things, amended Section 3 of the Exchange Act to
add definitions, added Section 15E to the Exchange Act to establish
self-executing requirements on NRSROs and provide the Commission
with the authority to implement a registration and oversight program
for NRSROs, amended Section 17 of the Exchange Act to provide the
Commission with recordkeeping, reporting, and examination authority
over NRSROs, and amended Section 21B(a) of the Exchange Act to
provide the Commission with the authority to assess penalties in
administrative proceedings instituted under Section 15E of the
Exchange Act. See Public Law 109-291 Sec. Sec. 3 and 4 and 15
U.S.C. 78c, 78o-7, 78q, and 78u-2. The Commission adopted rules to
implement a registration and oversight program for NRSROs 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). The
implementing rules were Form NRSRO, Rule 17g-1, Rule 17g-2, Rule
17g-3, Rule 17g-4, Rule 17g-5, and Rule 17g-6. The Commission has
twice adopted amendments to some of these rules. See Amendments to
Rules for Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 59342 (Feb. 2, 2009), 74 FR 6456 (Feb. 9,
2009) and Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, Exchange Act Release No. 61050 (Nov. 23,
2009), 74 FR 63832 (Dec. 4, 2009). The Commission also has proposed
further amendments to these rules, which remain pending. See
Proposed Rules for Nationally Recognized Statistical Rating
Organizations, 74 FR 63866 (Dec. 4, 2009). In addition, as noted
above, the Commission adopted Rule 17g-7 on January 20, 2011.
\5\ See Public Law 111-203 Sec. 932(a)(8) adding new paragraph
(s)(4)(C) to Section 15E of the Exchange Act. 15 U.S.C. 78o-
7(s)(4)(C).
\6\ See Public Law 111-203 Sec. 932(a)(8) adding new paragraph
(s)(4)(A) to Section 15E of the Exchange Act. 15 U.S.C. 78o-
7(s)(4)(A).
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II. The Proposed New Rules and Rule Amendments
The Commission's proposed rule amendments and proposed new rules to
implement Title IX, Subtitle C of the Dodd-Frank Act are described
below.\7\
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\7\ As used throughout this release, the term ``category'' of
credit rating refers to a distinct level in a rating scale
represented by a unique symbol, number, or score. For example, if a
rating scale consists of symbols (e.g., AAA, AA, A, BBB, BB, B, CCC,
CC, and C), each unique symbol would represent a category in the
rating scale. Similarly, if a rating scale consists of numbers
(e.g., 1, 2, 3, 4, 5, 6, 7, 8, and 9), each number would represent a
category in the rating scale. Each category also represents a
``notch'' in the rating scale. In addition, some NRSRO rating scales
attach additional symbols or numbers to the symbols representing
categories in order to denote gradations within a category. For
example, a rating scale may indicate gradations within a category by
attaching a plus or a minus or a number to a rating symbol. For
example, AA+, AA, and AA- or AA1, AA2, and AA3 would be three
gradations within the AA category. If a rating scale has gradations
within a category, each category and gradation within a category
would constitute a ``notch'' in the rating scale. For example, the
following symbols would each represent a notch in the rating scale
in descending order: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-,
BB+, BB, BB-, CCC+, CCC, CCC-, CC, C and D. Furthermore, for the
purposes of this release, changing a credit rating (e.g., upgrading
or downgrading the credit rating) means assigning a credit rating at
a different notch in the rating scale (e.g., downgrading an obligor
assigned an AA rating to an AA- rating or an A+ rating). A ``rating
action'' for the purposes of this release does not necessarily mean
changing a credit rating. A rating action is taken when an NRSRO
issues an expected or preliminary credit rating before it issues an
initial credit rating, issues an initial credit rating, upgrades an
existing credit rating, downgrades an existing credit rating
(including to a default category), places an existing credit rating
on credit watch or review (meaning the NRSRO is actively evaluating
whether to change the credit rating), affirms (or confirms) an
existing credit rating (meaning the NRSRO announces that it will not
change the credit rating), or withdraws a credit rating.
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A. Internal Control Structure
1. Self-Executing Requirement
Section 932(a)(2)(B) of the Dodd-Frank Act added paragraph (3) to
Section 15E(c) of the Exchange Act.\8\ Section 15E(c)(3)(A) requires an
NRSRO to ``establish, maintain, enforce, and document an effective
internal control structure governing the implementation of and
adherence to policies, procedures, and methodologies for determining
credit ratings, taking into consideration such factors as the
Commission may prescribe, by rule.'' \9\ While Section 15E(c)(3)(A)
provides that the Commission ``may'' prescribe factors an NRSRO would
need to take into consideration with respect to an internal control
structure governing the implementation of and adherence to policies,
procedures, and methodologies for determining credit ratings (an
``internal control structure''), the requirement that an NRSRO
``establish, maintain, enforce, and document an effective internal
control structure'' is self-executing.\10\ Consequently, an NRSRO must
adhere to this self-executing provision irrespective of whether the
Commission prescribes factors the NRSRO must take into
consideration.\11\
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\8\ See Public Law 111-203 Sec. 932(a)(2)(B) and 15 U.S.C. 78o-
7(c)(3)(A).
\9\ Id.
\10\ Id.
\11\ Id.
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The Commission preliminarily believes it would be appropriate at
this time to defer prescribing factors an NRSRO must take into
consideration with respect to its internal control structure. Deferring
rulemaking would provide the Commission with the opportunity, through
the NRSRO examination process and, as discussed below, the submission
of annual reports by the NRSROs, to review how the NRSROs have complied
with this self-executing requirement.\12\ This review could inform any
future rulemaking the Commission may initiate. Nonetheless, the
Commission is requesting extensive comment below on whether it would be
appropriate as part of this rulemaking to prescribe factors. Based on
the comments received, the Commission may decide to prescribe by rule
or identify through guidance the factors an NRSRO would need to
consider with respect to its internal control structure.
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\12\ Section 923(a)(8) of the Dodd-Frank Act struck existing
Section 15E(p) of the Exchange Act, which related to the date of
applicability of the Rating Agency Act of 2006 and added new Section
15E(p). See Public Law 111-203 Sec. 932(a)(8). New Section
15E(p)(3) of the Exchange Act requires, among other things, the
Commission staff to conduct an examination of each NRSRO at least
annually. See 15 U.S.C. 78o-7(p)(3). The Commission staff intends to
conduct such annual statutory examinations on a cycle based on the
Commission's fiscal year. The staff intends to conduct the first
annual statutory examination of a newly registered NRSRO in the
annual cycle following its registration.
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Request for Comment
The Commission generally requests comment on all aspects of Section
15E(c)(3)(A) of the Exchange Act. The Commission also seeks comment on
the following:
1. Should the Commission, as part of this rulemaking initiative,
prescribe factors that an NRSRO would need to take into consideration
when establishing, maintaining, enforcing, and documenting an effective
internal control structure governing the implementation of and
adherence to policies, procedures, and methodologies for determining
credit ratings? For example, can the objectives of the self-executing
requirement in Section 15E(c)(3)(A) of the Exchange Act be adequately
achieved by NRSROs if the Commission does not prescribe factors?
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2. Alternatively, should the Commission defer rulemaking in order
to review through examination and monitoring the effectiveness of the
internal control structures each NRSRO establishes, maintains,
enforces, and documents pursuant to Section 15E(c)(3)(A) of the
Exchange Act? For example, would it be more appropriate for the
Commission to evaluate through examination and the annual reports
discussed below in Section II.A.3 of this release whether there is a
need to prescribe factors and, if such a need is identified,
incorporate in rulemaking or guidance best practices identified through
examination and NRSRO reporting?
3. If appropriate to prescribe factors now, should the factors
address all elements of the self-executing requirement in Section
15E(c)(3)(A) of the Exchange Act (i.e., the establishment, maintenance,
enforcement, and documentation of the internal control structure) or
should the factors focus on the design (i.e., establishment) of the
internal control structure or one of the other elements or a
combination of some of the elements?
4. If appropriate to prescribe factors now for the establishment of
an internal control structure, what should those factors be? For
example, should the Commission prescribe any of the factors identified
in the sub-paragraphs below? In analyzing these potential factors,
commenters should address the potential advantages, disadvantages,
benefits, and costs that could result if the Commission prescribed any
of the factors, as well as the potential effectiveness of the controls
and any practical issues related to implementing them.
a. Controls reasonably designed to ensure that a newly developed
methodology or proposed update to an in-use methodology for determining
credit ratings is subject to an appropriate review process (e.g., by
persons who are independent from the persons that developed the
methodology or methodology update) and to management approval prior to
the new or updated methodology being employed by the NRSRO to determine
credit ratings; \13\
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\13\ Section 15E(t)(3)(A) of the Exchange Act contains a self-
executing provision requiring that the board of directors of the
NRSRO shall ``oversee'' the ``establishment, maintenance, and
enforcement of policies and procedures for determining credit
ratings.'' See 15 U.S.C. 78o-7(t)(3)(A). At the same time, Section
15E(r) of the Exchange Act requires the Commission to adopt rules
``to ensure that credit ratings are determined using procedures and
methodologies, including qualitative and quantitative data and
models'' that are approved by the board of the NRSRO. See 15 U.S.C.
78o-7(r)(1)(A).
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b. Controls reasonably designed to ensure that a newly developed
methodology or update to an in-use methodology for determining credit
ratings is disclosed to the public for consultation prior to the new or
updated methodology being employed by the NRSRO to determine credit
ratings, that the NRSRO makes comments received as part of the
consultation publicly available, and that the NRSRO considers the
comments before implementing the methodology;
c. Controls reasonably designed to ensure that in-use methodologies
for determining credit ratings are periodically reviewed (e.g., by
persons who are independent from the persons who developed and/or use
the methodology) in order to analyze whether the methodology should be
updated;
d. Controls reasonably designed to ensure that market participants
have an opportunity to provide comment on whether in-use methodologies
for determining credit ratings should be updated, that the NRSRO makes
any such comments received publicly available, and that the NRSRO
considers the comments;
e. Controls reasonably designed to ensure that newly developed or
updated quantitative models proposed to be incorporated into a credit
rating methodology are evaluated and validated prior to being put into
use;
f. Controls reasonably designed to ensure that quantitative models
incorporated into in-use credit rating methodologies are periodically
reviewed and back-tested;
g. Controls reasonably designed to ensure that an NRSRO engages in
analysis before commencing the rating of a class of obligors,
securities, or money market instruments the NRSRO has not previously
rated to determine whether the NRSRO has sufficient competency, access
to necessary information, and resources to rate the type of obligor,
security, or money market instrument;
h. Controls reasonably designed to ensure that an NRSRO engages in
analysis before commencing the rating of an ``exotic'' or ``bespoke''
type of obligor, security, or money market instrument to review the
feasibility of determining a credit rating;
i. Controls reasonably designed to ensure that measures (e.g.,
statistics) are used to evaluate the performance of credit ratings as
part of the review of in-use methodologies for determining credit
ratings to analyze whether the methodologies should be updated or the
work of the analysts employing the methodologies should be reviewed;
j. Controls reasonably designed to ensure that, with respect to
determining credit ratings, the work and conclusions of the lead credit
analyst developing an initial credit rating or conducting surveillance
on an existing credit rating is reviewed by other analysts,
supervisors, or senior managers before a rating action is formally
taken (e.g., having the work reviewed through a rating committee
process);
k. Controls reasonably designed to ensure that a credit analyst
documents the steps taken in developing an initial credit rating or
conducting surveillance on an existing credit rating with sufficient
detail to permit an after-the-fact review or internal audit of the
rating file to analyze whether the analyst adhered to the NRSRO's
procedures and methodologies for determining credit ratings;
l. Controls reasonably designed to ensure that the NRSRO conducts
periodic reviews or internal audits of rating files to analyze whether
analysts adhere to the NRSRO's procedures and methodologies for
determining credit ratings; or
m. Any other factors that commenters identify and explain.
5. If appropriate to prescribe factors now for the maintenance of
an internal control structure, what should those factors be? For
example, should the Commission prescribe any of the factors identified
in the sub-paragraphs below? In analyzing these potential factors,
commenters should address the potential advantages, disadvantages,
benefits, and costs that could result if the Commission prescribed any
of the factors, as well as the potential effectiveness of the controls
and any practical issues related to implementing them.
a. Controls reasonably designed to ensure that the NRSRO conducts
periodic reviews of whether it has devoted sufficient resources to
implement and operate the documented internal control structure as
designed;
b. Controls reasonably designed to ensure that the NRSRO conducts
periodic reviews or ongoing monitoring to evaluate the effectiveness of
the internal control structure and whether it should be updated;
c. Controls designed to ensure that any identified deficiencies in
the internal control structure are assessed and addressed on a timely
basis;
d. Any other factors that commenters identify and explain.
6. If appropriate to prescribe factors now for the enforcement of
an internal
[[Page 33423]]
control structure, what should those factors be? For example, should
the Commission prescribe any of the factors identified in the sub-
paragraphs below? In analyzing these potential factors, commenters
should address the potential advantages, disadvantages, benefits, and
costs that could result if the Commission prescribed any of the
factors, as well as the potential effectiveness of the controls and any
practical issues related to implementing them.
a. Controls designed to ensure that additional training is provided
or discipline taken with respect to employees who fail to adhere to
requirements imposed by the internal control structure;
b. Controls designed to ensure that a process is in place for
employees to report failures to adhere to the internal control
structure; or
c. Any other factors that commenters identify and explain?
7. If appropriate to prescribe factors now for the documentation of
an internal control structure, what should those factors be? For
example, should there be a factor relating to the level of written
detail about the internal control structure that should be documented?
Are there other factors that should be considered? What potential
advantages, disadvantages, benefits, and costs would result if the
Commission prescribed any such factors?
8. Identify any other factors that an NRSRO should consider when
establishing, maintaining, enforcing, and documenting an internal
control structure. Explain the utility of any factors identified as
well as the potential advantages, disadvantages, benefits, and costs
that could result if the Commission prescribed any such factors.
2. Proposed Amendment to Rule 17g-2
As noted above, Section 15E(c)(3)(A) of the Exchange Act requires
an NRSRO, among other things, to document its internal control
structure.\14\ Thus, the statute itself requires the NRSRO to make this
record.\15\ However, the statute does not prescribe how an NRSRO would
need to maintain this record.\16\ The Commission preliminarily believes
this record should be subject to the same recordkeeping requirements
applicable to other records an NRSRO is required to retain pursuant to
the NRSRO recordkeeping rule--Rule 17g-2.\17\ Consequently, the
Commission proposes adding new paragraph (b)(12) to Rule 17g-2 to
identify the internal control structure an NRSRO, among other things,
must document pursuant to Section 15E(c)(3)(A) of the Exchange Act as a
record that must be retained.\18\ As a result, the various retention
and production requirements of paragraphs (c), (d), (e), and (f) of
Rule 17g-2 would apply to the documented internal control
structure.\19\
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\14\ See 15 U.S.C. 78o-7(c)(3)(A).
\15\ Id.
\16\ Id. For example, it does not prescribe how long the
document must be retained.
\17\ 17 CFR 240.17g-2(c), (d), (e), and (f). Section 17(a)(1) of
the Exchange Act 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. 15 U.S.C. 78q(a)(1). The Commission preliminarily believes it
would be necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the Exchange
Act to apply the record retention requirements of Rule 17g-2 to the
internal control structure required pursuant to Section 15E(c)(3)(A)
of the Exchange Act (15 U.S.C. 78o-7(c)(3)(A)). See Oversight of
Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33582 (June 18, 2007)
(``The Commission designed [Rule 17g-2] based on its experience with
recordkeeping rules for other regulated entities. These other books
and records rules have proven integral to the Commission's investor
protection function because the preserved records are the primary
means of monitoring compliance with applicable securities laws. Rule
17g-2 is designed to ensure that an NRSRO makes and retains records
that will assist the Commission in monitoring, through its
examination authority, whether an NRSRO is complying with the
provisions of Section 15E of the Exchange Act and the rules
thereunder.'') (footnotes omitted).
\18\ See proposed new paragraph (b)(12) of Rule 17g-2.
\19\ See 17 CFR 240.17g-2(c), (d), (e) and (f). Paragraph (c) of
Rule 17g-2 requires an NRSRO to retain the records identified in
paragraphs (a) and (b) for three years after the date the record is
made or received. 17 CFR 240.17g-2(c). Paragraph (d) requires, among
other things, that an NRSRO maintain each record identified in
paragraphs (a) and (b) in a manner that makes the original record or
copy easily accessible to the principal office of the NRSRO. 17 CFR
240.17g-2(d). Paragraph (e) sets forth the requirements that apply
when an NRSRO uses a third-party custodian to maintain its records.
17 CFR 240.17g-2(e). Paragraph (f) requires an NRSRO to promptly
furnish the Commission with legible, complete, and current copies,
and, if specifically requested, English translations, of the records
identified in paragraphs (a) and (b), or any other records of the
NRSRO subject to examination under Section 17(b) of the Exchange
Act. See 17 CFR 240.17g-2(f); see also 15 U.S.C. 78q(b).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (b)(12) of Rule 17g-2.
3. Proposed Amendments to Rule 17g-3
Section 15E(c)(3)(B) of the Exchange Act provides that the
Commission shall prescribe rules requiring an NRSRO to ``submit'' an
annual internal controls report to the Commission, which shall contain:
(1) A description of the responsibility of management in establishing
and maintaining an effective internal control structure; (2) an
assessment of the effectiveness of the internal control structure; and
(3) the attestation of the chief executive officer (``CEO'') or
equivalent individual.\20\ Rule 17g-3 requires an NRSRO to furnish
annual reports to the Commission.\21\ In particular, paragraph (a) of
Rule 17g-3 requires an NRSRO to furnish five or, in some cases, six
separate reports within 90 days after the end of the NRSRO's fiscal
year and identifies the reports that must be furnished.\22\ The first
report--the NRSRO's financial statements--must be audited; the
remaining reports may be unaudited.\23\ Paragraph (b) of Rule 17g-3
provides that the NRSRO must attach to the reports a signed statement
by a duly authorized person that the person has responsibility for the
reports and, to the best knowledge of the person, the reports fairly
present, in all material respects, the information contained in the
reports.\24\
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\20\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii).
\21\ See 17 CFR 240.17g-3.
\22\ See 17 CFR 240.17g-3(a)(1)-(6).
\23\ Id.
\24\ See 17 CFR 240.17g-3(b).
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The Commission proposes amending paragraphs (a) and (b) of Rule
17g-3 to implement the rulemaking mandated by Section 15E(c)(3)(B) of
the Exchange Act.\25\ The proposed amendment would add a new paragraph
(a)(7) to require an NRSRO to file an additional report--the report on
the NRSRO's internal control structure--with its annual submission of
reports pursuant to Rule 17g-3.\26\ As discussed above in Section
II.A.1 of this release, the Commission preliminarily believes it would
be appropriate at this time to defer prescribing factors an NRSRO must
take into consideration with respect to its internal control
[[Page 33424]]
structure. For similar reasons, the Commission preliminarily believes
it would be appropriate at this time to implement Sections
15E(c)(3)(B)(i) and (ii) of the Exchange Act through rule text that
closely mirrors the statute.\27\ Consequently, proposed new paragraph
(a)(7) would require that the internal control report contain: (1) a
description of the responsibility of management in establishing and
maintaining an effective internal control structure; and (2) an
assessment by management of the effectiveness of the internal control
structure.\28\ As is the case with the reports currently identified in
paragraphs (a)(2) through (a)(6) of Rule 17g-3, the report identified
in new paragraph (a)(7) would be unaudited.\29\ While the proposed rule
text closely mirrors the statutory text, the Commission is requesting
extensive comment below on whether it would be appropriate as part of
this rulemaking to provide more explanation in terms of the standards
to use in preparing the internal controls report and providing
information in the report. Based on the comments received, the
Commission may decide to prescribe by rule or identify through guidance
such standards.
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\25\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii). In addition, as a
technical amendment, the Commission proposes to amend the title of
Rule 17g-3 to replace the words ``financial reports'' with the words
``financial and other reports.'' The Commission notes that the
report identified in paragraph (a)(6) of Rule 17g-3, the proposed
internal control report, and the compliance report discussed below
in Section II.K of this release are not financial in nature. The
Commission also proposes to add the word ``filed'' in the title of
Rule 17g-3. As discussed below in Section II.M.1 of this release,
the Commission is proposing amendments to Rules 17g-1 and 17g-3 to
treat certain submissions of Form NRSRO and the Rule 17g-3 annual
reports as being ``filed'' as opposed to being ``furnished'' to
conform to amendments the Dodd-Frank Act made to Section 15E of the
Exchange Act. See Public Law 111-203 Sec. 932(a). Specifically, the
reports identified in paragraphs (a)(1), (2), (3), (4), (5), (7) and
(8) of Rule 17g-3 would be ``filed'' and the report identified in
paragraph (a)(6) would be ``furnished.''
\26\ See proposed new paragraph (a)(7) of Rule 17g-3.
\27\ See 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii).
\28\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) with proposed
new paragraphs (a)(7)(i) and (ii) of Rule 17g-3.
\29\ See proposed new paragraph (a)(7) of Rule 17g-3.
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Section 15E(c)(3)(B)(iii) of the Exchange Act provides that the
annual internal controls report must contain an attestation of the
NRSRO's CEO, or equivalent individual.\30\ Accordingly, the Commission
proposes amending paragraph (b) of Rule 17g-3 to require that the
NRSRO's chief executive officer, or, if the firm does not have a CEO,
an individual performing similar functions, provide a signed statement
that would need to be attached to the report.\31\
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\30\ 15 U.S.C. 78o-7(c)(3)(B)(iii).
\31\ See proposed amendments to paragraph (b) of Rule 17g-3. In
particular, the Commission proposes re-organizing existing paragraph
(b) of Rule 17g-3 into paragraphs (b)(1) and (b)(2). Paragraph
(b)(1) would contain the current requirement that the NRSRO must
attach to each of the annual reports required pursuant to paragraphs
(a)(1)-(6) a signed statement by a duly authorized person associated
with the NRSRO stating that the person has responsibility for the
financial reports and, to the best knowledge of the person, the
reports fairly present, in all material respects, the information
required to be contained in the report. Paragraph (b)(2) of Rule
17g-3 would require that the report on the NRSRO's internal control
structure be attested to by the NRSRO's CEO or an individual
performing similar functions. See proposed paragraph (b)(2) of Rule
17g-3.
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Request for Comment
The Commission generally requests comment on all aspects of these
proposed amendments to paragraphs (a) and (b) of Rule 17g-3. The
Commission also seeks comment on the following:
1. Is the requirement to provide a description of the
responsibility of management in establishing and maintaining an
effective internal control structure sufficiently explicit? If not, how
should the Commission modify proposed paragraph (a)(7) of Rule 17g-3 to
make the requirement more understandable? For example, should the
Commission provide guidance on how an NRSRO must describe the
responsibility of management in establishing and maintaining an
effective internal control structure? If so, what should that guidance
be? For example, are there existing frameworks that such guidance could
be modeled on?
2. In terms of establishing an effective internal control
structure, what level of NRSRO management should have primary
responsibility for the design of the internal control structure and
what level of management should supervise the design of the internal
control structure? For example, should managers with direct
responsibility for supervising the personnel who use the policies,
procedures, and methodologies for determining credit ratings and the
personnel who conduct compliance reviews for adherence to those
policies, procedures, and methodologies design the internal control
structure and a committee of the NRSRO's most senior managers supervise
the design of the internal control structure? Should other management
or non-management levels of the NRSRO have responsibility for either of
these functions? In addition, Section 15E(t)(3)(C) of the Exchange Act
provides that the board of directors of the NRSRO shall ``oversee'' the
``effectiveness of the internal control system with respect to the
policies and procedures for determining credit ratings.'' \32\ How
should this statutorily mandated board responsibility be integrated
with the responsibility of the NRSRO's management to establish an
effective internal control structure?
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\32\ See 15 U.S.C. 78o-7(t)(3)(A).
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3. In terms of establishing an effective internal control
structure, should the Commission define the term ``internal control
structure governing the implementation of and adherence to policies,
procedures, and methodologies for determining credit ratings''? In
terms of establishing an effective internal control structure, should
the Commission further define the term ``internal control structure
governing the implementation of and adherence to policies, procedures,
and methodologies for determining credit ratings''? If so, how should
that term be further defined? \33\ Provide suggested rule text and
supporting analysis.
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\33\ The term ``internal control'' has been defined in other
contexts. For example, the Commission has defined internal control
over financial reporting. See 17 CFR 240.13a-15(f).
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4. In terms of establishing an effective internal control
structure, should the Commission prescribe a standard in terms of the
design? If so, what standard would be appropriate? For example, should
the internal control structure be ``reasonably designed'' to achieve
its objectives (a standard required by Sections 15E(g) and (h) of the
Exchange Act with respect to policies and procedures of an NRSRO to
address, respectively, the misuse of material nonpublic information and
conflicts of interest)? \34\ Conversely, is the proposed requirement
that the internal control structure be ``effective'' a sufficient
standard?
---------------------------------------------------------------------------
\34\ See 15 U.S.C. 78o-7(g) and (h).
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5. In terms of maintaining an effective internal control structure,
what level of NRSRO management should have primary responsibility for
monitoring the operation of the internal control structure and the
NRSRO's adherence to the internal control structure? For example,
should managers with direct responsibility for supervising the
personnel who use the policies, procedures, and methodologies for
determining credit ratings and the personnel who conduct compliance
reviews for adherence to those policies, procedures, and methodologies
have day-to-day responsibility for monitoring the operation of the
internal control structure and the NRSRO's adherence to the internal
control structure? Should other management or non-management levels of
the NRSRO have responsibility for either of these functions? For
example, should the personnel responsible for monitoring the operation
of the internal control structure and the NRSRO's adherence to the
internal control structure generate periodic (weekly, monthly,
quarterly, and/or annual) reports that are provided to the NRSRO's most
senior managers and the board about the internal control structure? If
so, what information should be contained in those reports? In addition,
Section 15E(t)(3)(C) of the Exchange Act provides that the board of
directors of the NRSRO shall ``oversee'' the ``effectiveness of the
internal control system with respect to the policies and
[[Page 33425]]
procedures for determining credit ratings.'' \35\ How should this
statutorily mandated board responsibility be integrated with the
responsibility of the NRSRO's management to maintain an effective
internal control structure?
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\35\ See 15 U.S.C. 78o-7(t)(3)(A).
---------------------------------------------------------------------------
6. Is the requirement to provide an assessment by management of the
effectiveness of the internal control structure sufficiently explicit?
If not, how should the Commission modify proposed paragraph (a)(7) of
Rule 17g-3 to make the requirement more understandable? For example,
given that the NRSRO needs to maintain the internal control structure
(i.e., keep it in operation), should the Commission clarify that the
assessment should address the effectiveness of the internal control
structure during the entire fiscal year covered by the report?
7. In terms of reporting management's assessment of the
effectiveness of the internal control structure, should the Commission
provide guidance on how an NRSRO must assess the effectiveness of the
internal control structure, such as evaluative criteria or standards?
If so, what should those criteria or standards be? For example, should
the Commission require that management's assessment of the
effectiveness of the internal control structure be based on procedures
sufficient to evaluate the design of the internal control structure and
test its operating effectiveness?
8. In terms of management's assessment of the effectiveness of the
internal control structure, should the Commission define the conditions
that preclude management from concluding that the internal control
structure is effective? If so, how should an ineffective internal
control structure be defined? For example, should management be
precluded from concluding that the internal control structure is
effective if there are one or more instances of ``material weaknesses''
in the internal control structure? If one or more instances of
``material weaknesses'' should preclude management from concluding that
its internal control structure is effective, then should the Commission
define ``material weakness''? If so, how should the term ``material
weakness'' be defined? If management cannot conclude that the internal
control structure is effective, what corrective action or sanctions
should be imposed on the NRSRO?
9. In terms of reporting management's assessment of the
effectiveness of the internal control structure, should the Commission
provide guidance regarding the topics to be addressed in the report? If
so, what should that guidance be? For example, if the Commission
prescribes factors that an NRSRO should take into consideration in
establishing, maintaining, enforcing, and documenting its internal
control structure, should the report specifically reference those
factors? In addition, should the report identify or describe the
framework management used to conduct the evaluation of the
effectiveness of the internal control structure? Moreover, should the
report identify deficiencies found during the assessment process? If
so, should all deficiencies be identified or only those which preclude
management from concluding that the internal control structure is
effective? Furthermore, should the Commission require that the report
disclose whether there were any significant changes in the internal
control structure or other factors that could significantly affect the
internal control structure subsequent to the date of the evaluation,
including any corrective actions in response to any material weaknesses
found during the evaluation?
10. In terms of reporting management's assessment of the
effectiveness of the internal control structure, should the report
identify any fraud, significant errors, or previously undisclosed
conflicts of interest identified during the assessment of the
effectiveness of the internal control structure that could have a
material effect on the integrity of the NRSRO's procedures and
methodologies for determining credit ratings? What other disclosures
should the report contain?
11. Should an NRSRO be required to maintain evidential matter,
including documentation, to provide reasonable support for management's
assessment of the effectiveness of the internal control structure that
could be used by Commission examination staff to review the adequacy of
the assessment? In this regard, should the Commission identify specific
objectives of an internal control structure that the evidential matter
would need to support? For example, should the evidential matter
provide reasonable support for an assessment that the internal control
structure is designed to effectively prevent or detect failures of the
NRSRO to adhere to its policies, procedures, and methodologies for
determining credit ratings? If such specific objectives should be
identified, describe them and identify the evidential matter that could
be retained to allow the Commission examination staff to review the
adequacy of the NRSRO's assessment of the effectiveness of the internal
control structure in achieving the objective.
12. With respect to proposed paragraph (b)(2) of Rule 17g-3, should
the Commission provide more guidance on the type of management
responsibilities that would qualify an individual as one who performs
functions similar to a CEO? If so, what are those types of
responsibilities?
13. Should the Commission require the internal control report to be
filed separately from the Rule 17g-3 annual reports (which are kept
confidential to the extent permitted by law) and, instead, require the
internal control report to be disclosed to the public on, for example,
the Commission's Electronic Data Gathering, Analysis, and Retrieval
(``EDGAR'') system? What would be the benefits and costs of requiring
the public disclosure of the report?
14. If it would be appropriate to make the report public, should
the Commission prescribe a form for the report? If so, what information
should the form require the NRSRO to provide in the disclosure? What
would the form look like? Could any of the Commission's current forms
serve as a model? If so, identify the forms and explain how they could
be tailored to require an NRSRO to provide information about its
internal control structure.
B. Conflicts of Interest Relating to Sales and Marketing
Section 932(a)(4) of the Dodd-Frank Act added new paragraph (3) to
Section 15E(h) of the Exchange Act.\36\ Section 15E(h)(3)(A) of the
Exchange Act provides that the Commission shall issue rules to prevent
the sales and marketing considerations of an NRSRO from influencing the
production of credit ratings by the NRSRO.\37\ Section 15E(h)(3)(B) of
the Exchange Act provides that the Commission's rules must contain two
additional provisions.\38\ First, Section 15E(h)(3)(B)(i) requires that
the Commission's rules shall provide for exceptions for small NRSROs
with respect to which the Commission determines that the separation of
the production of ratings and sales and marketing activities is not
appropriate.\39\ Second, Section 15E(h)(3)(B)(ii) requires that the
Commission's rules shall provide for the suspension or revocation of
the registration of an NRSRO if the Commission finds, on the record,
after notice and opportunity for a hearing,
[[Page 33426]]
that: (1) The NRSRO has committed a violation of a rule issued under
Section 15E(h) of the Exchange Act; and (2) the violation affected a
rating.\40\
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\36\ Public Law 111-203 Sec. 932(a)(4) and 15 U.S.C. 78o-
7(h)(3).
\37\ 15 U.S.C. 78o-7(h)(3)(A).
\38\ 15 U.S.C. 78o-7(h)(3)(B)(i) and (ii).
\39\ 15 U.S.C. 78o-7(h)(3)(B)(i).
\40\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
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The Commission proposes to implement Sections 15E(h)(3)(A), (B)(i),
and (B)(ii) of the Exchange Act by amending the NRSRO conflict of
interest rule--Rule 17g-5.\41\ The proposals would amend the rule by:
(1) identifying a new prohibited conflict in paragraph (c) of the rule;
(2) adding a new paragraph (f) setting forth the finding the Commission
would need to make in order to grant a small NRSRO an exemption from
the prohibition; and (3) adding a new paragraph (g) setting forth the
standard for suspending or revoking an NRSRO's registration for
violating a rule adopted under Section 15E(h) of the Exchange Act.
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\41\ 17 CFR 240.17g-5. The Commission adopted and subsequently
amended Rule 17g-5 pursuant, in part, to authority in Section
15E(h)(2) of the Exchange Act (15 U.S.C. 78o-7(h)(2)). See Oversight
of Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33595-33599 (June 18,
2007); Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 6465-6469 (Feb. 9, 2009); Amendments
to Rules for Nationally Recognized Statistical Rating Organizations,
74 FR at 63842-63850 (Dec. 4, 2009).
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1. Proposed New Prohibited Conflict
As noted above, Section 15E(h)(3)(A) of the Exchange Act provides
that the Commission shall issue rules to prevent the sales and
marketing considerations of an NRSRO from influencing the production of
ratings by the NRSRO.\42\ The Commission is proposing to implement this
provision by identifying a new conflict of interest in paragraph (c) of
Rule 17g-5.\43\ Paragraph (c) prohibits a person within an NRSRO (as
well as the NRSRO itself) \44\ from having any of the conflicts of
interest relating to the issuance or maintenance of a credit rating or
credit rating agency identified in the paragraph under all
circumstances (hereinafter the ``absolute prohibitions'').\45\ Proposed
new paragraph (c)(8) of Rule 17g-5 would identify a new absolute
prohibition; namely, one in which the NRSRO issues or maintains a
credit rating where a person within the NRSRO who participates in the
sales or marketing of a product or service of the NRSRO or a product or
service of a person associated with the NRSRO also participates in
determining or monitoring the credit rating, or developing or approving
procedures or methodologies used for determining the credit rating,
including qualitative or quantitative models.\46\
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\42\ 15 U.S.C. 78o-7(h)(3)(A).
\43\ See proposed new paragraph (c)(8) of Rule 17g-5.
\44\ See paragraph (d) of Rule 17g-5 defining ``person within an
NRSRO'' for purposes of the rule. 17 CFR 240.17g-5(d).
\45\ See 17 CFR 240.17g-5(c)(1)-(7). These absolute prohibitions
are distinguished from the types of conflicts identified in
paragraph (b) of Rule 17g-5, which are prohibited unless the NRSRO
has taken the steps to address them set forth in paragraph (a) of
Rule 17g-5. See 17 CFR 240.17g-5(a) and (b).
\46\ See proposed new paragraph (c)(8) of Rule 17g-5.
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The proposed new absolute prohibition would be designed to address
situations in which, for example, individuals within the NRSRO
responsible for selling its products and services could seek to
influence a specific credit rating to favor an existing or prospective
client or the development of a credit rating methodology to favor a
class of existing or prospective clients. With regard to methodologies,
the Commission notes that its staff found as part of the examination of
the activities of the three largest NRSROs in rating residential
mortgage-backed securities (``RMBS'') and collateralized debt
obligations (``CDOs'') linked to subprime mortgages that it appeared
``employees responsible for obtaining ratings business would notify
other employees, including those responsible for criteria development,
about business concerns they had related to the criteria.'' \47\ The
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5 would
be designed to insulate individuals within the NRSRO responsible for
the analytic function from such sales and marketing concerns and
pressures.
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\47\ See Summary Report of Issues Identified in the Commission
Staff's Examination of Select Credit Rating Agencies, Commission
(July 2008), pp. 25-26.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (c)(8) of Rule 17g-5. The Commission also seeks
comment on the following:
1. Would the proposed amendment impact existing governance
structures, reporting lines and internal organizations of NRSROs,
particularly smaller NRSROs? If so, provide specific information about
the nature and consequences of such impacts.
2. Are there sales and marketing activities persons that
participate in determining credit ratings or developing or approving
procedures or methodologies used for determining credit ratings,
including qualitative or quantitative models, could participate in
without undermining the goal of proposed paragraph (a)(8) of Rule 17g-
5? If so, what types of activities? How could proposed new paragraph
(a)(8) of Rule 17g-5 be modified to retain an absolute prohibition and
at the same time not prohibit persons who participate in determining
credit ratings or developing or approving procedures or methodologies
used for determining credit ratings, including qualitative or
quantitative models, to participate in sales and marketing activities
that do not expose them to business concerns that could compromise
their analytical integrity?
3. Should the Commission provide guidance on what constitutes a
sales and marketing activity? If so, how should the Commission define
``sales and marketing activities''? In addition, should the Commission
define what it means to ``participate in sales and marketing
activities''? Similarly, should the Commission define what it means to
``participate in developing or approving procedures and methodologies
used for determining credit ratings''? If so, how should the Commission
define these terms?
4. Identify other requirements applicable to NRSROs that are
designed to address this conflict of interest.
2. Proposed Exemption for ``Small'' NRSROs
Section 15E(h)(3)(B)(i) of the Exchange Act requires that the
Commission's rules under Section 15E(h)(3)(A) shall provide for
exceptions for small NRSROs with respect to which the Commission
determines that the separation of the production of ratings and sales
and marketing activities is not appropriate.\48\ To implement this
provision, the Commission is proposing to amend Rule 17g-5 by adding a
new paragraph (f).\49\ Proposed paragraph (f) would provide a mechanism
for a small NRSRO to apply in writing for an exemption from the
absolute prohibition proposed in new paragraph (c)(8).\50\ In
particular,
[[Page 33427]]
proposed new paragraph (f) of Rule 17g-5 would provide that upon
written application by an NRSRO, the Commission may exempt, either
conditionally or unconditionally or on specified terms and conditions,
such NRSRO from the provisions of paragraph (c)(8) of Rule 17g-5 if the
Commission finds that due to the small size of the NRSRO it is not
appropriate to require the separation within the NRSRO of the
production of credit ratings from sales and marketing activities and
such exemption is in the public interest.\51\
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\48\ See 15 U.S.C. 78o-7(h)(3)(B)(i).
\49\ See proposed new paragraph (f) of Rule 17g-5.
\50\ Section 36 of the Exchange Act provides that the
Commission, by rule, regulation, or order, may conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities or transactions from any
provision or provisions of the Exchange Act or any rule or
regulation thereunder, to the extent that such exemption is
necessary or appropriate in the public interest and is consistent
with the protection of investors. 17 U.S.C. 78mm. Consequently, an
NRSRO could request to be exempt from the proposed sales and
marketing prohibition pursuant to this more general authority in
Section 36. See id. Nonetheless, the Commission has adopted rules
providing mechanisms for registrants--such as broker-dealers--to
request an exemption from specific rule requirements. See, e.g., 17
CFR 240.15c3-1(b)(3); 17 CFR 240.15c3-3(k)(3); and 17 CFR 240.17a-
5(m)(3). The Commission preliminarily believes proposed paragraph
(f) of Rule 17g-5 should parallel such provisions.
\51\ See proposed new paragraph (f) of Rule 17g-5.
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The Commission preliminarily believes that the absolute prohibition
should apply to all NRSROs. However, the Commission notes that in some
cases the small size of an NRSRO could make a complete separation of
the sales and marketing function from the credit rating analytical
function inappropriate. For example, the NRSRO may not have enough
staff (or the resources to hire additional staff) to establish separate
functions. In such a case, the Commission would entertain requests for
relief. In granting such relief, the Commission may impose conditions
designed to preserve as much of the separation between these two
functions as possible.
Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (f) of Rule 17g-5. The Commission also seeks
comment on the following:
1. The Commission notes that Section 15E(h)(3)(A) of the Exchange
Act provides that the Commission shall issue rules to prevent the sales
and marketing considerations of an NRSRO from influencing the
production of credit ratings by the NRSRO. Section 15E(h)(3)(B)(i)
requires that the Commission's rules shall provide for exceptions for
small NRSROs with respect to which the Commission determines that the
separation of the production of ratings and sales and marketing
activities is not appropriate (emphasis added). Why would the
separation of the production of ratings from sales and marketing
activities be appropriate for NRSROs that are not small but might not
be appropriate for NRSROs that are small? For example, does the small
size of an NRSRO make the conflict less likely to influence ratings? If
so, why? Alternatively, could the small size of an NRSRO make the
application of the absolute prohibition impractical, thus preventing a
small credit rating agency from seeking registration or a small NRSRO
from maintaining its registration? If so, would the adverse impact on
competition outweigh the benefit of applying the absolute prohibition
to a small NRSRO? If so, explain how.
2. Would the case-by-case approach proposed by the Commission
appropriately implement Section 15E(h)(3)(B)(i) of the Exchange Act? If
not, how should the proposal be modified? For example, should the
Commission prescribe an objective self-executing exemption from the
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5? For
example, should the exemption be automatic for ``small'' NRSROs? If so,
how should the Commission define a small NRSRO? For example, should the
definition be based on the total assets of the NRSRO? In this regard,
should the Commission adopt a rule that exempts any NRSRO that has
total assets of $5 million or less from the absolute prohibition given
that is how the Commission currently defines a small NRSRO for purposes
of the Regulatory Flexibility Act? \52\ How would such an exemption
work in practice? For example, would such a rule need to provide for a
transition period for an NRSRO that crosses the total asset threshold
to provide time to establish the separate sales and marketing function?
How long should such a transition period be? For example, should it be
90, 120, 180 or some other number of days after the required filing
date of the NRSRO's audited financial statements indicating the
threshold was crossed are required to be filed with the Commission?
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\52\ See Section VII.C of this release; see also 5 U.S.C.
603(a), Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations, 72 FR 33618 (June 18,
2007); Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 6481 (Feb. 9, 2009); and Amendments
to Rules for Nationally Recognized Statistical Rating Organizations,
74 FR at 63863 (Dec. 4, 2009).
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3. What other factors should the Commission consider in analyzing
whether the small size of an NRSRO makes it not appropriate to require
the separation of the production of credit ratings from sales and
marketing activities? Should the Commission consider the annual
revenues of the NRSRO? Should the Commission consider the number of
employees of the NRSRO? Would consideration of the number of employees
create a disincentive to devote resources to adequately staff the
NRSRO? Are there factors in addition to an NRSRO's size the Commission
should consider in analyzing whether to grant an exemption under this
proposal? If so, please describe any such factors.
4. If the Commission granted relief to an NRSRO, should the
Commission specify conditions for obtaining the relief? If so, what
should those conditions be? For example, should the conditions limit
the number of credit analysts that can participate in sales and
marketing activities, limit the manner in which they can participate in
such activities, require additional procedures to address the conflict,
and require additional procedures to document how credit analysts
participate in sales and marketing activities? If any of these
conditions would be appropriate, describe how they could be implemented
in practice.
3. Suspending or Revoking a Registration
Section 15E(h)(3)(B)(ii) of the Exchange Act specifies that the
Commission's rules under Section 15E(h) of the Exchange Act shall
provide for suspension or revocation of the registration of an NRSRO if
the Commission finds, on the record, after notice and opportunity for a
hearing, that the NRSRO has committed a violation of ``a rule issued
under this subsection'' and the violation of the rule affected a credit
rating.\53\ While Section 15E(h)(3)(A) relates only to the conflict
arising from sales and marketing activities, Section 15E(h)(3)(B)(ii)--
by using the term ``subsection''--has a broader scope in that it refers
to all rules issued under Section 15E(h) of the Exchange Act.\54\
Consequently, the rule implementing Section 15E(h)(3)(B)(ii) must
provide for the suspension or revocation of an NRSRO's registration for
violations of any rule adopted under Section 15E(h).\55\ Moreover, the
Commission notes that Section 15E(h)(3)(B)(ii) does not require that
the violation of the rule be ``willful.'' \56\
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\53\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
\54\ See id.
\55\ Id.
\56\ Id.
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Currently, the Commission can seek to suspend or revoke the
registration of an NRSRO, in addition to other potential sanctions,
under Section 15E(d) of the Exchange Act.\57\ In particular, Section
15E(d) provides that the Commission shall, by order, censure, place
limitations on the activities, functions, or operations of, suspend for
a period not exceeding 12 months, or revoke the registration of an
NRSRO if the Commission finds, ``on the record after notice and
opportunity for a hearing,'' that such sanction is
[[Page 33428]]
``necessary for the protection of investors and in the public
interest'' and the NRSRO, or a person associated with the NRSRO, has
engaged in one or more of six categories of conduct.\58\ The first
category is that the NRSRO or an associated person has: committed or
omitted any act, or has been subject to an order or finding, enumerated
in subparagraphs (A), (D), (E), (G), or (H) of Section 15(b)(4) of the
Exchange Act; has been convicted of any offense identified in Section
15(b)(4)(B) of the Exchange Act; or has been enjoined from any action,
conduct, or practice identified in Section 15(b)(4)(C) of the Exchange
Act.\59\ The acts enumerated in Section 15(b)(4)(D) of the Exchange Act
include that the person has willfully violated any provision of the
Exchange Act or the rules or regulations under the Exchange Act.\60\
Therefore, the Commission has the ability, under Section 15E(d), to
suspend or revoke the registration of an NRSRO for a willful violation
of Rule 17g-5, but does not have the power to do so under Section
15E(d) for violations of Rule 17g-5 that are not willful.\61\
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\57\ See 15 U.S.C. 78o-7(d).
\58\ 15 U.S.C. 78o-7(d).
\59\ See 15 U.S.C. 78o-7(d)(1)(A); see also 15 U.S.C.
78o(b)(4)(A), (B), (C), (D), (E), (G), and (H).
\60\ 15 U.S.C. 78o(b)(4)(D).
\61\ See 15 U.S.C. 78o-7(d)(1)(A) and 15 U.S.C. 78o(b)(4)(D).
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The Commission preliminarily believes a rule implementing Section
15E(h)(3)(B)(ii) of the Exchange Act should work in conjunction with
Sections 15E(d) and 21C of the Exchange Act.\62\ Specifically, proposed
new paragraph (g) of Rule 17g-5 would provide that in a proceeding
pursuant to Section 15E(d) or Section 21C of the Exchange Act, the
Commission shall suspend or revoke the registration of an NRSRO if the
Commission finds in such proceeding that the NRSRO has violated a rule
issued under Section 15E(h) of the Exchange Act, the violation affected
a rating, and that suspension or revocation is necessary for the
protection of investors and in the public interest.\63\ The Commission
preliminarily believes this provision is appropriately placed in Rule
17g-5 given that it is the predominant rule issued under Section 15E(h)
of the Exchange Act.\64\
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\62\ 15 U.S.C. 78o-7(d) and 15 U.S.C. 78u-3.
\63\ See proposed new paragraph (g) of Rule 17g-5; see also 15
U.S.C. 78o-7(d) and (h), and 78u-3. Section 21C of the Exchange Act
provides the Commission with authority, among other things, to enter
an order requiring, among other things, that a person cease-and-
desist from continuing to violate, or future violations of, a
provision of the Exchange Act or any rule or regulation thereunder.
Proposed paragraph (g) of Rule 17g-5 would provide that the
Commission can issue an order in a cease-and-desist proceeding
suspending or revoking the registration of an NRSRO. Id.
\64\ See, e.g., Oversight of Credit Rating Agencies Registered
as Nationally Recognized Statistical Rating Organizations, 72 FR at
33595-33599 (June 18, 2007), Amendments to Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 6465-6469
(Feb. 9, 2009), and Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63842-63850 (Dec. 4, 2009).
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The first two proposed findings in proposed paragraph (g) of Rule
17g-5 would mirror the text of Section 15E(h)(3)(B)(ii) of the Exchange
Act.\65\ The final finding--that the suspension or revocation is
necessary for the protection of investors and in the public interest--
is a common finding that the Commission must make to take disciplinary
action against a registered person or entity.\66\ It is not, however, a
finding that the Commission must make in a proceeding under Section
21C.\67\ Further, unlike Section 15E(d) of the Exchange Act, the
Commission can take action under Section 21C for violations of the
securities laws even if such violations are not willful.\68\ Moreover,
Section 15E(h)(3)(B)(ii) of the Exchange Act does not prescribe the
maximum amount of time for which an NRSRO could be suspended, whereas
Section 15E(d) provides that a suspension shall not exceed 12
months.\69\ Consequently, a proceeding pursuant to paragraph (g) of
Rule 17g-5 brought under Section 21C could result in a suspension that
exceeds 12 months. Given that Section 21C of the Exchange Act has a
lower threshold for the intent to establish a violation, and given the
substantial consequences of suspending or revoking a registration, the
Commission preliminarily believes that the public interest finding
would be an appropriate predicate to a suspension or revocation of an
NRSRO's registration under Section 21C of the Exchange Act.
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\65\ Compare the first two findings in proposed new paragraph
(g) of Rule17g-5 (that the NRSRO has violated a rule issued under
Section 15E(h) of the Act; and the violation affected a rating) with
Sections 15E(h)(3)(B)(ii)(I) and (II) of the Exchange Act,
respectively. 15 U.S.C. 78o-7(h)(3)(B)(ii)(I) and (II).
\66\ For example, the Commission must make this finding to take
action under Section 15E(d) of the Exchange Act. See 15 U.S.C. 78o-
7(d).
\67\ See 15 U.S.C. 78u-3.
\68\ Compare 15 U.S.C. 78o-7(d) and 15 U.S.C. 78u-3.
\69\ Compare 15 U.S.C. 78o-7(h)(3)(B)(ii) and 15 U.S.C. 78o-
7(d).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (g) of Rule 17g-5. The Commission also seeks
comment on the following:
1. Should the Commission propose, pursuant to Section
15E(h)(3)(B)(ii) of the Exchange Act, an independent and alternative
process for suspending or revoking an NRSRO's registration for a
violation of a rule issued under Section 15E(h) (i.e., a proceeding
that is not pursuant to Sections 15E(d) and 21C of the Exchange Act)?
If so, how should such a separate proceeding operate? For example,
should it require the same findings proposed above or alternative or
additional findings?
2. In terms of the finding that ``the violation affected a
rating,'' what type of factual predicate should support such a finding?
For example, would it be appropriate to make such a finding if the
Commission determined that the violation caused the NRSRO to issue a
credit rating that was not based solely on its documented procedures
and methodologies for determining credit ratings (e.g., the Commission
finds that undue influence impacted the credit rating assigned to the
rated obligor, security, or money market instrument because strictly
adhering to the procedures and methodologies would have resulted in the
NRSRO issuing a credit rating at a lower or higher notch in the
applicable rating scale)?
3. With respect to proposed new paragraph (g) of Rule 17g-5, should
the proposed rule include additional or alternative findings that the
Commission would need to make to revoke or suspend the registration of
an NRSRO in a proceeding under Sections 15E(d) or 21C? If so, what
should those findings be? For example, should the Commission need to
find that the violation harmed investors or other users of credit
ratings?
4. Should the Commission, as proposed, require a public interest
finding in order to suspend or revoke an NRSRO's registration in a
proceeding under paragraph (g) of Rule 17g-5 pursuant to Section 21C,
or should the rule provide for the suspension or revocation of an
NRSRO's registration solely based on a finding that a violation of a
rule affected a rating?
5. With respect to proposed new paragraph (g) of Rule 17g-5, should
the rule incorporate only Section 15E(d) of the Exchange Act? If so,
why? Alternatively, should it incorporate only Section 21C of the
Exchange Act? If so, why?
6. As noted above, there would be no limit on the amount of time
for which the Commission could suspend the registration of an NRSRO in
a proceeding under Section 21C of the Exchange Act and proposed
paragraph (g) of Rule 17g-5. Should the Commission add such a time
limit to be consistent with Section 15E(d) of the Exchange Act?
Alternatively, does the
[[Page 33429]]
different standard provide the Commission with appropriate flexibility
to seek longer suspensions?
C. ``Look-Back'' Review
Section 932(a)(4) of the Dodd-Frank Act amended Section 15E(h) of
the Exchange Act to add a new paragraph (4).\70\ The Commission is
proposing to implement rulemaking required in Section 15E(h)(4)(A)(ii)
of the Exchange Act through proposed paragraph (c) of new Rule 17g-
8.\71\ In addition, the Commission is proposing to amend Rule 17g-2 to
apply that rule's record retention and production requirements to the
policies and procedures required pursuant to the self-executing
provisions in Section 15E(h)(4)(A) of the Exchange Act and pursuant to
proposed paragraph (c) of new Rule 17g-8.\72\
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\70\ See Public Law 111-203 Sec. 932(a)(4) and 15 U.S.C. 78o-
7(h)(4).
\71\ New Rule 17g-8 would be codified at 17 CFR 240.17g-8, if
adopted. In addition, new Rule 17g-8, as proposed, would consolidate
requirements that NRSROs have policies and procedures in a number of
areas. As discussed below in Section II.F.1 of this release,
proposed paragraph (a) of new Rule 17g-8 would require an NRSRO to
establish policies and procedures with respect to credit rating
methodologies. In addition, as discussed below in Section II.J.1 of
this release, proposed paragraph (b) of new Rule 17g-8 would require
an NRSRO to establish policies and procedures with respect to the
use of credit rating symbols, numbers, and scores. And, as discussed
in this section of the release, the Commission is proposing to
implement rulemaking specified in Section 15E(h)(4)(A)(ii) of the
Exchange Act (15 U.S.C. 78o-7(h)(4)(A)(ii)), in part, by proposing
paragraph (c) of new Rule 17g-8.
\72\ See 15 U.S.C. 78o-7(h)(4)(A), proposed paragraph (c) of new
Rule 17g-8, and proposed new paragraph (a)(9) of Rule 17g-2.
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1. Proposed Paragraph (c) of New Rule 17g-8
Sections 15E(h)(4)(A)(i) and (ii) of the Exchange Act require an
NRSRO to establish, maintain, and enforce policies and procedures
reasonably designed to ensure that, in any case in which an employee of
a person subject to a credit rating of the NRSRO or the issuer,
underwriter, or sponsor of a security or money market instrument
subject to a credit rating of the NRSRO, was employed by the NRSRO and
participated in any capacity in determining credit ratings for the
person or the securities or money market instruments during the 1-year
period preceding the date an action was taken with respect to the
credit rating, the NRSRO shall: (1) Conduct a review to determine
whether any conflicts of interest of the employee influenced the credit
rating (a ``look-back review''); and (2) take action to revise the
rating if appropriate, in accordance with such rules as the Commission
shall prescribe.\73\ Consequently, Section 15E(h)(4)(A)(i) of the
Exchange Act contains a self-executing provision requiring an NRSRO to
establish, maintain, and enforce policies and procedures as described
above to conduct look-back reviews, and Section 15E(h)(4)(ii) contains
a provision mandating Commission rulemaking with respect to
requirements for an NRSRO to revise a credit rating in certain
circumstances.\74\
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\73\ See 15 U.S.C. 78o-7(h)(4)(A)(i) and (ii) (emphasis added).
\74\ Id.
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The Commission proposes to implement the rulemaking required in
Section 15E(h)(4)(A)(ii) of the Exchange Act by proposing paragraph (c)
of new Rule 17g-8.\75\ Proposed paragraph (c) would require that the
policies and procedures the NRSRO establishes, maintains, and enforces
pursuant to Section 15E(h)(4)(A) of the Exchange Act must address
instances in which a review conducted pursuant to those policies and
procedures determines that a conflict of interest influenced a credit
rating assigned to an obligor, security, or money market instrument by
including, at a minimum, procedures that are reasonably designed to
ensure the NRSRO will: (1) Immediately place the credit rating on
credit watch; (2) promptly determine whether the credit rating must be
revised so it no longer is influenced by a conflict of interest and is
solely the product of the NRSRO's documented procedures and
methodologies for determining credit ratings; and (3) promptly publish
a revised credit rating, if appropriate, or affirm the credit rating if
appropriate.\76\
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\75\ See proposed paragraph (c) of new Rule 17g-8 and 15 U.S.C.
78o-7(h)(4)(A)(ii).
\76\ See proposed paragraphs (c)(1), (2) and (3) of new Rule
17g-8.
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The Commission acknowledges that Section 15E(c)(2) of the Exchange
Act provides, in pertinent part, that the Commission may not regulate
the substance of credit ratings or the procedures and methodologies by
which an NRSRO determines credit ratings.\77\ The Commission
preliminarily believes that the steps described above would not
regulate the procedures and methodologies by which an NRSRO determines
credit ratings because the NRSRO would apply its own procedures and
methodologies to determine whether the credit rating should be revised.
Moreover, the placement of a credit rating on credit watch is not a
determination of a credit rating (i.e., it does not change the credit
rating) but rather is a means of providing notice to users of the
NRSRO's credit ratings that an active evaluation of the credit rating
is underway. For these reasons, the Commission preliminarily believes
that the approach in proposed paragraph (c) of new Rule 17g-8
appropriately avoids regulating the substance of credit ratings or the
procedures and methodologies an NRSRO uses to determine credit ratings
but, at the same time, requires an NRSRO to have procedures reasonably
designed to ensure that it immediately provides notification and
promptly address a credit rating that is influenced by a conflict of
interest.\78\ The Commission also preliminarily believes that the
actions prescribed in proposed paragraph (c) of new Rule 17g-8 are
steps a prudent NRSRO would take in the normal course when discovering
a conflict of interest influenced the determination of a credit rating.
Nonetheless, the Commission is soliciting comment on these issues
below.
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\77\ 15 U.S.C. 78o-7(c)(2).
\78\ The Commission also notes an NRSRO would, among other
things, violate Section 15E(h)(1) of the Exchange Act and Rule 17g-
5, among other rules, if it continued to assign an obligor,
security, or money, market instrument a credit rating that, absent
the undue influence of the conflict of interest, would be different
because the NRSRO could not be deemed to have policies and
procedures reasonably designed to address and manage conflicts of
interest that can arise from its business under such a circumstance.
See 15 U.S.C. 78o-7(h) and 17 CFR 17g-5.
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Proposed paragraph (c)(1) of new Rule 17g-8 would require the NRSRO
to have procedures reasonably designed to ensure that, upon the NRSRO's
discovery of the conflict, it immediately publishes a rating action
placing the applicable credit ratings of the obligor, security, or
money market instrument on credit watch or review.\79\ When an NRSRO
publishes a rating action indicating the current credit rating assigned
to an obligor, security, or money market instrument (or a class of
obligors, securities, or money market instruments) is on credit watch
or under review, the purpose is to notify users of the NRSRO's credit
ratings that the credit rating is undergoing a process of evaluation
that may result in it being upgraded or downgraded.\80\ The Commission
preliminarily believes an NRSRO should have policies and procedures
reasonably designed to ensure that the users of its credit ratings are
provided immediate notice of the discovery that a conflict influenced a
credit rating assigned to an obligor, security, or money market
instrument.
[[Page 33430]]
The Commission also preliminarily believes an effective means of
providing such notice would be to place the obligor, security, or money
market instrument on credit watch.
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\79\ See proposed paragraph (c)(1) of new Rule 17g-8.
\80\ For example, an NRSRO may place a credit rating on negative
credit watch, which means it is evaluating whether to downgrade the
credit rating, or on positive credit watch, which means it is
evaluating whether to upgrade the credit rating.
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Proposed paragraph (c)(1) of new Rule 17g-8 also would provide that
the policies and procedures must be reasonably designed to ensure the
NRSRO includes the information required by paragraph
(a)(1)(ii)(J)(3)(i) of Rule 17g-7 with the publication of the rating
action placing the credit rating of the obligor, security, or money
market instrument on credit watch.\81\ As discussed below in Section
II.G of this release, the Commission is proposing to implement Section
15E(s) of the Exchange Act, in part, by requiring, in proposed new
paragraph (a) of Rule 17g-7, that an NRSRO generate a form to be
included with the publication of a credit rating.\82\ Proposed
paragraph (a) of Rule 17g-7, among other things, would prescribe
certain qualitative and quantitative information that must be disclosed
in the form.\83\ The Commission is proposing that the qualitative
information in the form include certain disclosures that would need to
be made if the rating action results from a look-back review conducted
pursuant to Section 15E(h)(4)(A)(i) of the Exchange Act and proposed
paragraph (c) of new Rule 17g-8.\84\ Specifically, when a credit rating
is placed on credit watch, proposed new paragraph (a)(1)(ii)(J)(3)(i)
of Rule 17g-7 would require the NRSRO to provide in the form published
with the rating action an explanation that the reason for the action is
the discovery that a credit rating assigned to the obligor, security,
or money market instrument in one or more prior rating actions was
influenced by a conflict of interest and the date and associated credit
rating of each prior rating action the NRSRO currently has determined
was influenced by the conflict.\85\ This would alert users of the
NRSRO's credit ratings that the credit rating assigned to the obligor,
security, or money market instrument might be revised to address a
conflict of interest and would identify the prior rating action or
actions the NRSRO has determined were influenced by the conflict. With
respect to identifying the prior rating actions, the Commission is
proposing that the rule require the NRSRO to provide the date and
associated credit rating of such actions the NRSRO ``currently has
determined'' were influenced by the conflict.\86\ The Commission's
proposed use of the term ``currently'' is designed to conform to the
requirement of proposed paragraph (c)(1) of Rule 17g-8 that the NRSRO
have procedures designed to place the credit rating of the obligor,
security, or money market instrument on credit watch immediately upon
the discovery that a conflict influenced a prior credit rating action
(i.e., not wait until the NRSRO has determined whether additional
credit ratings previously assigned to the obligor, security, or money
market instrument also were influenced by the conflict). The Commission
preliminarily believes that the best approach would be to alert users
of the NRSRO's credit ratings as soon as possible after a conflict is
discovered.
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\81\ Id.; see also proposed new paragraph (a)(1)(ii)(J)(3)(i) of
Rule 17g-7.
\82\ See 15 U.S.C. 78o-7(s) and proposed new paragraph (a) of
Rule 17g-7.
\83\ See proposed new paragraphs (a)(1)(ii)(A)-(N) of Rule 17g-
7.
\84\ See proposed new paragraphs (a)(1)(ii)(J)(3)(i)-(iii) of
Rule 17g-7 and related discussion below in Section II.G.3 of the
release.
\85\ See proposed new paragraph (a)(1)(ii)(J)(3)(i) of Rule 17g-
7.
\86\ Id.
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Proposed paragraph (c)(2) of new Rule 17g-8 would require the NRSRO
to have procedures reasonably designed to ensure it promptly determines
whether the current credit rating assigned to the obligor, security, or
money market instrument must be revised so that it no longer is
influenced by a conflict of interest and is solely a product of the
documented procedures and methodologies the NRSRO uses to determine
credit ratings.\87\ The goal would be to ensure as quickly as possible
that the credit rating assigned to the obligor, security, or money
market instrument is solely a product of the NRSRO's procedures and
methodologies for determining credit ratings (i.e., is in no way
influenced by the conflict). With respect to making this determination,
the Commission preliminarily believes one approach would be to apply de
novo the NRSRO's procedures and methodologies for determining credit
ratings to the rated obligor, security, or money market instrument and
revise the current credit rating if the de novo application produces a
credit rating at a different notch on the rating scale.
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\87\ See proposed paragraph (c)(2) of new Rule 17g-8.
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The Commission does not expect an NRSRO would revise a credit
rating in every circumstance in which an earlier rating action was
influenced by a conflict of interest. The Commission preliminarily
notes that Section 15E(h)(4)(A)(ii) of the Exchange Act provides that
the NRSRO's policies and procedures shall be reasonably designed to,
among other things, ensure that the NRSRO takes action to revise the
credit rating ``if appropriate.''\88\ It is possible, for example, that
in the period since the NRSRO published the conflicted credit rating
events unrelated to the conflict occurred that when factored into a de
novo application of the NRSRO's procedures and methodologies for
determining credit ratings would produce a credit rating at the same
notch in the rating scale as the credit rating that was influenced by
the conflict.\89\ The Commission preliminarily believes a requirement
that the NRSRO nonetheless revise the credit rating could interfere
with the NRSRO's procedures and methodologies for determining credit
ratings in that it would force the NRSRO to change the credit rating
assigned to the obligor, security, or money market instrument to a
different notch in the rating scale than would be the case if the
credit rating were solely a product of the NRSRO's procedures and
methodologies. Consequently, a mandatory revision requirement could, in
effect, require the NRSRO to publish a credit rating that was
inaccurate from the perspective of those procedures and methodologies.
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\88\ 15 U.S.C. 78o-7(h)(4)(A)(ii).
\89\ For example, assume that nine months ago an analyst
upgraded the credit rating assigned to an issuer's securities from
BBB to AA. The analyst leaves the NRSRO to work for the issuer. The
analyst's new employment triggers a look-back review of the rating
action upgrading the credit rating from BBB to AA pursuant to
Section 15E(h)(4)(A)(i) of the Exchange Act. The look-back review
determines the credit rating should not have been upgraded from BBB
to AA at that point in time and the analyst's action in upgrading
the credit rating was influenced by the prospect of employment with
the issuer. The NRSRO performs a de novo review of the credit rating
assigned to the issuer by applying its procedures and methodologies
for determining credit ratings. This review--as required by the
procedures and methodologies--takes into consideration favorable
financial results the issuer reported three months ago.
Consequently, the process of re-rating the issuer's securities
determines the current credit rating should be AA.
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Proposed paragraph (c)(3) of new Rule 17g-8 would require that the
NRSRO have procedures reasonably designed to ensure it promptly
publishes a revised credit rating, if appropriate, or an affirmation of
the credit rating, if appropriate, based on the determination of
whether the current credit rating assigned to the obligor, security, or
money market instrument must be revised.\90\ The Commission's intent is
for the NRSRO to have procedures that are reasonably designed to notify
users of the NRSRO's credit ratings as quickly as possible, whether the
credit rating assigned to the obligor, security, or money market
instrument will be
[[Page 33431]]
changed or remain the same.\91\ The goal would be to promptly remove
the uncertainty surrounding the credit rating to limit the potential
that investors and other users of credit ratings might make investment
or other credit based decisions based on incomplete information.
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\90\ See proposed paragraphs (c)(3)(i) and (ii) of new Rule 17g-
8; see also proposed new paragraphs (a)(1)(ii)(J)(3)(ii) and (iii)
of Rule 17g-7.
\91\ The Commission notes that, in the case of an NRSRO that
makes its rating actions available only to subscribers, former
subscribers who made an investment or other credit based decision
using the credit rating likely would not receive notice that the
credit rating was influenced by a conflict of interest as well as
any changes made to the credit rating as a result of the ``look-
back'' review.
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As with the placement of the credit rating on credit watch,
proposed paragraph (c)(3) of new Rule 17g-8 would require that the
NRSRO's procedures would need to be reasonably designed to ensure that
information required pursuant to proposed new paragraph
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7, respectively, is included
with the publication of a revised or affirmed credit rating.\92\ In the
case of a revised rating, proposed new paragraph (a)(1)(ii)(J)(3)(ii)
of Rule 17g-7 would require the NRSRO to provide in the form published
with the rating action an explanation that the reason for the action is
the discovery that a credit rating assigned to the obligor, security,
or money market instrument in one or more prior rating actions was
influenced by a conflict of interest, the date and associated credit
rating of each prior rating action the NRSRO has determined was
influenced by the conflict, and an estimate of the impact the conflict
had on each such prior rating action.\93\ Similarly, in the case of an
affirmed rating, proposed new paragraph (a)(1)(ii)(J)(3)(iii) of Rule
17g-7 would require the NRSRO to provide an explanation of why no
rating action was taken to revise the credit rating notwithstanding the
conflict, the date and associated credit rating of each prior rating
action the NRSRO has determined was influenced by the conflict, and an
estimate of the impact the conflict had on each such prior rating
action.\94\
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\92\ See proposed paragraphs (c)(3)(i) and (ii) of new Rule 17g-
8.
\93\ See proposed new paragraph (a)(1)(ii)(J)(3)(ii) of Rule
17g-7.
\94\ See proposed new paragraph (a)(1)(ii)(J)(3)(iii) of Rule
17g-7.
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As indicated in the proposed disclosures, the NRSRO would need to
include an estimate of the impact the conflict had on each prior rating
action influenced by the conflict.\95\ The Commission preliminarily
believes one approach an NRSRO could take to making such an estimate
would be to apply de novo its procedures and methodologies for
determining credit ratings to the rated obligor, security, or money
market instrument using information and inputs as of the time period
for which it was determined that the credit rating was influenced. In
other words, under this approach the NRSRO would reconstruct the past
rating action through a ``conflict-free'' application of its procedures
and methodologies for determining credit ratings. The NRSRO then could
compare the credit ratings and disclose the difference between the
rating action that was influenced by a conflict and the reconstructed
rating action.
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\95\ See proposed paragraph (c)(2)(i) of new Rule 17g-8; see
also proposed paragraph (c)(2)(ii) of Rule 17g-8.
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The disclosures required by proposed new paragraphs
(a)(1)(ii)(J)(3)(i), (ii) and (iii) of Rule 17g-7 would alert users of
the NRSRO's credit ratings that the rating action was taken because a
conflict of interest had influenced one or more credit ratings assigned
to the obligor, security, or money market instrument.\96\ In addition,
the estimate of the impact of the conflict would provide users of the
NRSRO's credit ratings with a sense of the magnitude of the variation
between the credit rating influenced by the conflict and the credit
rating that would have been determined had the conflict not existed.
The users of the NRSRO's credit ratings could consider this information
in evaluating the ability of the NRSRO to manage conflicts of interest
in the production of credit ratings. Moreover, if the variation between
the credit rating influenced by the conflict and the ``un-conflicted''
credit rating was large (e.g., 2 or 3 notches in the applicable rating
scale), users of the NRSRO's credit ratings could consider the
potential risk of using the NRSRO's credit ratings to make investment
or other credit-based decisions (particularly if the revision
downgraded the credit rating to a low category in the rating scale).
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\96\ See proposed paragraphs (a)(1)(ii)(J)(3)(i), (ii) and (iii)
of Rule 17g-7.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (c) of new Rule 17g-8. The Commission also seeks
comment on the following:
1. Would the requirements to have procedures reasonably designed to
ensure the NRSRO takes the steps set forth in proposed paragraphs
(c)(1), (2), and (3) of new Rule 17g-8 alter the procedures and
methodologies an NRSRO uses to determine credit ratings? For example,
would an NRSRO take materially different steps if a look-back review
conducted pursuant to Section 15E(h)(4)(A) of the Exchange Act
determined that a credit rating was influenced by a conflict of
interest? If so, describe in detail how those steps would differ.
2. Under Section 15E(h)(4)(A)(i) of the Exchange Act, an NRSRO
must, in certain circumstances, conduct a review to determine whether
any conflicts of interest of an employee influenced the credit rating.
Should the Commission define what it means to have a conflict of
interest ``influence'' a credit rating? If so, how should this term be
defined? For example, should a credit rating be deemed ``influenced''
if the NRSRO would have taken a different rating action with respect to
the credit rating in the absence of the conflict?
3. How would an NRSRO determine whether this conflict influenced a
credit rating? Describe the types of evidence that would support such a
determination. What steps could an NRSRO take to analyze whether this
conflict influenced a credit rating? Are there any practical issues
with respect to making such a determination? If so, describe them.
4. Is there any reason an NRSRO should not have procedures
reasonably designed to ensure it immediately publishes a rating action
placing the obligor, security, or money market instrument on credit
watch based on the discovery of the conflict and include with the
publication of the rating action the information required by proposed
new paragraph (a)(1)(ii)(J)(3)(i) of Rule 17g-7 as would be required by
proposed paragraph (c)(1) of Rule 17g-8? If so, please explain in
detail the rationale for not disclosing this information immediately in
this manner. In addition, if a commenter agrees with the objective of
the requirement but not the manner of disclosure, describe any
alternative means of disclosure that would achieve the objective.
5. What practical issues should the Commission consider in
implementing proposed paragraph (c)(1) of new Rule 17g-8? How could the
proposal be modified to address any practical issues identified without
undermining the objectives of the proposal?
6. Would the information required by proposed new paragraph
(a)(1)(ii)(J)(3)(i) of Rule 17g-7 to be included in the form published
with a rating action placing the obligor, security, or money market
instrument on credit watch be useful to the users of the NRSRO's credit
ratings? Is there additional or alternative information that should be
provided? If so, please describe such additional or alternative
information.
[[Page 33432]]
7. Is there any reason an NRSRO would not have procedures
reasonably designed to ensure it promptly determines whether the
current credit rating assigned to the obligor, security, or money
market instrument must be revised so it no longer is influenced by a
conflict of interest and is solely a product of the documented
procedures and methodologies the NRSRO uses to determine credit ratings
as would be required pursuant to proposed paragraph (c)(2) of new Rule
17g-8? If so, please explain in detail the rationale for not promptly
making such a determination. In addition, are there alternative
approaches to addressing conflicts of interest influencing credit
ratings that the Commission should consider? If so, please identify and
describe them.
8. What practical issues should the Commission consider in
implementing proposed paragraph (c)(2) of new Rule 17g-8? How could the
proposal be modified to address any practical issues identified without
undermining the objectives of the proposal?
9. Should the Commission be more prescriptive in terms of how an
NRSRO would be required to determine whether the current credit rating
assigned to the obligor, security, or money market instrument must be
revised so it no longer is influenced by a conflict of interest and is
solely a product of the documented procedures and methodologies the
NRSRO uses to determine credit ratings? If so, what actions should the
Commission require be included in the NRSRO's policies and procedures?
For example, should the Commission specifically require the NRSRO to
apply de novo its policies and procedures for determining credit
ratings in the ways described above?
10. Would a de novo application of the NRSRO's policies and
procedures for determining credit ratings be sufficient to address the
conflict of interest? Are there alternative or additional approaches to
determining whether a credit rating influenced by a conflict of
interest should be revised?
11. Is there any reason an NRSRO should not have procedures
reasonably designed to ensure that it promptly publishes, as
applicable, a revised credit rating or an affirmation of the current
credit rating based on the determination of whether the current credit
rating assigned to the obligor, security, or money market instrument
must be revised and include with the rating action the information
required by proposed new paragraphs (a)(1)(ii)(J)(3)(ii) or (iii) of
Rule 17g-7, as applicable, as would be required pursuant to paragraph
(c)(3) of new Rule 17g-8? If so, please explain in detail the rationale
for not promptly revising or affirming the current credit rating.
12. What practical issues should the Commission consider in
implementing proposed paragraph (c)(3) of new Rule 17g-8 that would
require an NRSRO to have procedures reasonably designed to ensure that
it promptly publishes, as appropriate, a revised credit rating or an
affirmation of the current credit rating and includes with the rating
action the information required by proposed new paragraphs
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7? For example, would the
requirement to estimate the impact the conflict had on the prior rating
actions substantially prolong the time between placing the credit
rating on credit watch and either publishing a revised credit rating or
affirming the current credit rating? How could the proposal be modified
to address any practical issues identified without undermining the
objective of promptly addressing a credit rating influenced by a
conflict of interest and at the same time providing investors and other
users of credit ratings with the information about the conflict?
13. In terms of estimating the impact of a conflict on a past
rating action, would a feasible approach be to apply de novo the
procedures and methodologies for determining credit ratings to the
relevant obligor, security, or money market instrument using
information and inputs as of the time period in which the conflicted
credit rating was determined? Would this approach result in a
meaningful estimate? Are there alternative or additional steps that
could be taken to estimate the impact?
14. Would the information required by proposed new paragraphs
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7 to be included in the form
published with a revised or affirmed credit rating, respectively, be
useful to the users of the NRSRO's credit ratings? Is there additional
or alternative information that should be provided? If so, please
describe such additional or alternative information.
15. How would the proposals impact obligors and issuers subject to
a credit rating determined through the ``look-back'' review to be
influenced by the conflict of interest?
16. In the case of an NRSRO that only makes its rating actions
available to subscribers, former subscribers likely would not receive
the proposed notices. Does this raise a significant issue that the
Commission should address? If so, describe alternatives that could be
used to address this issue.
2. Proposed Amendment to Rule 17g-2
Section 15E(h)(4)(A) of the Exchange Act requires an NRSRO ``to
establish, maintain, and enforce policies and procedures'' but does not
explicitly require an NRSRO to ``document'' such policies and
procedures.\97\ Nonetheless, the Commission preliminarily believes that
documenting these policies and procedures is necessary in order to
carry out the statute's mandate. The Commission also preliminarily
believes they should be documented because, among other reasons, it is
a sound practice for any organization to document its policies and
procedures to promote better understanding of them among the
individuals within the organization and thereby to promote compliance
with such policies and procedures. In addition, for the reasons
discussed in Section II.A.2 of this release, the Commission
preliminarily believes that the policies and procedures should be
subject to the same recordkeeping requirements that apply to other
records an NRSRO is required to retain pursuant to Rule 17g-2.\98\ For
these reasons, the Commission proposes adding paragraph (a)(9) to Rule
17g-2 to identify the policies and procedures an NRSRO is required to
establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of
the Exchange Act and paragraph (c) of Rule 17g-8 as a record an NRSRO
must make and retain.\99\ As a result, the policies and procedures
would need to be documented in writing and be subject to the record
retention and production requirements in paragraphs (c) through (f) of
Rule 17g-2.\100\
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\97\ See 15 U.S.C. 78o-7(h)(4)(A).
\98\ 17 CFR 240.17g-2.
\99\ See proposed new paragraph (a)(9) to Rule 17g-2; see also
Section 17(a)(1) of the Exchange Act, which 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. 15 U.S.C. 78q(a)(1).
\100\ See 17 CFR 240.17g-2(c)-(f).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (a)(9) of Rule 17g-2.
D. Fines and Other Penalties
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new subsection (p), which contains four paragraphs:
(1), (2), (3), and (4).\101\ Section 15E(p)(4)(A) provides that the
Commission shall establish, by rule, fines and other penalties
applicable to any NRSRO that
[[Page 33433]]
violates the requirements of Section 15E of the Exchange Act and the
rules under the Exchange Act.\102\
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\101\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(p)(1)-(4).
\102\ See 15 U.S.C. 78o-7(p)(4)(A).
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The Exchange Act already provides a wide range of fines, penalties,
and other sanctions applicable to NRSROs for violations of any section
of the Exchange Act (including Section 15E) and the rules under the
Exchange Act (including the rules under Section 15E).\103\ For example,
Section 15E(d)(1) of the Exchange Act provides that the Commission
shall censure an NRSRO, place limitations on the activities, functions,
or operations of an NRSRO, suspend an NRSRO for a period not exceeding
12 months, or revoke the registration of an NRSRO if, among other
reasons, the NRSRO violates Section 15E of the Exchange Act or the
Commission's rules thereunder.\104\ In addition, Section 932(a)(3) of
the Dodd-Frank Act amended Section 15E(d) to explicitly provide
additional potential sanctions.\105\ First, it provided the Commission
with the authority to seek sanctions against persons associated with,
or seeking to become associated with, an NRSRO.\106\ Under these
amendments, the Commission can censure such persons, place limitations
on the activities or functions of such persons, suspend such persons
for a period not exceeding 1 year, or bar such persons from being
associated with an NRSRO.\107\ Second, Section 932(a)(3) of Dodd-Frank
Act amended Section 15E(d) to provide the Commission with explicit
authority to temporarily suspend or permanently revoke the registration
of an NRSRO in a particular class or subclass of credit ratings if the
NRSRO does not have adequate financial and managerial resources to
consistently produce credit ratings with integrity.\108\
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\103\ See 15 U.S.C. 78o-7(d), 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff.
\104\ See Section 15E(d)(1)(A)-(F) of the Exchange Act (15
U.S.C. 78o-7(d)(1)(A)-(F)), as amended by the Dodd-Frank Act.
\105\ See Public Law 111-203 Sec. 932(a)(3) and 15 U.S.C. 78o-
7(d).
\106\ 15 U.S.C. 78o-7(d)(1).
\107\ Id.
\108\ See Public Law 111-203 Sec. 932(a)(3) and 15 U.S.C. 78o-
7(d)(2). Prior to this amendment, the Commission already had
authority to suspend or revoke the registration of an NRSRO if it
failed to maintain adequate financial and managerial resources to
consistently produce credit ratings with integrity. See Section
15E(d)(5) of the Exchange Act (15 U.S.C. 78o-7(d)(5)) before being
amended by the Dodd-Frank Act, which re-designated paragraph (d)(5)
of Section 15E as paragraph (d)(1)(E) (15 U.S.C. 78o-7(d)(1)(E)).
Section 15E(d)(2) of the Exchange Act, however, provides explicit
authority to target a suspension or registration revocation to a
specific class or subclass of security. See 15 U.S.C. 78o-7(d)(2).
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Furthermore, Sections 21, 21A, 21B, 21C, and 32 of the Exchange Act
provide additional means to sanction an NRSRO for violations of the
provisions of the Exchange Act such as the self-executing provisions in
Section 15E of the Exchange Act and the rules under the Exchange
Act.\109\
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\109\ See 15 U.S.C. 78o-7, 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff, respectively. In
fact, the Dodd-Frank Act amended Section 21B of the Exchange Act (15
U.S.C. 78u-2) to provide the Commission with the authority to assess
money penalties in cease and desist proceedings under Section 21C
(15 U.S.C. 78u-3). See Section 929P(a)(2) of the Dodd-Frank Act.
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The Commission preliminarily believes these provisions of the
Exchange Act, as amended by the Dodd-Frank Act, provide a sufficiently
broad range of means to impose fines, penalties, and other sanctions on
an NRSRO for violations of Section 15E of the Exchange Act and the
rules thereunder. For example, the fines, penalties, and sanctions
applicable to NRSROs are similar in scope to the fines, penalties, and
sanctions applicable to other registrants under the Exchange Act, such
as broker-dealers. Moreover, since enactment of the Rating Agency Act
of 2006, the Commission has not identified a specific need for a fine
or penalty applicable to NRSROs not otherwise provided for in the
Exchange Act. Consequently, the Commission preliminarily believes it
would be appropriate at this time to defer establishing new fines or
penalties in addition to those provided for in the Exchange Act.
However, in the future, the Commission may use the authority in Section
15E(p)(4)(A) of the Exchange Act if a specific need is identified. For
the foregoing reasons, to implement Section 15E(p)(4)(A) of the
Exchange Act at this time, the Commission proposes to amend the
instructions to Form NRSRO by adding new Instruction A.10.\110\ This
new instruction would provide notice to credit rating agencies applying
for registration and NRSROs that an NRSRO is subject to applicable
fines, penalties, and other available sanctions set forth in Sections
15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act (15 U.S.C. 78o-7,
78u, 78u-1, 78u-2, 78u-3, and 78ff, respectively) for violations of the
securities laws.
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\110\ See proposed new Instruction A.10 to Form NRSRO.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new Instruction A.10 to Form NRSRO. The Commission also seeks
comment on the following:
1. Are the fines, penalties and other sanctions applicable to
NRSROs in Sections 15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act
sufficient? If not, what additional fines and penalties should the
Commission establish by rule?
E. Public Disclosure of Information About the Performance of Credit
Ratings
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new subsection (q), which contains paragraphs (1)
and (2).\111\ Section 15E(q)(1) provides that the Commission shall, by
rule, require each NRSRO to publicly disclose information on the
initial credit ratings determined by the NRSRO for each type of
obligor, security, and money market instrument, and any subsequent
changes to such credit ratings, for the purpose of allowing users of
credit ratings to evaluate the accuracy of ratings and compare the
performance of ratings by different NRSROs.\112\ Section 15E(q)(2)
provides that the Commission's rules shall require, at a minimum,
disclosures that:
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\111\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2).
\112\ See 15 U.S.C. 78o-7(q)(1).
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Are comparable among NRSROs, to allow users of credit
ratings to compare the performance of credit ratings across NRSROs;
\113\
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\113\ See 15 U.S.C. 78o-7(q)(2)(A).
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Are clear and informative for investors having a wide
range of sophistication who use or might use credit ratings; \114\
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\114\ See 15 U.S.C. 78o-7(q)(2)(B).
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Include performance information over a range of years and
for a variety of types of credit ratings, including for credit ratings
withdrawn by the NRSRO; \115\
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\115\ See 15 U.S.C. 78o-7(q)(2)(C).
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Are published and made freely available by the NRSRO, on
an easily accessible portion of its Web site, and in writing, when
requested; \116\
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\116\ See 15 U.S.C. 78o-7(q)(2)(D).
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Are appropriate to the business model of an NRSRO; \117\
and
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\117\ See 15 U.S.C. 78o-7(q)(2)(E).
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Require an NRSRO to include an attestation with any credit
rating it issues affirming that no part of the rating was influenced by
any other business activities, that the rating was based solely on the
merits of the instruments being rated, and that such rating was an
independent evaluation of the risks and merits of the instrument.\118\
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\118\ See 15 U.S.C. 78o-7(q)(2)(F). As discussed below in
Section II.G.4 of this release, the Commission preliminarily
believes that the attestation requirement specified in Section
15E(q)(2)(F) should be incorporated into the rule the Commission is
proposing to implement Section 15E(s) of the Exchange Act, which
specifies, among other things, that the Commission adopt rules
requiring an NRSRO to generate a form to be included with the
publication of a credit rating. See 15 U.S.C. 78o-7(s) and proposed
new paragraph (a)(1)(iii) of Rule 17g-7.
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[[Page 33434]]
Currently, the Commission's rules require NRSROs to publish two
types of information about the performance of their credit ratings: (1)
Performance statistics\119\ and (2) ratings histories.\120\ As
discussed in detail below, the Commission proposes to implement the
rulemaking mandated in Section 15E(q) of the Exchange Act, in
substantial part, by significantly enhancing the requirements for
generating and disclosing this information by amending the instructions
to Form NRSRO as they relate to Exhibit 1 and amending Rule 17g-1, Rule
17g-2, and Rule 17g-7.\121\
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\119\ See Exhibit 1 to Form NRSRO and Instruction H to Form
NRSRO (as it relates to Exhibit 1). This type of disclosure shows
the performance of an NRSRO's credit ratings in the aggregate
through statistics. Specifically, it provides the percent of rated
obligors, securities, and money market instruments in each category
of credit rating in a rating scale (e.g., AAA, AA, A, BBB, BB, B,
CCC, CC, and C) that over a given time period were downgraded or
upgraded to another credit rating category (``transition rates'')
and went into default (``default rates''). The goal is to provide a
mechanism for users of credit ratings to compare the statistical
performance of credit ratings across NRSROs.
\120\ See 17 CFR 240.17g-2(d). This type of disclosure shows the
credit rating history of a given rated obligor, security, or money
market instrument. Specifically, it shows the initial credit rating
and all subsequent modifications to the credit rating (such as
upgrades, downgrades, and placements on watch) and the dates of such
actions. The goal is to allow users of credit ratings to compare how
different NRSROs rated an individual obligor, security, or money
market instrument and how and when those ratings were changed over
time. The disclosure of ratings histories also is designed to
provide ``raw data'' that can be used by third parties to generate
independent performance statistics such as transition and default
rates.
\121\ See proposed amendments to Instruction H to Form NRSRO (as
it relates to Exhibit 1), paragraph (i) of Rule 17g-1, paragraph (d)
of Rule 17g-2, and proposed new paragraph (b) of Rule 17g-7.
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1. Proposed Enhancements to Disclosures of Performance Statistics
The Commission proposes to implement the rulemaking mandated in
Section 15E(q) of the Exchange Act, in part, by amending Instruction H
to Form NRSRO (the ``instructions for Exhibit 1'') and Rule 17g-1.\122\
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\122\ See proposed amendments to the instructions for Exhibit 1
and paragraph (i) of Rule 17g-1.
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a. Proposed Amendments to Instructions for Exhibit 1
Exhibit 1 is part of the registration application a credit rating
agency seeking to be registered as an NRSRO (an ``applicant'') must
submit to the Commission and an NRSRO must file with the Commission,
keep up-to-date, and publicly disclose.\123\ Section 15E(a)(1)(B)(i) of
the Exchange Act requires that the registration application include
performance measurement statistics over short-term, mid-term, and long-
term periods (as applicable).\124\ The Commission implemented this
requirement, in large part, through Exhibit 1 to Form NRSRO and the
instructions for Exhibit 1.\125\ Section 15E(b)(1)(A) of the Exchange
Act provides that the performance measurement statistics must be
updated annually in an annual submission of the registration
application required by Section 15E(b)(2) (the ``annual
certification'').\126\
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\123\ In particular, Section 15E(a)(1)(A) of the Exchange Act
requires an applicant to furnish an application for registration to
the Commission, in such form as the Commission shall require, by
rule or regulation. See 15 U.S.C. 78o-7(a)(1)(A). Section
15E(a)(1)(B) of the Exchange Act identifies information that must be
included in the application for registration. See 15 U.S.C. 78o-
7(a)(1)(B)(i)-(x). The Commission implemented Sections 15E(a)(1)(A)
and (B) of the Exchange Act by adopting Form NRSRO. See Form NRSRO;
see also Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33569-33582 (June 18, 2007). Section 15E(a)(3) of the Exchange Act
provides that the Commission, by rule, shall require an NRSRO, upon
being granted registration, to make the information and documents in
its completed application for registration, or in any amendment to
its application, publicly available on its Web site, or through
another comparable, readily accessible means, except for certain
information that is submitted on a confidential basis. See 15 U.S.C.
78o-7(a)(3). The Commission implemented this provision by adopting
paragraph (i) of Rule 17g-1. See 17 CFR 240.17g-1(i); see also
Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations, 72 FR at 33569 (June
18, 2007). Section 15E(b)(1) requires an NRSRO to promptly amend its
application for registration if any information or document provided
therein becomes materially inaccurate; however, (as discussed below)
certain information does not have to be updated and other
information must be updated only on an annual basis. See 15 U.S.C.
78o-7(b)(1); see also 15 U.S.C. 78o-7(b)(1) and 15 U.S.C. 78o-
7(a)(1)(B)(ix). The Commission implemented this provision by
adopting Form NRSRO and paragraph (e) of Rule 17g-1. See Form NRSRO
and 17 CFR 240.17g-1(e); see also Oversight of Credit Rating
Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33567, 33569-33582 (June 18, 2007).
\124\ See 15 U.S.C. 78o-7(a)(1)(B)(i).
\125\ See instructions for Exhibit 1.
\126\ See 15 U.S.C. 78o-7(b)(1) and (2). In particular, Section
15E(b)(2) of the Exchange Act provides that not later than 90 days
after the end of each calendar year, an NRSRO shall file with the
Commission an amendment to its registration application, in such
form as the Commission, by rule, may prescribe: (1) Certifying that
the information and documents in the application for registration
continue to be accurate; and (2) listing any material change that
occurred to such information and documents during the previous
calendar year. See 15 U.S.C. 78o-7(b)(2). The Commission implemented
these provisions by adopting Form NRSRO and paragraph (f) of Rule
17g-1. See Form NRSRO and 17 CFR 240.17g-1(f); see also Oversight of
Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33567, 33569-33582 (June
18, 2007).
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The instructions for Exhibit 1 require an applicant and NRSRO to
provide performance measurement statistics of the credit ratings of the
applicant or NRSRO, including performance measurement statistics of the
credit ratings separately for each class of credit rating for which the
applicant is seeking registration or the NRSRO is registered.\127\ The
classes of credit ratings for which an NRSRO can be registered are
enumerated in the definition of ``nationally recognized statistical
rating organization'' in Section 3(a)(62) of the Exchange Act: (1)
Financial institutions, brokers, or dealers; \128\ (2) insurance
companies; \129\ (3) corporate issuers; \130\ (4) issuers of asset-
backed securities (as that term is defined in Section 1101(c) of part
229 of Title 17, Code of Federal Regulations, ``as in effect on the
date of enactment of this paragraph''); \131\ and (5) issuers of
government securities, municipal securities, or securities issued by a
foreign government.\132\ With respect to the fifth class of credit
ratings, the instructions for Exhibit 1 require the NRSRO to provide
performance measurement statistics for the following three subclasses
(as opposed to the class
[[Page 33435]]
as a whole): sovereigns, United States public finance, and
international public finance.\133\
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\127\ See instructions for Exhibit 1.
\128\ See 15 U.S.C. 78c(a)(62)(A)(i).
\129\ See 15 U.S.C. 78c(a)(62)(A)(ii).
\130\ See 15 U.S.C. 78c(a)(62)(A)(iii).
\131\ See 15 U.S.C. 78c(a)(62)(A)(iv). The instructions for
Exhibit 1 broaden this class of credit rating to include a credit
rating of any security or money market instrument issued by an asset
pool or as part of any asset-backed or mortgage-backed securities
transaction. The intent of the instruction is to include in the
class (and, therefore, in the performance statistics for the class)
credit ratings for structured finance products that are outside the
scope of the definition referenced in Section 3(a)(62)(A)(iv) of the
Exchange Act. See 15 U.S.C. 78c(a)(62)(A)(iv) and Amendments to
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR at 6458 (Feb. 9, 2009). As discussed below, the Commission is
proposing to continue to use a broadened definition in the proposed
new instructions for Exhibit 1. Moreover, 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. Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63832, footnote 3 (Dec.
4, 2009). This broad category of financial instrument includes an
``asset-backed security'' as defined in Section 3(a)(77) of the
Exchange Act (15 U.S.C. 78c(a)(77)) and other types of structured
debt instruments such as collateralized debt obligations CDOs,
including synthetic and hybrid CDOs. Id. The term ``Exchange Act-
ABS'' as used throughout this release refers more narrowly to an
``asset-backed security'' as defined in Section 3(a)(77) of the
Exchange Act. 15 U.S.C. 78c(a)(77).
\132\ See 15 U.S.C. 78c(a)(62)(A)(v).
\133\ See instructions for Exhibit 1.
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In addition, the instructions require that the performance
measurement statistics ``must at a minimum show the performance of
credit ratings in each class over 1-year, 3-year, and 10-year periods
(as applicable) through the most recent calendar year-end, including,
as applicable: historical ratings transition and default rates within
each of the credit rating categories,\134\ notches, grades, or rankings
used by the Applicant/NRSRO as an indicator of the assessment of the
creditworthiness of an obligor, security, or money market instrument in
each class of credit rating.''\135\ Paragraph (i) of Rule 17g-1
provides, among other things, that the NRSRO must make the annual
certification publicly available within 10 business days of furnishing
the annual certification to the Commission.\136\
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\134\ The transition rate is the percentage of ratings at a
given rating notch that transition to another specified rating notch
over a given time period. Only ratings that were outstanding at the
beginning of the time period are used in the calculation of the
transition rate. Transition rates are generally used to measure the
stability of the ratings. The default rate is the percentage of
ratings at a given rating notch that have defaulted over a given
time period. Only the ratings that were outstanding at the beginning
of the time period are used in the calculation.
\135\ See instructions for Exhibit 1.
\136\ See 17 CFR.240.17g-1(i).
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Currently, the instructions for Exhibit 1 do not prescribe the
methodology an NRSRO must use to calculate and present the performance
measurement statistics; nor do the instructions limit the type of
information that can be disclosed in the Exhibit.\137\ Consequently,
NRSROs have used different techniques to produce performance
measurement statistics, which has limited the ability of investors and
other users of credit ratings to compare the performance of credit
ratings across NRSROs.\138\ In addition, several NRSROs have included
substantial amounts of information in Exhibit 1 about performance
measurement statistics, in addition to transition and default rates.
These practices make the presentation of information in the Exhibits
widely inconsistent across NRSROs.
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\137\ When adopting Form NRSRO, the Commission explained that
the instructions would not prescribe how NRSROs must calculate
transition rates and default rates, noting that commenters had
opposed a standard approach because NRSROs use different
methodologies to determine credit ratings. See Oversight of Credit
Rating Agencies Registered as Nationally Recognized Statistical
Rating Organizations, 72 FR at 33574 (June 18, 2007). The Commission
stated that it intended to continue to consider the issue ``to
determine the feasibility, as well as the potential benefits and
limitations, of devising measurements that would allow reliable
comparisons of performance between NRSROs.'' Id. The Commission
incrementally standardized the disclosure requirements in Exhibit 1
by amending the Form in 2009 to require an NRSRO to disclose
transition and default rates for each class of credit rating for
which it was registered and for 1-, 3-, and 10-year periods. See
Amendments to Rules for Nationally Recognized Statistical Rating
Organizations 74 FR at 6457-6459 (Feb. 9, 2009).
\138\ See, e.g., Securities and Exchange Commission: Action
Needed to Improve Rating Agency Registration Program and Performance
Related Disclosures, GAO Report 10-782 (Sept. 2010) (``GAO Report
10-782'').
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For the foregoing reasons and to implement Section 15E(q) of the
Exchange Act, the Commission is proposing significant enhancements to
the requirements to disclose performance measurement statistics in
Exhibit 1.\139\ The enhancements would confine the disclosures in the
Exhibit to transition and default rates and certain limited
supplemental information. Moreover, the enhancements would standardize
the production and presentation of the transition and default
rates.\140\ Specifically, the Commission preliminarily believes that
the transition and default rates in Exhibit 1 should be produced using
a ``single cohort approach.'' \141\ As explained below, under this
approach, an applicant and NRSRO, on an annual basis, would be required
to compute how the credit ratings assigned to obligors, securities, and
money market instruments in a particular class or subclass of credit
rating that were outstanding on the date 1, 3, and 10 years prior to
the most recent calendar year-end performed during the respective 1-,
3-, and 10-year time period. The Commission's intent in proposing these
enhancements is to make the Exhibit 1 disclosures simply presented,
easy to understand, uniform in appearance, and comparable across
NRSROs.\142\
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\139\ See 15 U.S.C. 78o-7(q) and proposed amendments to
instructions for Exhibit 1.
\140\ See 15 U.S.C. 78o-7(q)(2)(B).
\141\ See GAO Report 10-782, pp. 27-37 (comparing, among other
things, a single cohort approach--the model for the Commission's
proposal--with an average cohort approach). See also GAO Report 10-
782, p. 25, note 38 (identifying more complex techniques for
calculating credit rating performance measurement statistics).
\142\ See Section 15E(q)(2)(A) of the Exchange Act, which
provides that the disclosure of information about the performance of
credit ratings should be comparable among NRSROs, to allow users of
credit ratings to compare the performance of credit ratings across
NRSROs. 15 U.S.C. 78o-7(q)(2)(A). See also Section 15E(q)(2)(B) of
the Exchange Act, which provides that the disclosure of information
about the performance of credit ratings should be clear and
informative for investors having a wide range of sophistication who
use or might use credit ratings. 15 U.S.C. 78o-7(q)(2)(B).
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To implement this proposal, the Commission is proposing to
substantially revise the instructions for Exhibit 1.\143\ The proposed
new instructions would be divided into paragraphs (1), (2), (3), and
(4), some of which would have subparagraphs.\144\ The proposed new
paragraphs would contain specific instructions with respect to, among
other things, how required information must be presented in the Exhibit
(including the order of presentation) and how transition and default
rates must be produced using a single cohort approach. As with all
information that must be submitted in Form NRSRO and its Exhibits,
applicants and NRSROs would be subject to these requirements.\145\
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\143\ See proposed amendments to instructions for Exhibit 1.
\144\ See proposed new paragraphs (1), (2), (3), and (4) of the
instructions for Exhibit 1.
\145\ Form NRSRO must be used by a credit rating agency to apply
for registration as an NRSRO and, once registered, an NRSRO must
publicly disclose the information required in Form NRSRO and
Exhibits 1 though 9. See 17 CFR 240.17g-1 and Instructions A.1, B,
C, D, E, and F to Form NRSRO.
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Proposed Paragraph (1) of the Instructions for Exhibit 1. Proposed
new paragraph (1) of the instructions for Exhibit 1 would require an
applicant and NRSRO to provide performance measurement statistics for
each class and subclass of credit ratings for which the applicant is
seeking registration as an NRSRO or the NRSRO is registered.\146\
Consistent with the current instructions, proposed new paragraph (1)
would require an applicant and NRSRO to provide transition and default
rates for 1-, 3-, and 10-year periods for each applicable class or
subclass of credit rating.\147\ Also consistent with the current
instructions, proposed new paragraph (1) would require an applicant and
NRSRO to produce and present three separate transition and default
statistics for each applicable class or subclass of credit rating;
namely, for 1-, 3-, and 10-year time periods through the most recently
ended calendar year. In addition, as part of the enhancements, an
applicant and NRSRO would need to present the transition and default
rates for each time period together in tabular form using a standard
format (a ``Transition/Default Matrix'').\148\
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\146\ See proposed new paragraph (1) of the instructions for
Exhibit 1.
\147\ Compare current instructions for Exhibit 1 with proposed
new paragraph (1) of the instructions for Exhibit 1.
\148\ See proposed new paragraph (1) of the instructions for
Exhibit 1.
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Proposed new paragraph (1) would identify the classes and
subclasses of credit ratings for which an applicant and NRSRO would
need to produce Transition/Default Matrices, as
[[Page 33436]]
applicable. The identified classes would reference the classes of
credit ratings for which an NRSRO can be registered as enumerated in
the definition of NRSRO in Section 3(a)(62)(A) of the Exchange
Act.\149\ This would be consistent with the current instructions for
Exhibit 1.\150\ Moreover, also consistent with the current
instructions, the class of credit ratings enumerated in Section
3(a)(62)(A)(iv) of the Exchange Act (issuers of certain asset-backed
securities) would be expanded by the instructions in proposed new
paragraph (1) to include a broader range of structured finance products
than are within the scope of the definition of Section
3(a)(62)(A)(iv).\151\
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\149\ Compare 15 U.S.C. 78c(a)(62)(A)(i)-(v) with proposed new
paragraphs (1)(A)-(E) of the instructions for Exhibit 1.
\150\ Compare current instructions for Exhibit 1 with proposed
new paragraph (1).
\151\ See 15 U.S.C. 78c(a)(62)(A)(iv); compare current
Instructions for Exhibit 1 with proposed new paragraph (1)(D).
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However, to enhance the disclosure of transition and default rates
in this class, the Commission is proposing to divide it into the
following subclasses: RMBS;\152\ commercial mortgage backed securities
(``CMBS'');\153\ collateralized loan obligations (``CLOs'');\154\
CDOs;\155\ issuances of asset-backed commercial paper conduits
(``ABCP'');\156\ other asset-backed securities;\157\ and other
structured finance products.\158\ The Commission preliminarily believes
dividing the broad class of structured finance products into these
subclasses would provide investors and other users of credit ratings
with more useful information about the performance of an NRSRO's
structured finance ratings.\159\ For example, during the recent crisis,
NRSROs assigned credit ratings to RMBS and CDOs that performed far
differently than credit ratings of some other types of
securitizations.\160\ Consequently, if an applicant or NRSRO computed
transition and default rates for structured finance products as a
single class, the underperformance of certain subclasses could be muted
by the better performance of other subclasses.
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\152\ The Commission preliminarily intends that an ``RMBS'' for
the purposes of this disclosure requirement would mean a
securitization of primarily residential mortgages. See proposed new
paragraph (1)(D)(i) of the instructions for Exhibit 1.
\153\ The Commission preliminarily intends that a ``CMBS'' for
the purposes of this disclosure requirement would mean a
securitization of primarily commercial mortgages. See proposed new
paragraph (1)(D)(ii) of the instructions for Exhibit 1.
\154\ The Commission preliminarily intends that a ``CLO'' for
the purposes of this disclosure requirement would mean a
securitization of primarily commercial loans. See proposed new
paragraph (1)(D)(iii) of the Instructions for Exhibit 1.
\155\ The Commission preliminary intends that a ``CDO'' for the
purposes of this disclosure requirement would mean a securitization
primarily of other debt instruments such as RMBS, CMBS, CLOs, CDOs,
other asset-backed securities, and corporate bonds. See proposed new
paragraph (1)(D)(iv) of the instructions for Exhibit 1.
\156\ The Commission preliminarily intends that ``ABCP'' for the
purposes of this disclosure requirement would mean short term notes
issued by a structure that securitizes a variety of financial assets
(e.g., trade receivables, credit card receivables), which secure the
notes. See proposed new paragraph (1)(D)(v) of the instructions for
Exhibit 1.
\157\ The Commission preliminarily intends that the term ``other
asset-backed security'' for the purposes of this disclosure
requirement would mean a securitization primarily of auto loans,
auto leases, floor plan financings, credit card receivables, student
loans, consumer loans, equipment loans, or equipment leases. See
proposed new paragraph (1)(D)(vi) of the instructions for Exhibit 1.
\158\ The Commission preliminarily intends that ``other
structured finance product'' for the purposes of this disclosure
requirement would mean a structured finance product that does not
fit into any of the other subclasses of structured products. See
proposed new paragraph (1)(D)(vii) of the instructions for Exhibit
1.
\159\ See, e.g., GAO Report 10-782, p. 36 (noting that NRSROs
active in rating structured finance generally present performance
statistics for this class by sectors (e.g., RMBS, CMBS and ABS) in
their voluntary disclosures). See also, GAO Report 10-782, p. 36
(observing that the various structured finance sectors have risk
characteristics that vary significantly and, therefore, that
presenting performance statistics for the class as a whole ``may not
be useful.'').
\160\ See, e.g., A Global Cross-Asset Report Card of Ratings
Performance in Times of Stress, Standard & Poor's (June 8, 2010).
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Consistent with the current instructions, proposed new paragraph
(1) would divide the class of credit ratings enumerated in Section
3(a)(62)(A)(v) of the Exchange Act (issuers of government securities,
municipal securities or securities issued by a foreign government) into
three subclasses.\161\ The subclasses would continue to be: sovereign
issuers; United States public finance; and international public
finance.\162\
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\161\ See 15 U.S.C. 78c(a)(62)(A)(v); compare current
instructions for Exhibit 1, with proposed new paragraph (1)(E).
\162\ See proposed new paragraph (1)(E) of the instructions for
Exhibit 1.
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In addition, consistent with the current instructions for an annual
certification, proposed new paragraph (1) would provide that the
performance measurement statistics must be updated yearly in the
NRSRO's annual certification in accordance with Section 15E(b)(1)(A)
and paragraph (f) of Rule 17g-1 (i.e., a Form NRSRO with updated
performance measurement statistics must be filed with the Commission no
later than 90 days after the end of the calendar year).\163\ Proposed
new paragraph (1) also would remind an NRSRO that, pursuant to
paragraph (i) of Rule 17g-1, the annual certification with the updated
performance measurement statistics must be made publicly and freely
available on an easily accessible portion of the NRSRO's corporate
Internet Web site within 10 business days after the filing and that the
NRSRO must make its up-to-date Exhibit 1 freely available in writing to
any individual who requests a copy of the Exhibit.\164\
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\163\ See Instruction F to Form NRSRO and proposed new paragraph
(1); see also 15 U.S.C. 78o-7(b)(1)(A) and 17 CFR 240.17g-1(f).
While paragraph (f) of Rule 17g-1 currently requires the annual
certification to be ``furnished,'' the Commission is proposing, as
discussed below in Section II.M.1 of the release, to replace the
term ``furnished'' with the term ``filed'' in a number of the NRSRO
rules, including Rule 17g-1.
\164\ See proposed new paragraph (1) of the instructions for
Exhibit 1. As discussed below in Section II.E.1.b of this release,
the Commission is proposing to amend paragraph (i) of Rule 17g-1 (17
CFR 240.17g-1(i)) to implement Section 15E(q)(2)(D) of the Exchange
Act, which provides that the Commission's rules must require that
the information about the performance of credit ratings be published
and made freely available on an easily accessible portion of an
NRSRO's Web site, and in writing when requested. See 15 U.S.C. 78o-
7(q)(2)(D). As discussed below, the proposed amendment to paragraph
(i) of Rule 17g-1 (17 CFR 240.17g-1(i)) would require an NRSRO to
publish and make freely available on an easily accessible portion of
its Web site all of Form NRSRO (i.e., not just Exhibit 1). However,
only Exhibit 1 would need to be made freely available in writing
when requested.
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Proposed Paragraph (2) of the Instructions for Exhibit 1. Proposed
new paragraph (2) of the instructions for Exhibit 1 would prescribe how
an applicant and NRSRO must present the performance measurement
statistics and other required information in the Exhibit.\165\
Specifically, it would require that the Transition/Default Matrices for
each applicable class and subclass of credit ratings be presented in
the order that the classes and subclasses are identified in proposed
paragraphs (1)(A) through (E) of Exhibit 1. In addition, the order of
the Transition/Default Matrices for a given class or subclass would
need to be: The 1-year matrix, the 3-year matrix, and then the 10-year
matrix.
[[Page 33437]]
Proposed new paragraph (2) also would provide that if the applicant or
NRSRO did not issue credit ratings in a particular class or subclass
for the length of time necessary to produce a Transition/Default Matrix
for a 1-, 3-, or 10-year period, it would need to explain that fact in
the location where the Transition/Default Matrix would have been
presented in the Exhibit.\166\
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\165\ See proposed new paragraph (2) of the instructions for
Exhibit 1.
\166\ For example, if an NRSRO is registered in the corporate
issuer class but has been issuing credit ratings for only 7 years in
that class, it could not produce a 10-year Transition/Default Matrix
for the class. Instead, the NRSRO would need to provide an
explanation in the location where a 10-year Transition/Default
Matrix would have been located (i.e., after the 3-year matrix) that
it had not been issuing credit ratings in that class for a
sufficient amount of time to produce a 10-year Transition/Default
Matrix.
---------------------------------------------------------------------------
Similar to the current Instructions, proposed paragraph (2) would
require an applicant and NRSRO to clearly define in Exhibit 1, after
the presentation of all applicable Transition/Default Matrices, each
symbol, number, or score in the rating scale used by the applicant or
NRSRO to denote a credit rating category and notches within a category
for each class and subclass of credit ratings in any Transition/Default
Matrix presented in the Exhibit.\167\ The instructions also would
require the applicant or NRSRO to clearly explain the conditions under
which it classifies obligors, securities, or money market instruments
as being in default. As discussed below, the Commission preliminarily
believes that obligors, securities, and money market instruments that
the applicant or NRSRO has classified as being in default as of the
period start date for a Transition/Default Matrix should be excluded
from the statistics in the matrix. Also, as discussed below, the
Commission is proposing a standard definition of ``default'' for the
purpose of calculating default rates. In addition, also as discussed
below, where an applicant or NRSRO has a definition of ``default'' that
is broader than this standard definition, the instructions would
require the applicant or NRSRO to supplement the standard definition
with its internal definition. For these reasons, the Commission
believes it would be useful for investors and other users of credit
ratings to know how an NRSRO defines default.
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\167\ Compare current instructions for Exhibit 1, with proposed
new paragraph (2). As discussed in Section II.J.2 of this release,
the Commission is proposing to implement Section 938(a)(2) of the
Dodd-Frank Act through paragraph (b)(2) of new Rule 17g-8, which
would require an NRSRO to have policies and procedures reasonably
designed to clearly define the meaning of any symbol used by the
NRSRO to denote a credit rating, including in Exhibit 1 to Form
NRSRO. See Public Law 111-203 Sec. 938(a)(2) and proposed paragraph
(b)(2) of new Rule 17g-8.
---------------------------------------------------------------------------
Similar to the current instructions, proposed paragraph (2) would
require that an applicant and NRSRO provide in Exhibit 1 the uniform
resource locator (URL) of its corporate Internet Web site where the
credit rating histories required to be disclosed pursuant to paragraph
(b) of Rule 17g-7 would be located (in the case of an applicant) or are
located (in the case of an NRSRO).\168\
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\168\ Compare current instructions for Exhibit 1, with proposed
new paragraph (2). As discussed below in Section II.E.2 of this
release, the Commission is proposing to amend Rule 17g-2 (17 CFR
240.17g-2) and Rule 17g-7 (17 CFR 240.17g-7) to enhance the credit
rating history disclosure requirements currently located in Rule
17g-2. Among other things, the Commission proposes relocating the
credit rating history disclosure requirements from Rule 17g-2 to
proposed new paragraph (b) of Rule 17g-7. See proposed amendments to
paragraph (d) of Rule 17g-2 and proposed new paragraph (b) of Rule
17g-7.
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Finally, proposed paragraph (2) would provide that Exhibit 1 must
contain no performance measurement statistics or information other than
as described in, and required by, the instructions for Exhibit 1;
except the applicant or NRSRO would be permitted to provide, after the
presentation of all required Transition/Default Matrices and other
required disclosures, Internet Web site URLs where other information
relating to performance measurement statistics of the applicant or
NRSRO is located.\169\ As noted above, some NRSROs include substantial
amounts of information in Exhibit 1 about the performance of their
credit ratings. The Commission preliminarily believes information in
addition to the disclosures that would be required under the
enhancements to Exhibit 1 may be useful to investors and other users of
credit ratings. However, the Commission also preliminarily believes
disclosing this related information in Exhibit 1 would make the Exhibit
less easy to use in terms of locating a particular Transition/Default
Matrix and comparing it with the matrices of other NRSROs.
Consequently, the Commission preliminarily believes an appropriate
balance would be to exclude related information from the Exhibit but
permit an NRSRO to cross-reference such information by providing
Internet Web site URLs at the end of the Exhibit.
---------------------------------------------------------------------------
\169\ See proposed new paragraph (2) of the instructions for
Exhibit 1.
---------------------------------------------------------------------------
Proposed Paragraph (3) of the Instructions for Exhibit 1. Proposed
paragraph (3) of the Instructions for Exhibit 1 would prescribe how an
applicant and NRSRO must design a Transition/Default Matrix.\170\ The
instructions would require an applicant and NRSRO to produce a 1-, 3-,
and 10-year Transition/Default Matrix for each applicable class and
subclass of credit rating that resembles, in design, the Transition/
Default Matrix in Figure 1 below.\171\
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\170\ See proposed new paragraph (3) of the instructions for
Exhibit 1.
\171\ However, as explained below, the top row and first column
would be based on the rating scale used by the applicant or NRSRO
for the applicable class or subclass of credit ratings. For example,
in the Sample Transition/Default Matrix, there are nine categories
denoted by the symbols: AAA, AA, A, BBB, BB, B, CCC, CC, and C but
no notches within those categories. An NRSRO that uses notches in
its ratings scale (e.g., AA+, AA, and AA-) would need to include the
symbol for each notch in the individual cells of the first column
and top row. However, as discussed below, the applicant or NRSRO
would exclude a ``default'' category even if it uses such a category
in its rating scale (though, as explained below, there would be a
column with the heading ``Default'' in the matrix that would depict
the percent of rated obligors, securities, and money market
instruments that went into default during the relevant time period
based on a standard definition of ``default'' in the instructions
for Exhibit 1 (i.e., not on the definition of the applicant or
NRSRO).
Figure 1--Corporate Issuers--10-Year Transition and Default Rates
[December 31, 2000 through December 31, 2010]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
ratings Paid Withdrawn
Credit rating scale outstanding as AAA AA A BBB BB B CCC CC C Default off (other)
of 12/31/2000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AAA............................................................. 10 50% 10% ....... ....... ....... ....... ....... ....... ....... ....... 40% ...........
AA.............................................................. 2000 1% 39% 12% 10% 8% 5% 4% ....... ....... 1% 19% 1%
A............................................................... 4000 ....... 6% 34% 15% 10% 6% 4% 3% ....... 2% 18% 2%
BBB............................................................. 3600 ....... 2% 9% 28% 15% 10% 6% 5% 1% 4% 17% 3%
BB.............................................................. 1000 ....... ....... 2% 4% 20% 14% 5% ....... ....... 2% 16% 37%
B............................................................... 500 ....... ....... 1% 3% 6% 20% 20% 15% ....... 15% 15% 5%
CCC............................................................. 300 ....... ....... ....... ....... 4% 6% 15% 25% 20% 20% 4% 6%
[[Page 33438]]
CC.............................................................. 200 ....... ....... ....... ....... ....... 2% 8% 10% 38% 30% 2% 10%
C............................................................... 160 ....... ....... ....... ....... ....... ....... 2% 8% 10% 67% 1% 12%
Total....................................................... 11,770 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ...........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
A sample Transition/Default Matrix similar to Figure 1 would be
depicted in proposed new paragraph (3) to provide a visual
representation of how to design and present a matrix.\172\ In addition
to the visual depiction, proposed new paragraph (3) would contain
narrative instructions on how to design a matrix. First, the narrative
instructions would prescribe the headings for each required column in a
Transition/Default Matrix by referring to the cells in the top row of
the table (the ``header row'').\173\ The narrative instructions would
require that the first and second cells in the header row contain the
headings, respectively, ``Credit Rating Scale'' and ``Number of Ratings
Outstanding as of [insert the applicable date].'' \174\ The applicable
date would be the date 1, 3, or 10 years prior to the most recent
calendar year-end depending on whether the Transition/Default Matrix
was being produced for a 1-, 3-, or 10-year period. The next sequence
of cells in the header row would need to contain, in order from left to
right, each credit rating symbol, number, or score used to denote a
category and a notch within a category in the rating scale used by the
applicant or NRSRO for the applicable class or subclass of credit
ratings in descending order from the highest to the lowest notch.\175\
The narrative instructions would require that the applicant or NRSRO
not include a ``default'' category in the header row even if such a
category is used in the rating scale.\176\ The narrative instructions
would require that the cells in the last three columns in the
Transition/Default Matrix contain the headings, in order from left to
right, ``Default'', ``Paid Off'', and ``Withdrawn (other).'' \177\
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\172\ See proposed new paragraph (3) of the instructions for
Exhibit 1.
\173\ See proposed new paragraph (3) of the instructions for
Exhibit 1.
\174\ See, e.g., the 1st and 2nd columns of the Sample
Transition/Default Matrix in Figure 1.
\175\ See proposed new paragraph (3) of the instructions for
Exhibit 1; see also the 3rd through 11th columns of the Sample
Transition/Default Matrix in Figure 1.
\176\ The Commission's reasoning for proposing to exclude a
category of ``default'' from the first column is explained below.
\177\ See proposed new paragraph (3) of the instructions for
Exhibit 1; see also the 12th through 14th columns of the Sample
Transition/Default Matrix in Figure 1.
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Next, the narrative instructions would require that the first
column have a separate cell containing each credit rating symbol,
number, or score in the rating scale used by the applicant or NRSRO to
denote a category and a notch within a category for the applicable
class or subclass of credit ratings in descending order from the
highest to the lowest notch.\178\ The applicant or NRSRO would be
required to populate the column with the credit rating symbols,
numbers, or scores in descending order from the highest to the lowest
notch. Consistent with the header row, the narrative instructions also
would require that the first column not include a ``default'' category
if the applicant or NRSRO uses such a category in its rating scale. The
last cell in the first column would need to contain the term ``Total.''
\179\
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\178\ See, e.g., the first column of the Sample Transition/
Default Matrix in Figure 1.
\179\ See proposed new paragraph (3) of the instructions for
Exhibit 1; see also the first column of the Sample Transition/
Default Matrix in Figure 1.
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Finally, the narrative instructions would require that the
Transition/Default Matrix have a title identifying the applicable class
or subclass of credit ratings, the period covered (1, 3, or 10 years),
and start date and end date for the period.
Proposed Paragraph (4) of the Instructions for Exhibit 1. Proposed
new paragraph (4) of the instructions for Exhibit 1 would prescribe how
an applicant or NRSRO would need to populate a Transition/Default
Matrix with data and statistical information.\180\ First, proposed new
paragraph (4)(A) would prescribe how to populate the cells of the
second column headed ``Number of Ratings Outstanding [as the Start
Date].'' \181\ First, the applicant or NRSRO would be required to
determine a start-date cohort consisting of the obligors, securities,
and money market instruments in the applicable class or subclass of
credit ratings that were assigned a credit rating (other than an
expected or preliminary credit rating)\182\ that was outstanding as of
the start date for the applicable period (i.e., the date 1, 3, or 10
years prior to the most recently ended calendar year).\183\
Consequently, the start-date cohort would exclude any obligor,
security, or money market instrument that received an initial credit
rating in the class or subclass after the start date.\184\
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\180\ See proposed paragraph (4) of the instructions for Exhibit
1.
\181\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1; see also the 2nd column of the Sample Transition/Default
Matrix in Figure 1.
\182\ ``Expected'' or ``preliminary'' credit ratings most
commonly are issued by an NRSRO with respect to a structured finance
product at the time the issuer commences the offering and typically
are included in pre-sale reports. Expected or preliminary credit
ratings may include a range of ratings, or any other indications of
a credit rating used prior to the assignment of an initial credit
rating for a new issuance. As such, the Commission preliminarily
believes they should be excluded from the Transition/Default
Matrices since the issuance of the ``initial'' credit rating is the
first formal expression of the NRSRO's view of the relative
creditworthiness of the obligor, security, or money market
instrument.
\183\ For example, if the most recent year end was December 31,
2010, the NRSRO would need to determine all the obligors,
securities, and money market instruments with credit ratings
outstanding in the relevant class as of December 31, 2009 (for the
1-year Transition/Default Matrix), December 31, 2007 (for the 3-year
Transition/Default Matrix), and December 31, 2000 (for the 10-year
Transition/Default Matrix). Because some obligors, securities, and
money market instruments have characteristics that could cause them
to be assigned more than one class of credit rating, the Commission
is seeking comment below in Section II.M.4.a of this release on
which class would be the most appropriate for certain types of
obligors, securities, and money market instruments. Based on the
comments received in response to those questions, the Commission may
decide to prescribe by rule or identify through guidance how certain
types of obligors, securities, and money market instruments should
be classified for the purpose of determining start-date cohorts.
\184\ For example, a Transition/Default Matrix covering a 10-
year period would not include obligors, securities, and money market
instruments that had been rated by the NRSRO for less than 10 years.
However, these obligors, securities, and money instruments may be
included in the start-date cohorts for the 1- and 3-year matrices
for the class or subclass.
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In addition, the proposed instructions would provide that the
applicant or NRSRO must exclude from the start-date cohort any
obligors, securities, or money
[[Page 33439]]
market instruments that were classified by the applicant or NRSRO as
being in default as of the period start date.\185\ The Commission
preliminarily believes that the Transition/Default Matrices should not
include obligors, securities, and money market instruments the
applicant or NRSRO has classified as in default.\186\ The reason is
that, if an applicant or NRSRO classifies an obligor, security, or
money market instrument as in default, the applicant or NRSRO is no
longer assessing the relative likelihood that the obligor, security, or
money market will continue to meet its obligations to make timely
payments of principal and interest as they come due (i.e., not default
on its obligations). Consequently, as long as the obligor, security, or
money market instrument continues to be classified as in default there
is no credit rating performance to measure. However, if an obligor,
security, or money market instrument is upgraded from the default
category because, for example, the obligor emerges from a bankruptcy
proceeding, the obligor would need to be included in a Transition/
Default Matrix that has a start date after the upgrade.\187\
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\185\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1. As indicated, the determination of whether an obligor,
security, or money market instrument should be excluded from the
start date cohort would be based on the definition of ``default''
used by the applicant or NRSRO. As discussed below, in determining
the outcome of a credit rating assigned to an obligor, security, and
money market instrument during the applicable time period covered by
a Transition/Default Matrix, the applicant or NRSRO would need to
use a standard definition of ``default'' in proposed new paragraph
(4)(B)(iii) as opposed to its own definition. The Commission
recognizes that the use of a standard definition of ``default'' to
determine the outcome of a credit rating during the applicable time
period could result in an obligor, security, or money market
instrument being included in the start-date cohort that, as of the
start date, would be classified as in ``default'' under the proposed
definition of ``default'' in paragraph (4)(B)(iii). In other words,
the applicant or NRSRO may not have classified the obligor,
security, or money market instrument as in default as of the start
date using its own narrower definition. In this case, the Commission
preliminarily believes such an obligor, security, or money market
instrument should be included in the start-date cohort since the
applicant or NRSRO had assigned it a credit rating representing a
relative assessment of the likelihood of default (rather than a
classification of default) on the start date. Therefore, the
performance of the applicant or NRSRO in rating that obligor,
security, or money market instrument should be incorporated into the
default rate.
\186\ This does not mean that the obligor, security or money
market instrument would never be reflected in default rates. For
example, assume that as of the date 10 years prior to the most
recently ended calendar year-end an obligor in the corporate issuer
class was assigned a credit rating of BBB. This obligor would be
included in the start-date cohort for the 10-year Transition/Default
Matrix and grouped with the other obligors, securities, and/or money
market instruments assigned BBB ratings. Further, assume that during
the first seven years of the 10-year period, the credit rating of
the obligor was downgraded from BBB to BB (in year 2), from BB to B
(in year 5) and from B to CCC (in year 7). Having an outstanding
credit rating of CCC in year 7, the obligor would be included in the
start-date cohort for the 3-year Transition/Default Matrix and
grouped with obligors, securities, and money market instruments
assigned CCC ratings. Finally assume the obligor defaults in year 8.
For the purposes of the 10- and 3-year Transition/Default Matrices,
the obligor would need to be classified as having defaulted and
included in the default rates calculated for those matrices.
However, because the obligor would be in default as of the period
start date for the 1-year Transition/Default Matrix, it would not be
included in the start-date cohort for that matrix.
\187\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1. For example, assume an obligor was classified as in
default by the NRSRO as of the start date for the 10-year
Transition/Default Matrix. The obligor would be excluded from the
start-date cohort for the matrix. Assume further that two years
later the obligor emerged from a bankruptcy proceeding after a re-
structuring. At that point in time, the NRSRO upgraded the obligor
from the default category by assigning it a credit rating of BBB.
Assume that three years later the NRSRO upgraded the obligor's
credit rating from BBB to A- and that it retained that rating for
the next five years. In this case, the obligor would be included in
the start-date cohorts for the 1- and 3-year Transition/Default
Matrices and grouped with the obligors, securities, and money market
instruments assigned A- credit ratings.
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The next step, after determining the start-date cohort, would be to
determine the number of obligors, securities, and money market
instruments in the start-date cohort that, as of the start date, were
assigned a credit rating at each notch in the rating scale used for the
class or subclass.\188\ The final step would be to populate the
appropriate column cells with these amounts and in the bottom cell
provide the total number of obligors, securities, and money market
instruments in the start-date cohort. As discussed next, determining
these totals would be necessary to compute the percentages used to
populate the rows of the Transition/Default Matrix. Moreover, the
Commission preliminarily believes it would be useful to investors and
other users of credit ratings to include these amounts in the matrix.
This would inform them of the sample sizes of the obligors, securities,
and money market instruments used to generate the transition and
default rates for the notches entered in the matrix.\189\
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\188\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1. For the class of credit ratings in the Sample Transition/
Default Matrix in Figure 1, this would mean determining how many of
the obligors, securities, and money market instruments in the start-
date cohort were assigned a credit rating of AAA, AA, A, BBB, BB, B,
CCC, CC, and C as of the start date. For example, the Sample
Transition/Default Matrix in Figure 1 shows a total start-date
cohort of 11,770 obligors, securities, and/or money market
instruments. Within this cohort and as of the 12/31/2000 start date,
10 were rated AAA, 2000 were rated AA, 4000 were rated A, 3600 were
rated BBB, 1000 were rated BB, 500 were rated B, 300 were rated CCC,
200 were rated CC, and 16 were rated C.
\189\ For example, if the outcome for a notch with 10 obligors
is that 5 defaulted, the default rate reflected on the Transition/
Default Matrix for that notch would be 50%. Similarly, if the
outcome of a notch with 5,000 obligors is that 2,500 defaulted, the
default rate for that notch would be 50% as well. Investors and
other users of credit ratings might conclude that 2,500 obligors
going into default reflects significantly worse performance than 5
obligors. Consequently, if the sample sizes were not reflected on
the matrix, investors and other users of credit ratings could draw
conclusions about the comparative performance of NRSROs that are
distorted by varying sample sizes.
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Proposed new paragraph (4)(B) would focus on the horizontal axis of
the Transition/Default Matrix by prescribing how an applicant and NRSRO
would need to populate the rows representing sequentially in descending
order the notches in the credit rating scale used for the applicable
class or subclass of credit ratings.\190\ The instructions would
provide that each row must contain percents indicating the cumulative
credit rating outcomes of the obligors, securities, and money market
instruments assigned a credit rating at that notch.\191\ The
instructions also would provide that the percents in a row must add up
to 100%.\192\
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\190\ See proposed new paragraph (4)(B) of the instructions for
Exhibit 1; see also the 2nd through the 10th rows of the Sample
Transition/Default Matrix in Figure 1 (AAA through C).
\191\ For example, in the Sample Transition/Default Matrix in
Figure 1, cumulative outcomes would need to determined for: the 10
obligors, securities, and/or money market instruments in the 2nd row
(AAA); the 2000 obligors, securities, and/or money market
instruments in the 3rd row (AA); the 4000 obligors, securities, and/
or money market instruments in the 4th row (A); the 3600 obligors,
securities, and/or money market instruments in the 5th row (BBB);
the 1000 obligors, securities, and/or money market instruments in
the 6th row (BB); the 300 obligors, securities, and/or money market
instruments in the 8th row (CCC); the 200 obligors, securities, and/
or money market instruments in the 9th row (CC); and the 160
obligors, securities, and/or money market instruments in the 10th
row (C).
\192\ See proposed new paragraph (4)(B) of the instructions for
Exhibit 1. For example, in the Sample Transition/Default Matrix in
Figure 1, the percents in the row representing the AAA category are
(from left to right): 50%, 10%, and 40%, which when added together
equal 100%.
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As discussed in detail below, proposed new paragraph (4)(B) would
identify five potential credit rating outcomes: (1) The obligor,
security, or money market instrument was assigned the same credit
rating as of the period end date; (2) the obligor, security, or money
market instrument was assigned a different credit rating as of the
period end date; (3) the obligor, security, or money market instrument
defaulted at any time during the period; (4) the obligor, security, or
money market instrument paid off during the period; or (5) the
applicant or NRSRO withdrew a credit rating of the obligor, security,
or
[[Page 33440]]
money market instrument at any time during the period for a reason
other than that the obligor, security, or money market instrument
defaulted or ``paid off.''\193\ Because the percents in a row would
need to add up to 100%, each obligor, security, and money market
instrument reflected in the numbers contained in the 2nd column of a
Transition/Default Matrix could be assigned only one credit rating
outcome.\194\ Proposed paragraphs (4)(B)(i) through (v) would instruct
applicants and NRSROs how to compute the percents used to populate each
row representing a notch in the rating scale in the Transition/Default
Matrix.\195\
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\193\ See proposed new paragraphs (4)(B)(i)-(v) of the
Instructions for Exhibit 1.
\194\ See proposed new paragraph (4)(B) of the instructions for
Exhibit 1; see also the 2nd column in the Sample Transition/Default
Table in Figure 1.
\195\ See proposed new paragraphs (4)(B)(i)-(v) of the
instructions for Exhibit 1.
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Proposed new paragraph (4)(B)(i) would require the applicant or
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date that were assigned a credit rating at
the same notch as of the period end date.\196\ The instructions would
require that: (1) this number be expressed as a percent of the total
number of obligors, securities, and/or money market instruments
assigned a credit rating at that notch as of the period start date; and
(2) the percent be entered in the column representing the same
notch.\197\
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\196\ See proposed new paragraph (4)(B)(i) of the instructions
for Exhibit 1.
\197\ For example, the 2nd row of the Sample Transition/Default
Matrix in Figure 1 represents the AAA notch in the applicable rating
scale. As reflected in the matrix, 10 obligors, securities, and/or
money market instruments were assigned a credit rating of AAA as of
the 12/31/2000 start date. Of these 10, 5 (or 50%) were assigned a
credit rating of AAA as of the 12/31/2010 end date. Accordingly, 50%
is input in the AAA column.
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An obligor, security, or money market instrument could have the
same credit rating as of the period end-date because the credit rating
did not change between the start date and the end date or the credit
rating transitioned to one or more other notches during the relevant
period but transitioned back to the start-date notch where it remained
as of the period end date. Consequently, proposed new paragraph
(4)(B)(i) would clarify that, to determine this amount, the applicant
or NRSRO would need to use the credit rating at the notch assigned to
the obligor, security, or money market instrument as of the period end
date and not a credit rating at any other notch assigned to the
obligor, security, or money market instrument between the period start
date and the period end date.\198\
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\198\ See proposed new paragraph (4)(B)(i) of the instructions
for Exhibit 1. For example, assume an obligor was assigned a credit
rating of BBB as of the start date of a 10-year Transition/Default
Matrix. Assume further that three years after the start date, the
credit rating was upgraded to AA but then eight years after the
start date the credit rating was downgraded to A, and nine years
after the start date the credit rating was downgraded to BBB where
it remained as of the period end date. For the purpose of the 10-
year Transition/Default Matrix, the outcome assigned this obligor
would be that it had the same credit rating as of the period end
date. However, the transitions that occurred in years eight and nine
would be reflected, respectively, in the 3- and 1-year Transitions/
Default Matrices for the class or subclass of credit ratings. In
other words, the credit rating history for this obligor would
reflect volatility over the short term but stability over the long
term.
---------------------------------------------------------------------------
Proposed new paragraph (4)(B)(ii) would require the applicant or
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date that were assigned a credit rating at
each other notch as of the period end date.\199\ The instructions would
require that: (1) these numbers be expressed as percents of the total
number of obligors, securities, and/or money market instruments
assigned a credit rating at that notch as of the period start date; and
(2) the percents be entered in the columns representing each
notch.\200\ The instructions in the paragraph would clarify that, to
determine these numbers, the applicant or NRSRO would need to use the
credit rating at the notch assigned to the obligor, security, or money
market instrument as of the period end-date and not a credit rating at
any other notch assigned to the obligor, security, or money market
instrument between the period start date and the period end date.\201\
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\199\ See proposed new paragraph (4)(B)(ii) of the instructions
for Exhibit 1.
\200\ See proposed new paragraph (4)(B)(ii) of the instructions
for Exhibit 1. For example, the 3rd row of the Sample Transition/
Default Matrix in Figure 1 represents the AA notch in the applicable
rating scale. As reflected in the matrix, 2000 obligors, securities,
and/or money market instruments were assigned a credit rating of AA
as of the 12/31/2000 start date. Of these 2000, as of the period end
date: 2 (or 1%) were assigned a credit rating of AAA; 240 (or 12%)
were assigned a credit rating of A; 200 (or 10%) were assigned a
credit rating of BBB; 160 (or 8%) were assigned a credit rating of
BB; 100 (or 5%) were assigned a credit rating of B; and 80 (or 4%)
were assigned a credit rating of CCC. Accordingly, 1% is input in
the AAA column, 12% in the A column, 10% in the BBB column, 8% in
the BB column, 5% in the B column, and 4% in the CCC column.
\201\ See proposed new paragraph (4)(B)(ii) of the instructions
for Exhibit 1. This instruction would mirror the instruction in
proposed new paragraph (4)(B)(i). As explained above, the applicant
or NRSRO would need to reflect in the transition rate for a given
notch the credit ratings assigned to the obligors, securities, and
money market instruments at that notch as of the period end-date
(rather than transitional credit ratings assigned during the
period). For example, in the Sample Transition/Default Matrix in
Figure 1, there were 2000 obligors, securities and/or money market
instruments assigned AA ratings as of 12/31/2000. As of 12/31/2010,
4% (or 80) of the obligors, securities, and/or money market
instruments were assigned a credit rating of CCC. The path by which
these obligors, securities, or money market instruments arrived at a
CCC credit rating as of the period end date could have been through
a series of rating actions that occurred during the 10 year period
(e.g., being downgraded to A, then BBB, then BB, then B, and then
CCC). The transitional credit ratings of these 80 obligors,
securities, and money market instruments between the AA credit
rating as of 12/31/2000 and the CCC credit rating as of 12/31/2010
would not be reflected in the transition rate for the AA notch.
---------------------------------------------------------------------------
Proposed new paragraph (4)(B)(iii) would require an applicant and
NRSRO to determine the total number of obligors, securities, and money
market instruments assigned a credit rating at the notch represented by
the row as of the period start date that went into Default at any time
during the applicable time period.\202\ The instructions would require
that: (1) This number be expressed as a percent of the total number of
obligors, securities, and/or money market instruments assigned a credit
rating at that notch as of the period start date; and (2) the percent
to be entered in the Default column.\203\
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\202\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1. This release denotes the proposed standardized
definition of the term ``default'' as ``Default'' to distinguish the
definition and its meaning from other uses of the term ``default''
herein.
\203\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1. For example, the 7th row of the Sample Transition/
Default Matrix in Figure 1 represents the B notch in the applicable
rating scale. As reflected in the matrix, 500 obligors, securities,
and/or money market instruments were assigned a credit rating of B
as of the 12/31/2000 start date. Of these 500, 75 (or 15%) were
classified as having gone into Default during period (12/31/2000-12/
31/2010). Accordingly, 15% is input in the Default column.
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As indicated, the classification of Default would be triggered if
the obligor, security, or money market instrument went into Default at
any time during the period.\204\ This is different than the
classifications in proposed paragraphs (4)(B)(i) and (ii), which are
based solely on the end-date status of the obligor, security or money
market instrument.\205\ This period-long approach is designed to
address concerns that an applicant or NRSRO might withdraw a credit
rating of an obligor, security, or money market instrument that went
into Default during the period in order to omit the obligor, security,
or money market instrument from the Transition/Default
[[Page 33441]]
Matrix and, therefore, improve the default rates presented in the
matrix.\206\
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\204\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1.
\205\ See proposed new paragraphs (4)(B)(i) and (ii) of the
instructions for Exhibit 1.
\206\ See 15 U.S.C. 78o-7(q)(2)(C) (providing that the
disclosures include performance information over a range of years
and for a variety of types of credit ratings, including for credit
ratings withdrawn by the NRSRO). The following provides an example
of how withdrawals can be used to impact a default rate. In the
Sample Transition/Default Matrix in Figure 1, the Default rate over
the 10-year period for the 3600 obligors, securities, and money
market instruments assigned a BBB rating as of the period start date
is 4%. This means that 144 obligors, securities, or money market
instruments assigned a credit rating at this notch as of the start
date went into Default during the period (144/3600 = 4%). If the
default rate was determined by the credit assigned to these 144
obligors as of the period end date, the NRSRO could withdraw, for
example, 100 of these credit ratings after default. Consequently,
only 44 of the obligors, securities, and/or money market instruments
would be in the default category as of the period end-date and,
therefore, the default rate for the BBB notch would be 1.2% instead
of 4% (44/3600 = 1.2%).
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The Commission preliminarily believes it would be appropriate to
prescribe a standard definition of Default in proposed new paragraph
(4)(B)(iii).\207\ This standard definition would need to be used by all
applicants and NRSROs to determine whether an obligor, security, or
money market instrument in the start-date cohort defaulted. The
Commission's goal in proposing a standard definition is to make the
default rates calculated and disclosed by the NRSROs more readily
comparable.\208\ The Commission is concerned that if applicants or
NRSROs use their own definitions of ``default,'' differences in those
definitions may result in the applicants and NRSROs inconsistently
classifying obligors, securities, and money market instruments as in
default.\209\ For example, an NRSRO that uses a narrow definition may
show better (i.e., lower) default rates than an NRSRO using a broader
definition even though the former's credit ratings would perform no
better under the broader definition. The Commission preliminarily
believes that potential variances in how applicants and NRSROs may
define ``default'' could make comparing performance across NRSROs
difficult and could be a way to manipulate the data to produce more
favorable results.
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\207\ See proposed new paragraph (4)(B)(iii) of the Instructions
for Exhibit 1.
\208\ See 15 U.S.C. 78o-7(q)(2)(A) (providing that the
Commission's rules shall require disclosures that are comparable
among NRSROs, to allow users of credit ratings to compare the
performance of credit ratings across NRSROs).
\209\ See, e.g., GAO Report 10-782, p. 38 (``NRSROs can differ
in how they define default. Therefore, some agencies may have higher
default rates than others as a result of a broader set of criteria
for determining that a default has occurred.'').
---------------------------------------------------------------------------
The Commission recognizes that a proposal to use a standard
definition of default may raise concerns among the NRSROs. For example,
in the past, NRSROs have argued against prescribing a standardized
approach for calculating transition and default rates given the
different meanings of their credit ratings and definitions of
default.\210\ Nonetheless, as explained above, the Commission
preliminarily believes a standard definition is the preferred approach
to make disclosures of default rates comparable and, therefore, useful
to investors and other users of credit ratings. However, the Commission
is requesting comment below on the proposed use of a standard
definition, including whether there are alternatives that could achieve
the Commission's goal of comparability.
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\210\ See, e.g., letter dated March 12, 2007 from Jeanne M.
Dering, Executive Vice President, Moody's Investors Services and
letter dated March 12, 2007 from Vickie A. Tillman, Executive Vice
President, Standard & Poor's (commenting on proposals in Oversight
of Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33574 (Feb. 9, 2007).
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Proposed new paragraph (4)(B)(iii) would prescribe two disjunctive
definitions of Default.\211\ An applicant and NRSRO would need to
classify an obligor, security, or money market instrument as having
gone into Default if the conditions in either or both of the
definitions were met. The first definition would apply if the obligor
failed to timely pay principal or interest due according to the terms
of an obligation, or the issuer of the security or money market
instrument failed to timely pay principal or interest due according to
the terms of the security or money market instrument.\212\ This would
be the standard definition of Default used by the applicant or NRSRO.
The goal of this proposed definition is to establish a minimum baseline
for classifying an obligor, security, or money market instrument as
having gone into Default. The Commission's intent is to avoid a
situation in which applicants and NRSROs use varying definitions of
default, which, as noted above, could result in some NRSROs using
materially narrower definitions in order to produce more favorable
default rates.\213\
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\211\ See proposed new paragraphs (4)(B)(iii)(a) and (b) of the
instructions for Exhibit 1.
\212\ See proposed new paragraphs (4)(B)(iii)(a) of the
instructions for Exhibit 1.
\213\ Because this would be a standard definition, the applicant
or NRSRO would need to classify the obligor, security, or money
market instrument as having gone into Default even if the applicant
or NRSRO assigned a credit rating other than default to the obligor,
security, or money market instrument at the time of the event of
Default because, for example, the applicant or NRSRO uses a narrower
definition of ``default.''
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The second definition would apply if the applicant or NRSRO
classified the obligor, security, or money market instrument as having
gone into default using its own definition of ``default.'' \214\ This
proposal is designed to supplement the standard definition to address a
situation where the NRSRO's definition of ``default'' is broader than
the standard definition and, as a consequence, the NRSRO has classified
an obligor, security, or money market instrument as having gone into
default during the time period even though, under the standard
definition, the applicant or NRSRO would not need to make a Default
classification. The Commission preliminarily believes that the standard
definition of Default, as proposed, is broad and would apply to most
cases commonly understood as a default. Consequently, the Commission
preliminarily believes a classification of default under the second
definition would be rare.\215\
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\214\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1.
\215\ The Commission recognizes that supplementing the standard
definition in proposed paragraph (4)(B)(iii) with the definition
used by the applicant or NRSRO could potentially import an
idiosyncratic element to a given NRSRO's Default classifications.
However, any such impact only could increase the number of obligors,
securities, and money market instruments classified as having gone
into Default (i.e., an internal definition only could expand the
standard definition). The Commission is not concerned if an
applicant or NRSRO over-classifies (relative to other applicants or
NRSROs) the number of obligors, securities, or money market
instruments that went into Default, provided all NRSROs are using
the standard definition as a baseline. Moreover, the Commission
believes any such over-classifications would be de minimis given the
broad scope of the standard definition. Furthermore, each obligor,
security, and money market instrument in the start-date cohort must
be assigned 1 of 5 potential outcomes. Consequently, if an applicant
or NRSRO has classified an obligor, security, or money market
instrument as having gone into default based on its own definition a
classification of Default would be the most appropriate outcome
among the 5 possible outcomes identified in proposed new paragraph
(4)(B) of the instructions for Exhibit 1.
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Finally, proposed new paragraph (4)(B)(iii) also would clarify that
an obligor, security, or money market instrument that goes into in
Default must be classified as in Default even if the applicant or NRSRO
assigned a credit rating to the obligor, security, or money market
instrument at a notch above default in its rating scale on or after the
event of Default or withdrew the credit rating on or after the event of
Default.\216\ This proposed clarification is designed to affirm the
requirement that an obligor, security, or money market instrument that
goes into Default at any time during the period covered by the
Transition/Default Matrix must be included in the default rate for the
applicable category of credit rating
[[Page 33442]]
irrespective of the post-Default status of the obligor, security, or
money market instrument.
---------------------------------------------------------------------------
\216\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1.
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Proposed new paragraph (4)(B)(iv) would require an applicant and
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date that Paid Off at any time during the
applicable time period.\217\ The instructions would require that: (1)
This amount be expressed as a percent of the total number of obligors,
securities, and/or money market instruments assigned a credit rating at
that notch as of the period start date; and (2) the percent be entered
in the Paid Off column.\218\ As with the Default classification, this
classification would be made if the obligor, security, or money market
instrument Paid Off at any time during the period.\219\
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\217\ See proposed new paragraph (4)(B)(iv) of the instructions
for Exhibit 1.
\218\ Id. For example, the 9th row of the Sample Transition/
Default Matrix in Figure 1 represents the CC notch in the applicable
rating scale. As reflected in the matrix, 200 obligors, securities,
and/or money market instruments were assigned a credit rating of CC
as of the 12/31/2000 start date. Of these 200, 4 (or 2%) were
classified as having Paid Off during period (12/31/2000-12/31/2010).
Accordingly, 2% is input in the Paid Off column.
\219\ See proposed new paragraph (4)(B)(iv) of the instructions
for Exhibit 1.
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Proposed new paragraph (4)(B)(iv) would define Paid Off using two
different sets of conditions: (1) One set applicable to obligors; and
(2) one set applicable to securities and money market instruments.\220\
The reason is that a credit rating of an ``obligor'' typically means a
credit rating of the entity with respect to all obligations of the
entity; whereas a credit rating of a ``security'' or ``money market
instrument'' means a credit rating of a specific debt instrument such
as a bond, note, or issuance of commercial paper.\221\ Consequently, as
used generally, a credit rating of an obligor does not relate to a
single obligation with a term of maturity but rather to the obligor's
overall ability to meet any obligations as they come due. Therefore, an
obligor credit rating normally would not be classified as Paid Off
since it does not reference a specific obligation that will mature.
However, the Commission preliminarily believes it is possible that an
applicant or NRSRO could determine a credit rating relating directly to
an obligor's ability to meet a specific obligation with a definite term
to maturity.\222\ In this case, the obligor could be classified as
having Paid Off given that the obligation to which the credit rating
relates is identifiable and was extinguished during the period. At the
same time, the Commission's objective is to avoid inadvertently
proposing a definition that would permit an NRSRO to classify an
obligor assigned a typical obligor credit rating as having Paid Off
because it extinguished one of its obligations during the time
period.\223\
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\220\ See proposed new paragraphs (4)(B)(iv)(a) and (b) of the
instructions for Exhibit 1.
\221\ As discussed earlier, this understanding of the meaning of
an ``obligor'' credit rating is based, in part, on the definition of
``credit rating'' in Section 3(a)(60) of the Exchange Act (``The
term `credit rating' means an assessment of the creditworthiness of
an obligor as an entity or with respect to specific securities or
money market instruments.''). See 15 U.S.C. 78o-7(a)(60).
\222\ For example, an NRSRO could issue a credit rating that
relates solely to the likelihood that the obligor would meet an
obligation to pay principal and interest on a specific term loan.
\223\ For example, an applicant or NRSRO could seek to improve
its default rates by classifying obligors as having paid off because
they extinguished one obligation during the relevant period before
defaulting on other obligations.
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For these reasons, the Commission proposes that paragraph
(4)(B)(iv)(a) provide that an applicant and NRSRO may classify an
obligor as having Paid Off only if the applicant or NRSRO assigned the
obligor a credit rating with respect to a single specifically
identified obligation; the obligor extinguished the obligation during
the applicable time period by paying in full all outstanding principal
and interest due on the obligation according to the terms of the
obligation (e.g., because the obligation matured, was called, or was
prepaid); and the applicant or NRSRO withdrew the credit rating because
the obligation was extinguished.\224\ The third clause of the proposed
definition (that the NRSRO withdrew the credit rating) would be
designed to ensure that the credit rating, in fact, did relate to the
single specifically identified obligation. If the applicant or NRSRO
continued to assign a credit rating to the obligor after the obligation
was extinguished, it would suggest that the credit rating related to
the obligor's creditworthiness in a broader sense (i.e., not with
respect to the single obligation).
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\224\ See proposed new paragraph (4)(B)(iv)(a) of the
instructions for Exhibit 1.
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As for securities and money market instruments, proposed paragraph
(4)(B)(iv)(b) would provide that the applicant or NRSRO may classify a
security or money market instrument as having Paid Off only if the
issuer of the security or money market instrument extinguished its
obligation with respect to the security or money market instrument
during the applicable time period by paying in full all outstanding
principal and interest due according to the terms of the security or
money market instrument (e.g., because the security or money market
instrument matured, was called, or was prepaid); and the applicant or
NRSRO withdrew the credit rating for the security or money market
instrument because the obligation was extinguished.\225\ Consequently,
the proposed definition would mirror the second and third elements of
the definition of Paid Off as it relates to the credit rating of an
obligor.\226\
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\225\ See proposed new paragraph (4)(B)(iv)(b) of the
instructions for Exhibit 1.
\226\ Compare proposed new paragraphs (4)(B)(iv)(a) and (b) of
the instructions for Exhibit 1.
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Proposed new paragraph (4)(B)(v) would require the applicant or
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date for which the applicant or NRSRO
withdrew a credit rating assigned to the obligor, security, or money
market instrument at any time during the applicable time period for a
reason other than Default or Paid-Off.\227\ The instructions would
require that: (1) This amount be expressed as a percent of the total
number of obligors, securities, and/or money market instruments
assigned a credit rating at that notch as of the period start date; and
(2) the percent be entered in the Withdrawn (other) column.\228\ The
instructions would provide that the applicant or NRSRO must classify
the obligor, security, or money market instrument as Withdrawn (other)
even if the applicant or NRSRO assigned a credit rating to the obligor,
security, or money market instrument after withdrawing the credit
rating.\229\
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\227\ See proposed new paragraph (4)(B)(v) of the instructions
for Exhibit 1.
\228\ Id. For example, the 4th row of the Sample Transition/
Default Matrix in Figure 1 represents the A notch in the applicable
rating scale. As reflected in the matrix, 4000 obligors, securities,
and/or money market instruments were assigned a credit rating of A
as of the 12/31/2000 start date. Of these 4000, 80 (or 2%) were
classified as having been Withdrawn (other) during the period (12/
31/2000-12/31/2010). Accordingly, 2% is input in the Withdrawn
(other) column.
\229\ See proposed new paragraph (4)(B)(v) of the instructions
for Exhibit 1.
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There are legitimate reasons to withdraw a credit rating assigned
to an obligor, security, or money market instrument. For example, an
NRSRO might withdraw a credit rating because the rated obligor or
issuer of the rated security or money market instrument stopped paying
for the surveillance of the credit rating or because the NRSRO issued
and was monitoring the credit rating on an unsolicited basis and no
longer wanted to devote resources to
[[Page 33443]]
monitoring it. However, the Commission also is concerned that an
applicant or NRSRO could withdraw a credit rating assigned to an
obligor, security, or money market instrument to make its transition or
default rates appear more favorable.\230\ Therefore, the Commission
proposes requiring an applicant and NRSRO to disclose the percent of
obligors, securities, and money market instruments for which the
applicant or NRSRO withdrew the credit rating for reasons other than
Default or Paid Off during the period covered by the Transition/Default
Matrix.\231\ Investors and other users of credit ratings could use the
percents of withdrawn credit ratings to assess whether the number of
withdrawals impacted the transition and default rates entered in the
Transition/Default Matrix.\232\ They also would be able to compare
historical withdrawal percents of an NRSRO and across all NRSROs. If an
NRSRO has a disproportionate number of withdrawals for one period as
compared to prior periods or as compared to those of other NRSROs,
investors and other users of credit ratings could consider that factor
in assessing the veracity of the transition and default rates entered
in the NRSRO's Transition/Default Matrix.
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\230\ For example, the 5th row of the Sample Transition/Default
Matrix in Figure 1 represents the BBB notch in the applicable rating
scale. 3600 obligors, securities, and/or money market instruments
were assigned a credit rating at this notch as of the start date.
The transition rates from this notch to a lower notch are: 15% (BB),
10% (B), 6% (CCC), 5% (CC), and 1% (C). Taken together, this means
that 37% (or 1332) of the obligors, securities, and money market
instruments were assigned a credit rating as of the end-date that
was below BBB (i.e., in categories commonly referred to as ``non-
investment grade'' or ``speculative''). To lower the transition
rates to ``non-investment grade'' categories, the credit ratings for
400 obligors, securities, or money market instruments assigned a BBB
credit rating as of the start date could be withdrawn. This would
reduce the transition rate to notches below BBB from 37% (1332/3600)
to 26% (932/3600).
\231\ See proposed new paragraph (4)(B)(v) of the instructions
for Exhibit 1.
\232\ For example, the 6th row of the Sample Transition/Default
Matrix in Figure 1 represents the BB notch in the applicable rating
scale. 1000 obligors, securities, and/or money market instruments
were assigned a credit rating at this notch as of the start date. Of
these 1000, 370 (or 37%) had their credit ratings withdrawn during
the period (12/31/2000-12/31/2010). This amount is much larger than
the withdrawal rates for the other notches, which range from 0% (AAA
notch) to 12% (C notch). Moreover, the default rate for the BB notch
(2%) is an anomaly in that it is lower than the default rate for the
next highest notch BBB (4%). Normally, lower notches would be
expected to have higher default rates. In addition, the AAA, AA, A,
and BBB notches all have single digit default rates (ranging from 0%
to 4%); whereas the notches below BBB all have double digit default
rates (ranging from 15% to 67%), except for the BB notch (which, as
noted, has a default rate of 2%). Furthermore, the two-notch
downgrade transition rate for the BB notch is 5% (BB to CCC). This
appears to be an anomaly given that the two-notch downgrade rates
for the other notches are: 10% for the AA notch (AA to BBB); 10% for
the A notch (A to BB); 10% for the BBB notch (BBB to B); 15% for the
B notch (B to CC); 20% for the CCC notch (CCC to C); and 30% for the
CC notch (CC to Default). An investor or other user of credit
ratings reviewing this matrix could conclude that the withdrawal of
credit ratings at the BB notch for reasons other than Default or
Paid Off materially impacted the transition and default rates for
the BB notch. The high rate of withdrawals in this instance also
could be the focus of examination by the Commission staff.
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Request for Comment
The Commission generally requests comment on all aspects of the
proposed new instructions for Exhibit 1 to Form NRSRO. The Commission
also seeks comment on the following:
1. With respect to prescribing a standard method of calculating
transition and default rates, would a single cohort approach (rather
than an average cohort approach or some other approach) \233\ be the
most appropriate way to make the transition and default rates clear and
informative for investors having a wide range of sophistication who use
or might use credit ratings? Commenters should identify and explain any
other approach they believe could be used to prescribe a standard
process for calculating and presenting transition and default rates
that would better achieve this goal.
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\233\ An average cohort approach for calculating rating
transitions or default statistics consists of taking the average of
several cohorts over a longer time period. For example, the one-year
average transition rate would be calculated by taking the average
transition rate from several one-year cohorts over a given time
period.
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2. What practical issues should the Commission consider in
implementing a standard process for calculating and presenting
transition and default rates? For example, would the variances in the
procedures and methodologies NRSROs use to determine credit ratings
raise practical issues in terms of adhering to a standard process for
calculating and presenting transition and default rates? In addition,
would the variances in the meanings and definitions NRSROs ascribe to
the notches of credit ratings in their rating scales raise practical
issues in terms of adhering to a standard process for calculating and
presenting transition and default rates? How could the proposal be
modified to address any practical issues identified without undermining
the goal of comparability?
3. With respect to any practical issues identified in response to
the solicitation of comment in question 2, would the proposed
single cohort approach for calculating and presenting transition and
default rates heighten or lessen the issues relative to other possible
approaches such as the average cohort approach? Commenters should
identify and explain any other approach they believe could be used to
prescribe a standard process for calculating and presenting transition
and default rates that would raise the least practical issues.
4. Would the proposals require an NRSRO to disclose proprietary
information? If so, describe the type or types of proprietary
information. Also, describe potential ways to address this issue.
5. Would the proposals have an impact on competition? For example,
would they advantage or disadvantage a certain type of NRSRO? Could
they potentially alter the behavior of NRSROs? For example, could the
proposals cause certain NRSROs to stop determining a particular type of
credit rating? If so, describe whether there would be any costs or
negative impacts as a result and, if so, how such costs or negative
impacts could be addressed.
6. How would the proposals differ from the way NRSROs currently
calculate and present transition and default rates? For example, would
they be more or less sophisticated than current methods? Would they be
more or less burdensome than current methods? Describe the differences.
Furthermore, describe the benefits of a standardized approach in terms
of making the disclosure more useful to investors and other users of
credit ratings.
7. Would dividing the class of credit ratings for structured
finance products into the subclasses identified in proposed paragraphs
(1)(D)(i) through (vii) of the instructions for Exhibit 1 provide
investors and other users of credit ratings with more useful
information about the performance of an NRSRO's structured finance
ratings? For example, should the Commission continue to require
transition and default rates for this class only as a whole? If so,
explain how this would provide more useful information about the
performance of an NRSRO's structured finance ratings.
8. Are the subclasses of credit ratings for structured finance
products identified in proposed paragraphs (1)(D)(i) through (vii) of
the instructions for Exhibit 1 the most appropriate way to stratify
this class of credit ratings? For example, should the ``other-ABS''
subclass be divided up into subclasses based on the assets underlying
the ABS (i.e., auto loans, auto leases, floor plan financings, credit
card receivables, student loans, consumer loans, equipment loans or
equipment leases)?
[[Page 33444]]
In addition, are there other classes of structured finance products
that should be identified in proposed paragraph (1)(D) of the
instructions for Exhibit 1?
9. Are the descriptions of the subclasses of credit ratings for
structured finance products identified in proposed paragraphs (1)(D)(i)
through (vii) of the instructions for Exhibit 1 sufficiently clear to
provide an applicant and NRSRO with guidance as to which credit ratings
should be included in the production of the Transition/Default Matrices
for each subclass? How could the descriptions be modified to make them
clearer and provide better guidance?
10. Would the design and presentation of a Transition/Default
Matrix prescribed in proposed paragraph (3) of the instructions for
Exhibit 1 be clear and informative for investors having a wide range of
sophistication who use or might use credit ratings? How could the
design and presentation of the Transition/Default Matrix be modified to
better achieve this goal?
11. Would the design and presentation of a Transition/Default
Matrix prescribed in proposed paragraph (3) of the instructions for
Exhibit 1 be an appropriate way to present transition and default
rates? How could the design and presentation of the Transition/Default
Matrix be modified to better accommodate these statistics?
12. Are the instructions in proposed paragraphs (1), (2), (3), and
(4) of Exhibit 1 sufficiently clear in terms of requirements for
producing the required Transition/Default Matrices and presenting
necessary information in the Exhibit? For example, are instructions in
the paragraphs sufficiently clear in terms of the requirements for
populating the columns and rows of a Transition/Default Matrix? How
could the instructions be modified to make them clearer and provide
better guidance?
13. Should obligors, securities, and money market instruments that
an applicant or NRSRO has classified as being in default as of the
start date of a period covered by a Transition/Default Matrix be
excluded from the start-date cohort for that matrix? If not, explain
the rationale for including them.
14. Should the start-date cohorts for the Transition/Default
Matrices be comprised of obligors only (i.e., not include securities or
money market instruments assigned credit ratings in the class or
subclass)? For example, if the credit ratings of securities or money
instruments issued by an obligor are simply a function of the credit
rating of the obligor, would it be sufficient to include only the
obligor in the start-date cohort? If so, should this be the case for
all classes and subclasses of credit ratings or for certain classes and
subclasses? For example, the credit ratings assigned to securities and
money market instruments in the structured finance class often are
based on differing levels of credit enhancement specific to each
tranche of a security issued by the obligor. Consequently, in such a
case, the credit rating of the security or money market instrument
issued would not be a function solely or primarily of the credit rating
of the obligor.
15. Commenters are referred to the questions in Section II.M.4.a of
this release with respect Items 6 and 7 of Form NRSRO and how certain
types of obligors, securities, and money market instruments should be
classified for purposes of providing approximate amounts of credit
ratings outstanding in each class of credit rating for which an
applicant is seeking registration (Item 6) or an NRSRO is registered
(Item 7)? In responding to those questions, commenters should consider
how proposed classifications could be applied to determining the
composition of start-date cohorts for the purposes of the proposed
enhancements to Exhibit 1.
16. Should the default rates in the Transition/Default Matrices be
determined using the proposed standard definition of Default? For
example, would the use of a standard definition raise practical issues
in light of the different meanings that NRSROs ascribe to the notches
in their credit rating scales or the different definitions of
``default'' they utilize? How could the proposal be modified to address
any practical issues identified without undermining the goal of
comparability?
17. Is the proposed standard definition of Default sufficiently
broad to apply to most, if not all, events commonly understood as
constituting a default? For example, should the definition explicitly
include that the obligor or issuer of the security or money market
instrument is in a bankruptcy proceeding or would this be redundant in
that the definition already provides that the obligor or issuer of the
security has failed to timely pay interest or principal due? In
addition, should the definition explicitly include events that would
constitute a default due to a breach of a covenant unrelated to the
failure to timely pay interest or principal due on a security or money
market instrument (e.g., a covenant might provide that a default by the
issuer on a bank loan to a third party or a default by an affiliate of
the issuer would constitute a default with respect to a rated security
of the issuer)? Would it be appropriate to include such cross-default
provisions as part of the definition of the Default in the instructions
for Exhibit 1? For example, if the issuer continued to make timely
payments of interest and principal to the holders of the security
notwithstanding the cross-defaults, would it nonetheless be appropriate
to classify the security as in Default? If so, how could the proposed
definition be modified to make it broad enough to apply to all
instances of default? Should the requirement provide for an NRSRO to be
able to use its own definition if the standard definition would not be
feasible given the NRSRO's procedures and methodologies for determining
credit ratings? If so, should the NRSRO be required to make disclosures
about why it is using its own definition? Describe the nature of such
disclosures.
18. Should the proposed standard definition of Default be refined
to distinguish between degrees of default severity? For example, should
the definition distinguish between a situation where an obligor or the
issuer of a security or money market instrument has failed to make a
timely payment of interest or principal that potentially could be cured
and the situation where the obligor or issuer of the security or money
market instrument is no longer able to cure a failed payment of
interest or principal or is in a bankruptcy proceeding? How could the
proposed definition be modified to account for relative degrees of
default severity and how should such modifications be incorporated into
the proposed instructions for calculating default statistics?
19. Is the proposed standard definition of Paid Off sufficiently
broad to apply to most, if not all, events commonly understood as
constituting the extinguishment of an obligation upon which a credit
rating is based? If not, how could the proposed definition be modified
to make it broad enough to apply to all instances that should, for the
purposes of transition and default rates, be classified as having Paid
Off? Should the requirement provide for an NRSRO to be able to use its
own definition if the standard definition would not be feasible given
the NRSRO's procedures and methodologies for determining credit
ratings? If so, should the NRSRO be required to make disclosures about
why it is using its own definition? Describe the nature of such
disclosures.
20. Would the proposed treatment for Withdrawn (other) credit
ratings in the Transition/Default Matrices sufficiently
[[Page 33445]]
address the concern that an applicant or NRSRO might use withdrawals to
make its transition and default rates appear more favorable? For
example, should the Commission, by rule, require an NRSRO to monitor an
obligor, security, or money market instrument after withdrawal in order
to classify whether the obligor, security, or money market instrument
went into Default or Paid Off? If so, how long should the applicant or
NRSRO be required to monitor the obligor, security, or money market
instrument? Alternatively, should the applicant or NRSRO be required to
explain and disclose in Exhibit 1 the reason why it withdrew the credit
ratings in the given class or subclass of credit ratings? If so, how
much detail should the applicant or NRSRO provide in the description?
Should the requirement provide for an NRSRO to be able to use its own
definition if the standard definition would not be feasible given the
NRSRO's procedures and methodologies for determining credit ratings? If
so, should the NRSRO be required to make disclosures about why it is
using its own definition? Describe the nature of such disclosures.
b. Proposed Amendments to Rule 17g-1
Section 15E(q)(2)(D) of the Exchange Act provides that the
Commission's rules must require an NRSRO to make the information about
the performance of credit ratings freely available and disclose it on
an easily accessible portion of its Web site, and in writing when
requested.\234\ The Commission proposes to implement Section
15E(q)(2)(D) by amending paragraph (i) of Rule 17g-1.\235\ Paragraph
(i) requires an NRSRO to make its current Form NRSRO and information
and documents submitted in Exhibits 1 through 9 publicly available on
its Web site or through another comparable, readily accessible means
within 10 business days of being granted an initial registration or a
registration in an additional class of credit ratings, and within 10
business days of furnishing a Form NRSRO to update information on the
Form, to provide the annual certification, and to withdraw a
registration.\236\ These requirements implemented Section 15E(a)(3) of
the Exchange Act,\237\ which provides, among other things, that the
Commission shall, by rule, require an NRSRO, upon the granting of a
registration, to make the information and documents submitted to the
Commission in its completed application for registration, or in any
amendment, publicly available on its Internet Web site, or through
another comparable, readily accessible means.\238\
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\234\ See 15 U.S.C. 78o-7(q)(2)(D).
\235\ See proposed amendments to paragraph (i) of Rule 17g-1.
\236\ See 17 CFR 240.17g-1(i).
\237\ 15 U.S.C. 78o-7(a)(3).
\238\ See 15 U.S.C. 78o-7(a)(3).
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Although Section 15E(q)(2)(D) only addresses disclosures of
information about the performance of credit ratings, the Commission is
proposing to amend paragraph (i) of Rule 17g-1 to require an NRSRO to
make Form NRSRO and Exhibits 1 through 9 freely available on an easily
accessible portion of its corporate Internet Web site. This would avoid
having separate requirements for the Exhibit 1 performance statistics
and the rest of Form NRSRO and the other public Exhibits. The
Commission preliminarily believes users of credit ratings would benefit
if Form NRSRO and all the public Exhibits were disclosed together in
the same manner. In addition, the Commission preliminarily believes
applying the requirement to disclose the information on an ``easily
accessible'' portion of the NRSRO's corporate Internet Web site would
assist investors and other users of credit ratings by making it easier
to locate a Form NRSRO. For example, some corporate Internet Web sites
contain large amounts of information, some of which must be accessed by
navigating through multiple Web pages. The Commission believes Form
NRSRO and the public Exhibits should be easy for investors and other
users of credit ratings to locate when they access an NRSRO's corporate
Internet Web site. In this regard, the Commission preliminarily
believes that a Form NRSRO would be on an ``easily accessible'' portion
of a Web site if it could be accessed through a clearly and prominently
labeled hyperlink to the Form on the home-page of the NRSRO's corporate
Internet Web site.
The proposed amendment to paragraph (i) also would remove the
option for an NRSRO to make its Form NRSRO publicly available ``through
another comparable, readily accessible means'' as an alternative to
Internet disclosure. The Commission preliminarily believes there is no
alternative means of disclosure that makes information as ``readily
accessible'' as (and, therefore, is comparable to) an Internet Web
site. This view is supported by the fact that all NRSROs currently
comply with paragraph (i) of Rule 17g-1 by making their Form NRSROs
available on their corporate Internet Web sites.\239\ The Commission,
therefore, is proposing amending paragraph (i) to require that the
disclosure of Form NRSRO and its public Exhibits be made on an NRSRO's
corporate Internet Web site without exception.\240\ In addition, to
implement Section 15E(q)(2)(D) of the Exchange Act, the Commission is
proposing to amend paragraph (i) to provide that Exhibit 1 must be made
freely available in writing, when requested.
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\239\ See Annual Report on Nationally Recognized Statistical
Rating Organizations. Commission (Jan. 2011), pp. 18-19.
\240\ See proposed amendments to paragraph (i) of Rule 17g-1.
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Finally, the Commission notes that throughout Form NRSRO and the
Instructions to Form NRSRO there are references to the current
requirement in paragraph (i) to make Form NRSRO and information and
documents submitted in Exhibits 1 through 9 ``publicly available on
[the NRSRO's] Web site or through another comparable, readily
accessible means.\241\ The Commission proposes amending all these
references so that they would mirror the text of the proposed amendment
to paragraph (i).
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\241\ See, e.g., references in Item 5, in the Note to Item 6.C,
Item 8, and Item 9 of Form NRSRO and Instruction A.3 and Instruction
H to Form NRSRO.
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Request for Comment
The Commission generally requests comment on all aspects of the
proposed amendments to paragraph (i) of Rule 17g-1. The Commission also
seeks comment on the following:
1. Is there any reason why the Commission should not apply the
requirement to make an NRSRO's performance statistics ``freely
available on an easily accessible portion of its Web site'' to Form
NRSRO and the public Exhibits as a whole? For example, should the
requirement apply only to Exhibit 1?
2. Is the Commission correct in its preliminary belief that a Form
NRSRO would be on an ``easily accessible'' portion of a Web site if it
could be accessed through a clearly and prominently labeled hyperlink
to the Form on the home-page of the NRSRO's corporate Internet Web
site? Are there other portions of an NRSRO's corporate Internet Web
site that, provided the NRSRO placed a hyperlink to Form NRSRO on such
portion of the Web site, should be deemed ``easily accessible''?
3. Is there another means of making Form NRSRO publicly available
besides the Internet that should be deemed ``another comparable,
readily accessible means''? If so, identify the means and explain the
potential advantages of permitting it as a means of disclosure.
[[Page 33446]]
4. With respect to the proposed requirement that Exhibit 1 be made
freely available in writing, when requested, how should an NRSRO meet
such a request? For example, should an NRSRO be required to mail a
written copy of Exhibit 1 to a party requesting the Exhibit? If so,
would it be appropriate to permit the NRSRO to charge reasonable
handling and postage fees? For example, would allowing an NRSRO to
charge a reasonable handling and postage fee discourage requests that
are not based on a legitimate need to obtain Exhibit 1 in paper form?
In this regard, the Commission notes that Exhibit 1 currently can be
immediately accessed through an NRSRO's corporate Internet Web site
and, under the proposed amendments to paragraph (i) of Rule 17g-1,
would need to be posted on an easily accessible portion of the NRSRO's
corporate Internet Web site. Consequently, why would a person have a
legitimate need to request that an NRSRO provide Exhibit 1 in paper
form (which would take time to process the request and send out the
Exhibit) when it could be obtained immediately through the Internet?
2. Proposed Enhancements to Rating Histories Disclosures
Paragraph (a)(8) of Rule 17g-2 requires an NRSRO to make and retain
a record that, ``for each outstanding credit rating, shows all rating
actions and the date of such actions from the initial credit rating to
the current credit rating identified by the name of the rated security
or obligor and, if applicable, the CUSIP of the rated security or the
Central Index Key (``CIK'') number of the rated obligor.'' \242\ An
NRSRO is required to retain this record for three years pursuant to
paragraph (c) of Rule 17g-2.\243\
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\242\ 17 CFR 240.17-2(a)(8). A CIK number has ten-digits and is
assigned to uniquely identify a filer using the Commission's EDGAR
system.
\243\ See 17 CFR 240.17g-2(c).
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In addition, paragraph (d) of Rule 17g-2 requires the NRSRO to
publicly disclose certain of this information as well. Specifically,
paragraph (d)(2) of Rule 17g-2 requires an NRSRO to ``make and keep
publicly available on its corporate Internet Web site in an eXtensible
Business Reporting Language (``XBRL'') format'' the information
required to be documented pursuant to paragraph (a)(8) of Rule 17g-2
for 10% of the outstanding credit ratings, selected on a random basis,
in each class of credit rating for which the NRSRO is registered if the
credit rating was paid for by the obligor being rated or by the issuer,
underwriter, or sponsor of the security being rated (``issuer-paid''
credit ratings) and the NRSRO has 500 or more such issuer-paid credit
ratings outstanding in that class (the ``10% Rule'').\244\ Paragraph
(d)(2) further provides that any ratings action required to be
disclosed need not be made public less than six months from the date
the action is taken.\245\ This six-month grace period is designed to
preserve the ability of NRSROs to sell data feeds to the portfolios of
their current credit ratings by making the information disclosed in the
10% Rule out-of-date.\246\ Paragraph (d)(2) also requires that, if a
credit rating made public pursuant to the rule is withdrawn or the
rated instrument matures, the NRSRO must randomly select a new
outstanding credit rating from that class of credit ratings in order to
maintain the 10% disclosure threshold.\247\ Finally, paragraph (d)(2)
provides that in making the information available on its corporate
Internet Web site, the NRSRO must use the List of XBRL Tags for NRSROs
as specified on the Commission's Internet Web site.\248\
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\244\ 17 CFR 240.17-2(d)(2).
\245\ Id.
\246\ The fact that the disclosure involves only a random sample
of 10% of the outstanding credit ratings also limits the utility of
the information disclosed in terms of serving as a substitute to
purchasing a data feed to the NRSRO's current portfolio of
outstanding credit ratings.
\247\ 17 CFR 240.17-2(d)(2).
\248\ Id.
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Paragraph (d)(3) of Rule 17g-2 requires an NRSRO to make publicly
available on its corporate Internet Web site information required to be
documented pursuant to paragraph (a)(8) of the rule for any credit
rating initially determined by the NRSRO on or after June 26, 2007, the
effective date of the Rating Agency Act of 2006 (the ``100%
Rule'').\249\ The 100% Rule applies to all types of credit ratings, as
opposed to the 10% Rule, which is limited to issuer-paid credit
ratings. However, paragraphs (d)(3)(i)(B) and (C) prescribe different
grace periods for when an NRSRO must disclose a rating action depending
on whether or not it was issuer-paid.\250\ Specifically, paragraph
(d)(3)(i)(B) provides that if the credit rating is issuer-paid, then
the grace period is 12 months after the date the action is taken.\251\
Similar to the 6-month grace period in the 10% Rule, this 12-month
grace is designed to preserve the ability of NRSROs to sell data feeds
to their portfolios of current outstanding credit ratings by making the
information disclosed in the 100% Rule out-of-date.\252\ For all non-
issuer paid credit ratings, paragraph (d)(3)(i)(C) provides a grace
period of 24 months after the date the rating action is taken. This
longer grace period is designed to address the ``subscriber-paid''
business model in which the NRSRO makes its credit ratings available
for a fee rather than for free.\253\ Paragraph (d)(3)(ii) of Rule 17g-2
requires the NRSRO to disclose the ratings history information on its
corporate Internet Web site in an XBRL format using the List of XBRL
Tags for NRSROs as published by the Commission on its Internet Web
site.\254\
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\249\ 17 CFR 240.17-2(d)(3).
\250\ 17 CFR 240.17-2(d)(3)(i)(B) and (C).
\251\ 17 CFR 240.17-2(d)(3)(i)(B).
\252\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63837-63842 (Dec. 4,
2009) (discussing the grace periods in the rule).
\253\ Id.
\254\ At the time the 10% Rule became effective (which preceded
the 100% Rule), the Commission had not published the List of XBRL
Tags. Consequently, the Commission issued a notice that NRSROs could
use any machine readable format to publish the ratings history
information required by the 10% Rule. See Notice Regarding the
Requirement to Use eXtensible Business Reporting Language Format to
Make Publicly Available the Information Required Pursuant to Rule
17g-2(d) of the Exchange Act, Exchange Act Release No. 60451 (Aug.
5, 2009). On August 27, 2010, the Commission provided notice that
the List of XBRL tags required to be used for purposes of the 10%
Rule and, the subsequently adopted 100% Rule, was available on the
Commission's Internet Web site. See Notice Regarding the Requirement
to Use eXtensible Business Reporting Language Format to Make
Publicly Available the Information Required Pursuant to Rule 17g-
2(d) of the Exchange Act, Exchange Act Release No. 62784 (Aug. 27,
2010), 75 FR 53988 (Sept. 2, 2010). Information about the List of
XBRL Tags is located at the following page on the Commission's Web
site: http://www.sec.gov/spotlight/xbrl/nrsro-implementation-guide.shtml. The publication of this notice in the Federal Register
triggered the 60-day period after which NRSROs were required to
begin using an XBRL format for purposes of the two rules. The 60-day
period ended on November 1, 2010. The XBRL Tags identified by the
Commission include mandatory tags with respect to the information
specifically identified in paragraph (a)(8) of Rule 17g-2 (17 CFR
240.17g-2(a)(8)) (i.e., the date of the rating action, the credit
rating identified by the name of the rated security or obligor and,
if applicable, the CUSIP of the rated security or the CIK number of
the rated obligor). The XBRL Tags also identify additional
information that could be tagged by the NRSRO to enhance the
disclosure.
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The Commission is proposing amendments designed to enhance the
utility of the 100% Rule.\255\ Moreover, in light of the proposed
amendments to the 100% Rule (discussed below) and Exhibit 1 (discussed
above), the Commission is proposing to repeal the 10% Rule. The 10%
Rule does not permit comparability across NRSROs
[[Page 33447]]
because it captures only issuer-paid credit ratings in a class of
credit ratings where there are 500 or more such ratings and only if two
or more NRSROs randomly select the same rated obligor, issuer, or money
instrument to be included in the sample.\256\ Moreover, the Commission
understands that the 10% Rule may not produce sufficient ``raw data''
to allow third parties to generate independent performance
statistics.\257\ The goal of the rule was to provide some information
about how an NRSRO's credit ratings performed, particularly ratings
assigned to obligors, securities and money market instruments that had
been rated for 10 or 20 years. The Commission now preliminarily
believes that, in light of the proposed enhancements to Exhibit 1 and
the 100% Rule, the 10% Rule would provide minimal incremental benefit
to investors and other users of credit ratings in terms of providing
information about the performance of a given NRSRO's credit ratings.
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\255\ See, e.g., GAO Report 10-782, p. 40 (``However, we found
that the data disclosed under the 10 percent sample disclosure
requirement do not contain enough information to construct
comparable performance statistics and are not representative of the
population of credit ratings at each NRSRO and that the data
disclosed under the 100 percent disclosure requirement likely
present similar issues.'').
\256\ See, e.g., GAO Report 10-782, pp. 40-47.
\257\ Id.
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With respect to the 100% Rule, the Commission is proposing its
provisions be moved from Rule 17g-2 (the NRSRO recordkeeping rule) to
Rule 17g-7.\258\ Currently, Rule 17g-7 requires an NRSRO to disclose
certain information in any report accompanying an asset-backed
security.\259\ In other words, the rule requires an NRSRO to publicly
disclose information outside of Form NRSRO (the predominant NRSRO
disclosure rule). Similarly, the 100% Rule in its current form (and as
proposed) also requires (and would require) an NRSRO to disclose
information outside of Form NRSRO. Finally, as discussed below in
Section II.G of this release, Section 15E(s) of the Exchange Act
provides that the Commission shall adopt rules to require an NRSRO to
disclose further information outside of Form NRSRO.\260\ The Commission
is proposing to consolidate non-Form NRSRO disclosure rules by
codifying them in Rule 17g-7.\261\
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\258\ 17 CFR 240.17g-7.
\259\ See 17 CFR 240.17g-7, which requires an NRSRO to include
in any report accompanying a credit rating with respect to an asset-
backed security, as that term is defined in Section 3(a)(77) of the
Exchange Act (15 U.S.C. 78c(a)(77)) a description of: the
representations, warranties and enforcement mechanisms available to
investors; and how they differ from the representations, warranties
and enforcement mechanisms in issuances of similar securities. Id.
\260\ See 15 U.S.C. 78o-7(s).
\261\ See 15 U.S.C. 78o-7 and 15 U.S.C. 78q. The current
provisions of Rule 17g-7 would be incorporated into new paragraph
(a) of Rule 17g-7 as discussed below in Section II.G of this
release. The Commission notes that some NRSROs may (or could in the
future) have additional disclosure requirements based on their
status as another type of registrant or because they are part of a
company that has filing obligations under other provisions of the
securities laws. The Commission does not intend to consolidate such
other disclosure requirements in Rule 17g-7.
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The proposed enhancements to the 100% Rule would be codified in new
paragraph (b) of Rule 17g-7.\262\ Proposed paragraph (b)(1) would
require, among other things, that the NRSRO publicly disclose the
ratings history information for free on an easily accessible portion of
its corporate Internet Web site.\263\ This would implement Section
15E(q)(2)(D) of the Exchange Act and, by using the ``easily accessible
portion'' language, enhance the current requirement of the 100% Rule
that the ratings history information be disclosed on the NRSRO's
corporate Internet Web site.\264\ As discussed above in Section
II.E.1.b of this release, some Internet Web sites contain large amounts
of information, some of which must be accessed by navigating through
multiple web pages.\265\ Consequently, as discussed, the Commission
preliminary believes that Form NRSRO would be on an ``easily
accessible'' portion of an Internet Web site if it could be accessed
through a clearly and prominently labeled hyperlink to the Form on the
homepage of the NRSRO's corporate Internet Web site. The Commission
preliminarily believes that the same holds true for the disclosure of
the data file or files containing the information that would be
required by the enhanced 100% Rule.\266\
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\262\ See proposed new paragraph (b) of Rule 17g-7.
\263\ See proposed new paragraph (b)(1) of Rule 17g-7.
\264\ See 15 U.S.C. 78o-7(q)(2)(D); compare 17 CFR 240.17g-
7(d)(3)(i)(A), with proposed new paragraph (b) of Rule 17g-7. As
discussed above, Section 15E(q)(2)(D) of the Exchange Act provides
that the Commission's rules shall require the information about the
performance of credit ratings be published and made freely available
by the NRSRO, on an easily accessible portion of its Web site, and
in writing, when requested. Id. The Commission, however,
preliminarily believes that the ``in writing'' requirement would not
be feasible if applied to the disclosures of rating histories.
First, the data file containing the disclosures would need to be
constantly updated by the NRSRO as new rating actions are added.
Thus, it would not remain static like the Exhibit 1 performance
measurement statistics which are updated annually. Consequently, by
the time a party received a written copy of the disclosure, it
likely would not be up-to-date. Second, the amount of information in
the data file would be substantial (particularly for NRSROs that
have issued hundreds of thousands of credit ratings) and increase
over time. For these reasons, the Commission preliminarily believes
that converting the information in the electronic disclosure to
written form and mailing it to the party making the request would be
impractical and not particularly useful. In terms of utility, as
discussed below, the electronic disclosure of the data would need to
be made using an XBRL format. The Commission preliminarily believes
this would be a much more efficient and practical medium for
accessing and analyzing the information rather than obtaining it in
paper form. Consequently, the Commission preliminarily believes that
the benefits, if any, to requiring a written disclosure would be
limited. However, the Commission is requesting comment below on this
issue.
\265\ See Section II.E.1.b of this release proposing amendments
to paragraph (i) of Rule 17g-1 to implement Section 15E(q)(2)(D) of
the Exchange Act. 15 U.S.C. 78o-7(q)(2)(D). Under the proposals, an
NRSRO would need to make Form NRSRO and Exhibits 1 through 9
``freely available on an easily accessible portion of its website.''
See proposed amendments to paragraph (i) of Rule 17g-1.
\266\ See 15 U.S.C. 78o-7(q)(2)(D).
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The next enhancement to the 100% Rule proposed by the Commission is
to substantially broaden the scope of credit ratings that would be
subject to the disclosure requirements. The Commission's intent is to
require disclosure of information about all outstanding credit ratings
in each class and subclass of credit ratings for which the NRSRO is
registered but within certain prescribed time frames. As noted above,
the 100% Rule currently only captures credit ratings where the NRSRO
initially determined a credit rating for the obligor, security, or
money market instrument on or after June 26, 2007.\267\ This means that
obligors, securities, and money market instruments assigned a credit
rating by the NRSRO before that date are excluded entirely from the
disclosure even if a rating action is taken with respect to the
obligor, security, or money market instrument after that date.
Consequently, if a user of the disclosures wanted to calculate a
transition or default rate for a given NRSRO's credit ratings, the user
could not compile a start-date cohort that included all obligors,
securities, or money market instruments assigned a credit as of the
start date.\268\ The Commission's proposal would be designed to address
this issue.\269\
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\267\ See 17 CFR 240.17g-2(d)(3)(i)(A).
\268\ See, e.g., GAO Report 10-782, p. 45. This issue is
particularly acute when the NRSRO determines credit ratings for
obligors in only one class of credit ratings. As discussed earlier,
obligor credit ratings typically provide an assessment of the
relative creditworthiness of the obligor as an entity for all its
obligations. Thus, it is different from a credit rating for a
security or money instrument that typically has a single finite
obligation that will mature, be called, or be prepaid (if it does
not default). An NRSRO that primarily issued obligor credit ratings
in a class and initially rated them prior to June 26, 2007 would
never have to include the rating histories of these obligors in the
disclosure. For example, the NRSRO could be monitoring credit
ratings for the same group of obligors that were initially rated 10
to 20 years ago. In this case, the NRSRO would have no ratings
histories to disclose.
\269\ See, e.g., GAO Report 10-782, pp. 45-46.
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In particular, the Commission is proposing that the rule no longer
be limited to the disclosure of histories for credit ratings where the
NRSRO initially
[[Page 33448]]
determined a credit rating for the obligor, security, or money market
instrument on or after June 26, 2007.\270\ Instead, the rule, as
proposed, would apply to any credit rating that was outstanding as of
June 26, 2007, but the rating histories disclosed for these credit
ratings would not need to include information about actions taken
before June 26, 2007.\271\ Moreover, in order to immediately include
these credit ratings in the disclosure, the proposed rule would require
the NRSRO to disclose the credit rating assigned to the obligor,
security, or money market instrument and associated information as of
June 26, 2007. Specifically, proposed paragraph (b)(1)(i) of Rule 17g-7
would require an NRSRO to disclose each credit rating assigned to an
obligor, security, and money market instrument in every class of credit
ratings for which the NRSRO is registered that was outstanding as of
June 26, 2007 and any subsequent upgrades or downgrades of a credit
rating assigned to the obligor, security, or money market instrument
(including a downgrade to, or assignment of, default), any placements
of a credit rating assigned to the obligor, security, or money market
instrument on watch or review, any affirmation of a credit rating
assigned to the obligor, security, or money market instrument, and a
withdrawal of a credit rating assigned to the obligor, security, or
money market instrument.\272\ Consequently, an NRSRO would need to
include in the XBRL file through which it makes the rating history
disclosures all outstanding credit ratings as of June 26, 2007 (i.e.,
not wait until a new rating action was taken with respect to the credit
rating) and then disclose subsequent actions taken with respect to
those credit ratings. In other words, the histories for this class of
credit ratings would begin on June 26, 2007. This would mean that the
disclosures would not contain complete histories for many credit
ratings.\273\ However, the disclosures would capture all outstanding
credit ratings in each class of credit ratings for which the NRSRO is
registered and, therefore, market participants could immediately begin
computing short-term transition and default rates using start-date
cohorts that include all the obligors, securities, and money market
instruments assigned a credit rating in a given class.\274\
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\270\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
\271\ The Commission notes, however, that an NRSRO could
voluntarily disclose more rating history information than required
by the current rule or the proposed amendment to the rule.
\272\ Id.
\273\ For example, assume an obligor was initially rated in AA
on June 26, 2000. Thereafter, the rating was downgraded to AA- on
June 26 2003, to A on June 26, 2005, and to BBB on June 26, 2008.
Under the proposed rule, the ratings history disclosure would cross
the June 26, 2007 threshold with an A rating. The history for this
obligor would omit the initial AA rating on June 26, 2000 and the
downgrades to AA- and A on June 26, 2003 and June 26, 2005,
respectively. Therefore, the first event in the rating history would
be that the obligor was assigned an A rating as of June 26, 2007.
The next event in the rating history would be the downgrade of the
credit rating to BBB on June 26, 2008.
\274\ For example, a user of the credit rating histories would
be able to generate transition and default rates for a period having
a start date as far back as June 26, 2007. In doing so, the user
would be able to compile a start-date cohort consisting of all the
obligors, securities, and money market instruments assigned an
outstanding credit rating in a given class as of June 26, 2007. The
user could compute transition and default rates over short-term
periods (i.e., 1 or 2 years) in the near term and for longer periods
as time progresses and more ratings actions over a longer time
horizon are added to the disclosure. In addition, the user could
calculate transition or default rates using a different process than
the single cohort approach proposed for the Exhibit 1 disclosures.
For example, the user could begin calculating short-term transition
and default rates using a rolling average in which start-date
cohorts are identified each month (e.g., June 26, 2007, July 26,
2007, August 26, 2007, and so on).
---------------------------------------------------------------------------
Proposed paragraph (b)(1)(ii) of Rule 17g-7 would contain the
existing requirement in the 100% Rule that an NRSRO disclose rating
histories for each credit rating in every class of credit ratings for
which the NRSRO is registered that was initially determined on or after
June 26, 2007 and any subsequent rating action taken with respect to
such credit ratings.\275\ Specifically, proposed paragraph (b)(1)(ii)
would require the NRSRO to disclose each credit rating assigned to an
obligor, security, and money market instrument in every class of credit
ratings for which the NRSRO is registered that was initially determined
on or after June 26, 2007, and any subsequent upgrades or downgrades of
a credit rating assigned to the obligor, security, or money market
instrument (including a downgrade to, or assignment of, default), any
placements of a credit rating assigned to the obligor, security, or
money market instrument on watch or review, any affirmation of a credit
rating assigned to the obligor, security, or money market instrument,
and a withdrawal of a credit rating assigned to the obligor, security,
or money market instrument. Consequently, the disclosure mandated under
proposed paragraph (b)(1) of Rule 17g-7 would capture all credit
ratings outstanding as of June 26, 2007 (regardless of when the
obligor, security, or money market instrument was initially assigned a
credit rating) and the subsequent rating actions taken with respect to
those credit ratings as well as all credit ratings initially determined
on or after that date and the subsequent rating actions taken with
respect to those credit ratings.\276\
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\275\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
\276\ See proposed new paragraph (b)(1) of Rule 17g-7.
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The next enhancement to the 100% Rule proposed by the Commission is
to increase the number and scope of the data fields that must be
disclosed about a rating action.\277\ Specifically, proposed paragraph
(b)(2) of Rule 17g-7 would identify 7 categories of data that would
need to be disclosed when a credit rating action is published pursuant
to proposed new paragraph (b)(1) of Rule 17g-7. In addition, some of
the categories would have sub-categories.\278\ The goal would be to
make the data more useful in terms of the amount of information
provided, the ability to search and sort the information, and the
ability to compare historical rating information across NRSROs.\279\
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\277\ See proposed new paragraph (b)(2) of Rule 17g-7.
\278\ If adopted, the Commission would need to update the List
of XBRL Tags to include some of the new data fields; whereas other
of the fields are covered by existing Tags, including by some of the
voluntary Tags.
\279\ See, e.g., GAO Report 10-782, p. 41 (``First, SEC [sic]
did not specify the data fields the NRSROs were to disclose in the
rule, and the data fields provided by the NRSROs were not always
sufficient to identify a complete rating history for ratings in each
of the seven samples. If users cannot identify the rating history
for each rating in the sample, they cannot develop performance
measures that track how an issuer's credit rating evolves.'').
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Proposed new paragraph (b)(2)(i) of Rule 17g-7 would identify the
first category of data: namely, the identity of the NRSRO disclosing
the rating action.\280\ This may seem unnecessary as the identity of
the NRSRO making the disclosure should be obvious. However, as noted
above, the NRSRO would need to assign an XBRL Tag to each item of
information, including the identity of the NRSRO. Including and tagging
the identity of the NRSRO would assist users who download and combine
data files of multiple NRSROs to sort credit ratings by a given NRSRO.
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\280\ See proposed new paragraph (b)(2)(i) of Rule 17g-7.
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Proposed new paragraph (b)(2)(ii) of Rule 17g-7 would identify the
second category of data: namely, the date of the rating action.\281\
This proposed
[[Page 33449]]
requirement is in the 100% Rule as it exists today.\282\ The inclusion
of the date of a rating action is designed to allow investors and other
users of credit ratings to review the timing of a rating action.\283\
This would allow the person reviewing the credit rating histories of
the NRSROs to reach conclusions about which NRSROs did the best job in
determining an initial rating and, thereafter, making appropriate and
timely adjustments to the credit rating.\284\
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\281\ See proposed new paragraph (b)(2)(ii) of Rule 17g-7. The
Commission notes that many of the rating actions in an NRSRO's
disclosure would share the date of June 26, 2007, which would be the
first action disclosed for rating histories of credit ratings
initially determined before June 26, 2007. This would result from
the proposed requirement to add all credit ratings outstanding as of
June 26, 2007 to the disclosure. See proposed new paragraph
(b)(1)(i) of Rule 17g-7. As discussed below, the Commission is
proposing that this action (the adding of an outstanding credit
rating) have a unique XBRL tag so that persons using these
disclosures do not confuse the action as an initial credit rating or
change to an existing credit rating (e.g., an upgrade or a down
grade). See proposed new paragraph (b)(2)(v)(A) of Rule 17g-7.
\282\ See 17 CFR 240.17g-2(a)(8).
\283\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4,
2009).
\284\ Id.
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Proposed new paragraph (b)(2)(iii) of Rule 17g-7 would identify the
third category of data.\285\ The information in this category would
need to be disclosed if the rating action is taken with respect to an
obligor (i.e., as opposed to a credit rating of a security or money
market instrument). In this case, the NRSRO would need to disclose (if
applicable): (1) the CIK number of the rated obligor; and (2) the legal
name of the obligor. This proposed requirement is in the 100% Rule as
it exists today.\286\
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\285\ See proposed new paragraph (b)(2)(iii) of Rule 17g-7.
\286\ See 17 CFR 240.17g-2(a)(8).
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Proposed new paragraph (b)(2)(iv) of Rule 17g-7 would identify the
fourth category of data.\287\ The information in this category would
need to be disclosed when the rating action is taken with respect to a
security or money market instrument. In this case, the NRSRO would need
to disclose (if applicable): (1) The CIK number of the issuer of the
security or money market instrument; (2) the legal name of the issuer
of the security or money market instrument; and (3) the CUSIP of the
security or money market instrument.\288\ The proposed requirement to
include the CUSIP of security or money market instrument is in the 100%
Rule as it exists today.\289\ The requirements to include the name and
CIK number of the issuer would be new. The Commission preliminarily
believes including this information would be useful because it would
allow users of the XBRL data file to sort credit ratings of securities
and money market instruments by issuer.
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\287\ See proposed new paragraph (b)(2)(iv) of Rule 17g-7.
\288\ CUSIP stands for the Committee on Uniform Securities and
Identification. A CUSIP number consists of nine characters that
uniquely identify a company or issuer and the type of security.
\289\ See 17 CFR 240.17g-2(a)(8).
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Proposed paragraph (b)(2)(v) of Rule 17g-7 would identify the fifth
category of data: namely, a classification of the type of rating
action.\290\ The NRSRO would be required to select 1 of 7
classifications to identify the reason for the rating action.\291\
Aside from the first classification discussed below, the Commission
preliminarily believes that the classifications identify all types of
actions an NRSRO might take with respect to a credit rating.
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\290\ See proposed paragraph (b)(2)(v) of Rule 17g-7.
\291\ The actual disclosure would need to be the type of rating
action and not the credit rating resulting from the rating action.
For example, if the rating action was a downgrade, the NRSRO would
need to classify it as a ``downgrade'' and not, for example, a
change of the current credit rating from the AA notch to AA- notch.
This would allow users of the disclosures to sort the information
by, for example, initial credit ratings, upgrades, and downgrades.
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The first classification would be that the rating action
constitutes a disclosure of a credit rating that was outstanding as of
June 26, 2007 for the purposes of proposed paragraph (b)(1)(i) of Rule
17g-7.\292\ As discussed above, the Commission is proposing that the
100% rule capture all credit ratings outstanding as of June 26, 2007 by
disclosing the credit rating and associated information as of that
date.\293\ If adopted, this would mean that thousands, if not hundreds
of thousands, of ratings histories each beginning on June 26, 2007
would be disclosed. The proposed classification is designed to alert
users of the disclosures that the proposed rule caused the June 26,
2007 entry in the rating history of the obligor, security, or money
market instrument and not because, for example, a credit rating was
initially determined for the obligor, security, or money market
instrument on that date.
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\292\ See proposed paragraph (b)(2)(v)(A) of Rule 17g-7.
\293\ See proposed paragraph (b)(1)(i) of Rule 17g-7.
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The second classification would be that the rating action was an
initial credit rating.\294\ For example, an NRSRO would select this
classification if the rating action was the first credit rating
determined by the NRSRO with respect to the obligor, security, or money
market instrument. The third classification would be an upgrade to an
existing credit rating.\295\ The fourth classification would be a
downgrade to an existing credit rating, which would include assigning a
credit rating of default.\296\ The fifth classification would be
placing an existing credit rating on credit watch or review.\297\ This
means the NRSRO has disclosed that it is actively evaluating whether
the credit rating should be changed. The sixth classification would be
affirming the current credit rating assigned to the obligor, security,
or money market instrument.\298\ For example, an NRSRO may publish an
announcement that it is affirming the current credit rating of an
obligor, security, or money market instrument and, consequently,
determine not to upgrade or downgrade the credit rating to a different
notch in the rating scale.
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\294\ See proposed paragraph (b)(2)(v)(B) of Rule 17g-7. The
Commission is not proposing that a rating action that results in an
``expected'' or ``preliminary'' credit rating be included in the
rating history for a given obligor, security, or money market
instrument. As noted above, expected or preliminary ratings most
commonly are issued by an NRSRO with respect to a structured finance
product at the time the issuer commences the offering and typically
are included in pre-sale reports. These ratings may include a range
of ratings, or any other indications of a credit rating used prior
to the assignment of an initial credit rating for a new issuance. As
such, the Commission preliminarily believes they should be excluded
from the ratings histories since the issuance of the ``initial''
credit rating is the first formal expression of the NRSRO's view of
the relative creditworthiness of the obligor, security, or money
market instrument.
\295\ See proposed paragraph (b)(2)(v)(C) of Rule 17g-7.
\296\ See proposed paragraph (b)(2)(v)(D) of Rule 17g-7.
\297\ See proposed paragraph (b)(2)(v)(E) of Rule 17g-7.
\298\ See proposed paragraph (b)(2)(v)(F) of Rule 17g-7. Some
NRSRO's also may ``confirm'' an existing credit rating. For the
purposes of this proposed disclosure requirement, the Commission
intends the term ``affirmation of an existing credit rating'' to
include a ``confirmation'' of an existing credit rating.
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The seventh classification would be the withdrawal of an existing
credit rating.\299\ In the case of a withdrawal, the NRSRO would be
required to provide a sub-classification identifying reason for the
withdrawal.\300\ There would be three sub-classifications: (1) The
obligor defaulted, or the security or money, market instrument went
into default; \301\ (2) the obligation subject to the credit rating was
extinguished by payment in full of all outstanding principal and
interest due on the obligation according to the terms of the
obligation; \302\ or (3) the credit rating was withdrawn for reasons
other than those set forth in (1) and (2) above.\303\
[[Page 33450]]
These sub-classifications would parallel, in many respects, the
outcomes identified in paragraphs (4)(B)(iii), (iv), and (v) of the
proposed amendments to the instructions for Exhibit 1 to Form NRSRO
discussed above in Section II.E.1.a of this release. However, the
Commission preliminarily believes that it would not be appropriate to
prescribe standard definitions of ``default'' and ``paid-off'' for the
purposes of making these classifications.\304\ The reason is the
ratings history disclosure requirement is designed to allow investors
and other users of credit ratings to compare how each NRSRO treats a
commonly rated obligor, security, or money market instrument. In other
words, unlike the production of performance statistics where standard
definitions are necessary to promote comparability of aggregate
statistics, the historical rating information should indicate on the
granular level any differences between the NRSROs with respect to the
rating actions they take for a commonly rated obligor, security or
money, market instrument, including their differing definitions of
default. This would allow investors and other users of credit ratings
to review, for example, the timing of when one NRSRO downgraded an
obligor to the default category as opposed to another NRSRO or group of
NRSROs. Among other things, investors and other users of credit ratings
could review the data to identify outliers that are either quick or
slow to downgrade obligors, securities, or money market instruments to
default. In addition, an NRSRO with a very narrow definition of
``default'' might continue to maintain a security at a notch in its
rating scale above the default category; whereas other NRSROs, using
broader definitions, had classified the security as having gone into
default. Creating a mechanism to identify these types of variances is a
goal of the enhancements to the 100% Rule. Moreover, users of the
ratings history information could use the standard definition of
Default in the proposed enhancements to the instructions for Exhibit 1
as a benchmark to compare when an NRSRO classified obligors,
securities, or money markets as having gone into default.
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\299\ See proposed paragraph (b)(2)(v)(G) of Rule 17g-7.
\300\ See proposed paragraphs (b)(2)(v)(G)(1), (2) and (3) of
Rule 17g-7.
\301\ See proposed paragraph (b)(2)(v)(G)(1) of Rule 17g-7.
\302\ See proposed paragraphs (b)(2)(v)(G)(2) of Rule 17g-7.
\303\ See proposed paragraphs (b)(2)(v)(G)(3) of Rule 17g-7.
\304\ For the reasons discussed herein, the Commission also
preliminarily believes that the NRSRO should use its definition of
``default'' in taking a rating action that results in a downgrade to
the default category, which would need to be classified as a
downgrade in the information disclosed with the rating action
pursuant to proposed paragraph (b)(2)(v)(D) of Rule 17g-7.
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The Commission preliminarily believes a default and the
extinguishment of an obligation because it was paid in full are the
most frequently occurring reasons why an NRSRO withdraws a credit
rating. However, as discussed above, in Section II.E.1.a of this
release, there are other reasons an NRSRO might withdraw a credit
rating, including that the rated obligor or issuer of the rated
security or money market instrument stopped paying for the surveillance
of rating or the NRSRO decided not to devote resources to continue to
perform surveillance on the rating of an obligor, security, or money
market instrument on an unsolicited basis. However, as also discussed
above, the withdrawal of credit ratings could be used to make
performance statistics appear more favorable. Consequently, as with the
Transition/Default Matrices in Exhibit 1, an NRSRO would be required to
identify when a credit rating was withdrawn for reasons other than
default or the extinguishment of the obligation upon which the credit
rating is based. Similar to the Transition/Default Matrices, persons
using the ratings history information could analyze how often an NRSRO
withdraws a credit rating for ``other'' reasons in a class or subclass
of credit ratings.
Proposed paragraph (b)(2)(vi) of Rule 17g-7 would identify the
sixth category of data: Namely, a classification of the class or
subclass of credit rating.\305\ The classes of credit ratings would be
based on the definition of ``nationally recognized statistical rating
organization'' in Section 3(a)(62) of the Exchange Act.\306\
Consequently, the first classification would be financial institutions,
brokers or dealers.\307\ The second classification would be insurance
companies.\308\ The third classification would be corporate
issuers.\309\
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\305\ See proposed paragraph (b)(2)(vi) of Rule 17g-7.
\306\ See 15 U.S.C. 78o-7(a)(62). Because some obligors,
securities, and money market instruments have characteristics that
could cause them to be assigned more than one class of credit
rating, the Commission is seeking comment below in Section II.M.4.a
of this release on which class would be the most appropriate for
certain types of obligors, securities, and money market instruments.
Based on the comments received in response to those requests, the
Commission may decide to prescribe by rule or identify through
guidance how certain types of obligors, securities, and money market
instruments should be classified for the purposes proposed in new
paragraph (b)(vi) of Rule 17g-7.
\307\ See 15 U.S.C. 78o-7(a)(62)(B)(i) and proposed paragraph
(b)(2)(vi)(A) of Rule 17g-7.
\308\ See 15 U.S.C. 78o-7(a)(62)(B)(ii) and proposed paragraph
(b)(2)(vi)(B) of Rule 17g-7.
\309\ See 15 U.S.C. 78o-7(a)(62)(B)(iii) and proposed paragraph
(b)(2)(vi)(C) of Rule 17g-7.
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The fourth classification would be issuers of structured finance
products.\310\ If the credit rating falls into this class, the proposed
rule would require the NRSRO to identify a sub-classification as
well.\311\ The sub-classifications would be the same subclasses for
structured finance credit ratings the Commission is proposing an
applicant and NRSRO use for the purposes of the Transition/Default
Matrices to be disclosed in Exhibit 1 to Form NRSRO:\312\ RMBS;\313\
CMBS;\314\ CLOs;\315\ CDOs;\316\ ABCP;\317\ other asset-backed
securities;\318\ and other structured finance products.\319\
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\310\ See 15 U.S.C. 78o-7(a)(62)(B)(iv) and proposed paragraph
(b)(2)(vi)(D) of Rule 17g-7. Consistent with the existing
Instructions to Exhibit 1 to Form NRSRO (and the proposed amendments
to those instructions) this class of credit rating would be broader
than the class identified in Section 15E(a)(62)(B)(iv) of the
Exchange Act.
\311\ See proposed paragraphs (b)(2)(vi)(D)(1)-(7) of Rule 17g-
7.
\312\ See discussion in Section II.E.1.a of this release and
proposed new paragraphs (1)(D)(i)-(vii) of the instructions for
Exhibit 1.
\313\ See proposed paragraph (b)(2)(vi)(D)(1) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``RMBS'' for the purposes of this rule
means a securitization primarily of residential mortgages.
\314\ See proposed paragraph (b)(2)(vi)(D)(2) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``CMBS'' for the purposes of this rule
means a securitization primarily of commercial mortgages.
\315\ See proposed paragraph (b)(2)(vi)(D)(3) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends ``CLO'' for the purposes of this rule means a
securitization primarily of commercial loans.
\316\ See proposed paragraph (b)(2)(vi)(D)(4) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminary intends ``CDO'' for the purposes of this rule to mean a
securitization primarily of other debt instruments such as RMBS,
CMBS, CLOs, CDOs, other asset backed securities, and corporate
bonds.
\317\ See proposed paragraph (b)(2)(vi)(D)(5) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends ``ABCP'' for the purposes of this rule to mean
short term notes issued by a structure that securitizes a variety of
financial assets (e.g., trade receivables or credit card
receivables), which secure the notes.
\318\ See proposed paragraph (b)(2)(vi)(D)(6) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``other asset backed security'' for the
purposes of this rule to mean a securitization primarily of auto
loans, auto leases, floor plan financings, credit card receivables,
student loans, consumer loans, equipment loans or equipment leases.
\319\ See proposed paragraph (b)(2)(vi)(D)(7) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``other structured finance product'' for
the purposes of this rule to mean a structured finance product not
identified in the other sub-classifications of structured finance
products.
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The fifth classification would be issuers of government securities,
municipal securities or securities issued by a foreign government.\320\
If the credit rating falls into this class, the proposed rule would
require the NRSRO to
[[Page 33451]]
identify a sub-classification as well.\321\ The sub-classifications
would be the same for this class as are currently identified in the
Instructions for Exhibit 1 to Form NRSRO: (1) Sovereign issuers;\322\
(2) United States public finance;\323\ or (3) International public
finance.\324\
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\320\ See 15 U.S.C. 78o-7(a)(62)(B)(v) and proposed paragraph
(b)(2)(vi)(E) of Rule 17g-7.
\321\ See proposed paragraphs (b)(2)(vi)(E)(1)-(3) of Rule 17g-
7.
\322\ See Instructions for Exhibit 1 to Form NRSRO and proposed
paragraph (b)(2)(vi)(E)(1) of Rule 17g-7.
\323\ See Instructions for Exhibit 1 to Form NRSRO and proposed
paragraph (b)(2)(vi)(E)(2) of Rule 17g-7.
\324\ See Instructions for Exhibit 1 to Form NRSRO and proposed
paragraph (b)(2)(vi)(E)(3) of Rule 17g-7.
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Proposed paragraph (b)(2)(vii) of Rule 17g-7 would identify the
seventh category of data: Namely, the credit rating symbol, number, or
score in the applicable rating scale of the NRSRO assigned to the
obligor, security, or money market instrument as a result of the rating
action or, if the credit rating remained unchanged as a result of the
action, the credit rating symbol, number, or score in the applicable
rating scale of the NRSRO assigned to the obligor, security, or money
market instrument as of the date of the rating action.\325\ The rating
symbol, number, or score is a key component of the information that
would need to be disclosed as it reflects the NRSRO's view of the
relative creditworthiness of the obligor, security, or money market
instrument subject to the rating as of the date the action is taken.
The proposal would specify that the NRSRO, in either case, would need
to include a credit rating in a default category, if applicable.
Otherwise an NRSRO might exclude a default on the theory that it is not
a credit rating per se (i.e., an opinion of creditworthiness) but
rather a statement of fact.
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\325\ See proposed new paragraph (b)(2)(vii) of Rule 17g-7.
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Proposed paragraph (b)(3) of Rule 17g-7 would provide that the
information identified in paragraph (b)(2) of the rule (discussed
above) must be disclosed in an interactive data file that uses an XBRL
format and the List of XBRL Tags for NRSROs as published on the
Internet Web site of the Commission.\326\ This would be consistent with
the current requirement of the 100% Rule.\327\ As discussed above,
however, the data fields that would need to have an XBRL tag would be
expanded.\328\
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\326\ See proposed new paragraph (b)(3) of Rule 17g-7.
\327\ See 17 CFR 240.17g-2(d)(3)(ii).
\328\ See proposed new paragraph (b)(2)(i)-(vii).
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Proposed paragraph (b)(4) of Rule 17g-7 would specify when a rating
action would need to be disclosed by establishing two distinct grace
periods: 12 months and 24 months.\329\ In particular, a rating action
would need to be disclosed: (1) Within 12 months from the date the
action is taken, if the credit rating subject to the action is issuer-
paid; \330\ (2) or within 24 months from the date the action is taken,
if the credit rating subject to the action is not issuer-paid.\331\
These separate grace periods for issuer-paid and non-issuer-paid credit
ratings are consistent with the current requirement of the 100%
Rule.\332\
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\329\ See proposed new paragraph (b)(4) of Rule 17g-7.
\330\ See proposed paragraph (b)(4)(i) of Rule 17g-7.
\331\ See proposed paragraph (b)(4)(ii) of Rule 17g-7.
\332\ See 17 CFR 240.17g-2(d)(3)(i)(B) and (C). See Amendments
to Rules for Nationally Recognized Statistical Rating Organizations,
74 FR at 63837-63842 (Dec. 4, 2009) (discussing the 100% Rule and
the reasons why the Commission adopted distinct 12 and 24 month
grace periods).
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Finally, paragraph (b)(5) of Rule 17g-7 would provide that an NRSRO
may cease disclosing a rating history of an obligor, security, or money
market instrument no earlier than 20 years after the date a rating
action with respect to the obligor, security, or money market
instrument is classified as a withdrawal of the credit rating pursuant
to paragraph (b)(2)(v)(G) of Rule 17g-7, provided no subsequent credit
ratings are assigned to the obligor, security, or money market
instrument after the withdrawal classification.\333\ This proposed
requirement is designed to ensure that information about credit ratings
that are withdrawn for any reason would remain a part of the disclosure
for a significant period of time. The Commission preliminarily believes
this would address concerns that an NRSRO might withdraw a credit
rating to remove its history from the disclosure requirement to, for
example, make the performance of its credit ratings appear better than,
in fact, is the case.
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\333\ See proposed paragraph (b)(5) of Rule 17g-7.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (b) of Rule 17g-7. The Commission also seeks
comment on the following:
1. Should the 10% Rule be retained? For example, could it be
enhanced to meet the requirement of Section 15E(q)(A) of the Exchange
Act that disclosures be comparable among NRSROs, to allow users of
credit ratings to compare the performance of credit ratings across
NRSROs? If so, how could the 10% Rule be modified to better meet this
requirement? Moreover, even with such modifications, would an enhanced
10% Rule provide information to investors and other users of credit
ratings that would be useful to assess the performance of credit
ratings across NRSROs?
2. Should the proposed rule require that the disclosure of the
ratings history information under the proposed enhancements to the 100%
Rule be made freely available in writing, when requested? If so, how
should an NRSRO meet such a request? For example, would an NRSRO be
required to mail a written copy of information in the XBRL data file to
a party requesting the information? If so, would it be appropriate to
permit the NRSRO to charge reasonable handling and postage fees? Would
such a requirement to provide a written copy of the information in the
XBRL data file be feasible? Are there other ways an NRSRO could make
this disclosure freely available in writing?
3. If the rule required an NRSRO to provide a written copy of the
information in the XBRL data file, when requested, under what
circumstances would a party request this information in writing, given
that it would be freely available on an easily accessible portion of
the NRSRO's corporate Internet Web site? Moreover, why would a party
request the information in written form when downloading an electronic
file in an XBRL format would make accessing and analyzing the
information much easier?
4. Should the rule require that an NRSRO publish quarterly, bi-
annual, or annual copies of the rating histories and that these be made
available when requested to implement the ``in writing'' provision in
the statute?
5. What practical issues should the Commission consider in
implementing the proposed enhancements to the 100% Rule? For example,
would the variances in the procedures and methodologies NRSROs use to
determine credit ratings raise practical issues in terms of classifying
and disclosing the proposed required information about a credit rating
action? In addition, would the variances in the meanings and
definitions that NRSROs ascribe to the categories of credit ratings in
their rating scales raise practical issues in terms of classifying and
disclosing the proposed required information about a credit rating
action? How could the proposal be modified to address any practical
issues identified without undermining the goal of making the data more
useful in terms of the
[[Page 33452]]
amount of information provided, the ability to search and sort the
information, and the ability to compare historical rating information
across NRSROs?
6. How long would it take an NRSRO to implement the proposed
requirements and begin making the proposed disclosures? What steps
would an NRSRO need to take to implement the proposed requirements?
7. What practical issues should the Commission consider with
respect to the proposed requirement to add histories for all credit
ratings outstanding as of June 26, 2007 to the disclosure? How could
the proposal be modified to address any practical issues identified
without undermining the rule's goal of making the data more useful in
terms of the amount of information provided, the ability to search and
sort the information, and the ability to compare historical rating
information across NRSROs?
8. What practical issues should the Commission consider with
respect to the proposed new requirement to disclose the name and CIK
number of the issuer of a rated security or money market instrument?
How could the proposal be modified to address any practical issues
identified without undermining the goal of making the data more useful
in terms of the amount of information provided, the ability to search
and sort the information, and the ability to compare historical rating
information across NRSROs?
9. What practical issues should the Commission consider with
respect to the proposed new requirement to disclose the type of rating
action? For example, are the proposed classifications a comprehensive
list of the types of rating actions taken by NRSROs? If not, identify
and describe any other types of rating actions. Would the disclosure of
this data be useful to investors and other users of credit ratings? How
could the proposal be modified to address any practical issues
identified without undermining the goal of making the data more useful
in terms of the amount of information provided, the ability to search
and sort the information, and the ability to compare historical rating
information across NRSROs?
10. With respect to the proposal to disclose the types of rating
actions, are the three sub-classifications proposed for the withdrawal
classification sufficient? For example, should the rule further refine
the ``withdrawal for other reasons'' sub-classification to require
disclosure of certain other reasons that a credit rating might be
withdrawn such as the obligor or issuer ceased paying for the credit
rating?
11. What practical issues should the Commission consider with
respect to the proposed new requirement to disclose the class or
subclass of the credit rating? For example, are the descriptions of the
subclasses of credit ratings for structured finance products
sufficiently clear to provide an NRSRO with guidance as to how such
credit ratings should be classified? How could the descriptions be
modified to make them clearer and provide better guidance?
12. Are the subclasses of credit ratings for structured finance
products the most appropriate way to divide this class of credit
ratings? For example, should the ``other-ABS'' subclass be separated
into subclasses based on the assets underlying the ABS (i.e., auto
loans, auto leases, floor plan financings, credit card receivables,
student loans, consumer loans, equipment loans, or equipment leases)?
In addition, are there other classes of structured finance products
that should be identified?
13. Commenters are referred to the questions in Section II.M.4.a of
this release with respect to Items 6 and 7 of Form NRSRO and how
certain types of obligors, securities, and money market instruments
should be classified for purposes of providing approximate amounts of
credit ratings outstanding in each class of credit rating for which an
applicant is seeking registration (Item 6) or an NRSRO is registered
(Item 7)? In responding to those questions, commenters should consider
how proposed classifications could be applied for the purposes of
proposed new paragraph (b)(2)(vi) of Rule 17g-7.
14. Is 20 years the appropriate amount of time to require that the
ratings history for a withdrawn credit rating remain part of the
disclosure? Should the rule require these histories be retained for a
lesser period of time, such as 10 or 15 years or a greater period of
time, such as 25 or 30 years? If a different time period would be more
appropriate, explain the rationale for such different time period.
15. Are the existing 12 and 24 month grace periods appropriate?
Should the Commission consider adopting a single grace period, rather
than the existing bifurcated approach?
F. Credit Rating Methodologies
Section 932(a)(8) of the Dodd-Frank Act amends Section 15E of the
Exchange Act to add new subsection (r).\334\ Section 15E(r) of the
Exchange Act provides that the Commission shall prescribe rules, for
the protection of investors and in the public interest, with respect to
the procedures and methodologies, including qualitative and
quantitative data and models, used by NRSROs that require each NRSRO to
ensure a number of objectives.\335\ The Commission preliminarily
believes it would be appropriate to implement Section 15E(r) by
proposing rules requiring an NRSRO to establish, maintain, enforce, and
document policies and procedures that are reasonably designed to ensure
the objectives identified in that section of the statute.\336\ This
approach would allow an NRSRO to establish policies and procedures that
can be integrated with its procedures and methodologies for determining
credit ratings, which vary across NRSROs. At the same time, the
proposed rule would set forth specific objectives that the policies and
procedures would need to be reasonably designed to achieve both in
design and operation. The Commission preliminarily believes this
approach would be appropriate, particularly given that the objectives
set forth in Section 15E(r) of the Exchange Act relate to the
procedures and methodologies an NRSRO uses to determine credit
ratings.\337\
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\334\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(r).
\335\ See 15 U.S.C. 78o-7(r)(1)-(3).
\336\ See id.
\337\ See Section 15E(r) of the Exchange Act (15 U.S.C. 78o-
7(r)); see also Section 15E(c)(2) of the Exchange Act (providing, in
pertinent part, that the Commission may not regulate the substance
of credit ratings or the procedures and methodologies by which any
NRSRO determines credit ratings). 15 U.S.C. 78o-7(c)(2).
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For these reasons, the Commission is proposing to implement Section
15E(r) of the Exchange Act, in large part, through paragraph (a) of new
Rule 17g-8.\338\ The Commission also is proposing an amendment to Rule
17g-2 to apply the record retention and production requirements of that
rule to the policies and procedures.\339\
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\338\ See proposed paragraph (a) of new Rule 17g-8. As discussed
above in Section II.C of this release, the Commission is proposing
to implement several provisions of the Dodd-Frank Act through rules
that would prescribe policies and procedures an NRSRO would need to
establish, maintain, enforce, and document. The Commission is
proposing that all such rule requirements be consolidated in new
Rule 17g-8. See proposed paragraphs (a), (b), and (c) of new Rule
17g-8 and Section II.C.1 of this release discussing proposed
paragraph (c) and Section II.J.1 discussing proposed paragraph (b).
\339\ See proposed new paragraph (b)(13) of Rule 17g-2.
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1. Proposed Paragraph (a) of New Rule 17g-8
As noted above, proposed paragraph (a) of new Rule 17g-8 would
require an NRSRO to have policies and procedures
[[Page 33453]]
that are reasonably designed to achieve objectives identified in
Section 15E(r) of the Exchange Act.\340\ In particular, the prefatory
text would require an NRSRO to establish, maintain, enforce, and
document policies and procedures that are reasonably designed to ensure
the objectives identified in paragraphs (a)(1), (2), (3), (4), and (5).
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\340\ See prefatory text of proposed paragraph (a) of new Rule
17g-8.
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Proposed paragraph (a)(1) of new Rule 17g-8 would implement Section
15E(r)(1)(A) of the Exchange Act.\341\ This section provides that the
Commission's rules shall require an NRSRO to ensure that credit ratings
are determined using procedures and methodologies, including
qualitative and quantitative data and models, that are approved by the
board of the NRSRO, or a body performing a function similar to that of
a board.\342\ The Commission preliminarily believes that the mandate
set forth in the statute is explicit and, consequently, proposes rule
text that would mirror the statutory text.\343\ Therefore, proposed
paragraph (a)(1) of new Rule 17g-8 would require an NRSRO to have
policies and procedures that are reasonably designed to ensure that the
procedures and methodologies, including qualitative and quantitative
data and models, the NRSRO uses to determine credit ratings are
approved by its board of directors or another body performing a
function similar to that of a board of directors.\344\ In this regard,
the Commission notes that Section 15E(t)(3)(A) of the Exchange Act
contains a self-executing provision that the board of the NRSRO shall
oversee the ``establishment, maintenance, and enforcement of the
policies and procedures for determining credit ratings.'' \345\
Consequently, the Commission preliminarily believes that the policies
and procedures proposed to be required pursuant to paragraph (a)(1) of
Rule 17g-8 would need to be designed to assist the NRSRO's board in
carrying out this responsibility. In addition, Section 15E(t)(5) of the
Exchange Act provides that the Commission may permit an NRSRO to
delegate responsibilities required in Section 15E(t) to a committee if
the Commission finds that compliance with the provisions of that
section present an unreasonable burden on a small NRSRO.\346\
Consequently, the Commission preliminarily believes that the policies
and procedures proposed to be required pursuant to paragraph (a)(1) of
Rule 1717g-8 would need to be designed to assist the NRSRO's committee
in carrying out the responsibility to oversee the ``establishment,
maintenance, and enforcement of the policies and procedures for
determining credit ratings mandated by Section 15E(t)(3)(A) of the
Exchange Act'' if the committee (rather than the board) carries out
this responsibility.\347\
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\341\ See proposed paragraph (a)(1) of new Rule 1717g-8 and 15
U.S.C. 78o-7(r)(1)(A).
\342\ See 15 U.S.C. 78o-7(r)(1)(A).
\343\ See proposed paragraph (a)(1) of new Rule 17g-8.
\344\ Compare proposed paragraph (a)(1) of new Rule 17g-8, with
15 U.S.C. 78og-7(r)(1)(A).
\345\ See 15 U.S.C. 78og-7(t)(3)(A).
\346\ See 15 U.S.C. 78og-7(t)(5).
\347\ See 15 U.S.C. 78og-7(t)(3)(A).
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Proposed paragraph (a)(2) of new Rule 17g-8 would implement Section
15E(r)(1)(B) of the Exchange Act.\348\ This section provides that the
Commission's rules shall require an NRSRO to ensure that credit ratings
are determined using procedures and methodologies, including
qualitative and quantitative data and models, that are in accordance
with the policies and procedures of the NRSRO for the development and
modification of credit rating procedures and methodologies.\349\ The
Commission preliminarily believes that the mandate set forth in the
statute is explicit and, consequently, proposes rule text that would
mirror the statutory text.\350\ Therefore, proposed paragraph (a)(2) of
new Rule 17g-8 would require an NRSRO to have policies and procedures
that are reasonably designed to ensure that the procedures and
methodologies, including qualitative and quantitative data and models,
the NRSRO uses to determine credit ratings are developed and modified
in accordance with the policies and procedures of the NRSRO.\351\
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\348\ See proposed paragraph (a)(2) of new Rule 17g-8 and 15
U.S.C. 78og-7(r)(1)(B).
\349\ See 15 U.S.C. 78o-7(r)(1)(B).
\350\ See proposed paragraph (a)(2) of new Rule 17g-8.
\351\ Compare proposed paragraph (a)(2) of new Rule 17g-8, with
15 U.S.C. 78o-7(r)(1)(B).
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Proposed paragraph (a)(3)(i) of new Rule 17g-8 would implement
Section 15E(r)(2)(A) of the Exchange Act.\352\ This section provides
that the Commission's rules shall require an NRSRO to ensure that when
material changes are made to credit rating procedures and methodologies
(including changes to qualitative and quantitative data and models),
the changes are applied consistently to all credit ratings to which the
changed procedures and methodologies apply.\353\ The Commission
preliminarily believes that the mandate set forth in the statute is
explicit and, consequently, proposes rule text that would mirror the
statutory text.\354\ Therefore, proposed paragraph (a)(3)(i) of new
Rule 17g-8 would require an NRSRO to have policies and procedures that
are reasonably designed to ensure that material changes to the
procedures and methodologies, including changes to qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are applied consistently to all credit ratings to which the
changed procedures or methodologies apply.\355\
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\352\ See proposed paragraph (a)(3)(i) of new Rule 17g-8 and 15
U.S.C. 78o-7(r)(2)(A).
\353\ See 15 U.S.C. 78o-7(r)(2)(A).
\354\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
\355\ Compare proposed paragraph (a)(3)(i) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(2)(A).
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Proposed paragraph (a)(3)(ii) of new Rule 17g-8 would implement
Section 15E(r)(2)(B) of the Exchange Act.\356\ This section provides
that the Commission's rules shall require an NRSRO to ensure that when
material changes are made to credit rating procedures and methodologies
(including changes to qualitative and quantitative data and models), to
the extent that changes are made to credit rating surveillance
procedures and methodologies, the changes are applied to then-current
credit ratings by the NRSRO within a reasonable time period determined
by the Commission, by rule.\357\ The Commission proposes that paragraph
(a)(3)(ii) of new Rule 17g-8 require the NRSRO to have policies and
procedures that are reasonably designed to ensure that material changes
to the procedures and methodologies, including changes to qualitative
and quantitative data and models, the NRSRO uses to determine credit
ratings are, to the extent that the changes are to surveillance or
monitoring procedures and methodologies, applied to then-current credit
ratings within a reasonable period of time taking into consideration
the number of ratings impacted, the complexity of the procedures and
methodologies used to determine the credit ratings, and the type of
obligor, security, or money market instrument being rated.\358\ This
proposed rule would mirror the text of Section 15E(r)(2)(B) of the
Exchange Act but add additional language to implement the rulemaking
provision that the changes are applied to then-current credit ratings
by the NRSRO within a ``reasonable time
[[Page 33454]]
period determined by the Commission, by rule.'' \359\
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\356\ See proposed paragraph (a)(3)(i) of new Rule 17g-8 and 15
U.S.C. 78o-7(r)(2)(B).
\357\ 15 U.S.C. 78o-7(r)(2)(B).
\358\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
\359\ Compare proposed paragraph (a)(3)(ii) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(2)(B).
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In determining what time period would be reasonable, the Commission
preliminarily believes that the NRSRO should be required to have
policies and procedures designed to ensure that the changes are applied
to existing credit ratings within a reasonable time period taking into
consideration certain relevant factors; namely, the number of ratings
impacted, the complexity of the procedures and methodologies used to
determine the credit ratings, and the type of obligor, security, or
money market instrument being rated. The Commission preliminarily
believes that a prescribed time frame (e.g., 1, 2, 3, 4 or more months)
would not be appropriate because the reasonableness of the timeframe in
which existing credit ratings are modified would depend on the facts
and circumstances. If the rule mandated a time-frame that is too short,
under the circumstances, the NRSRO would need to rush to meet the
deadline. This could negatively impact the quality of the credit
ratings determined using the changed surveillance procedures and
methodologies. Moreover, prescribing a timeframe that is too long could
create an inadvertent ``safe harbor'' allowing the NRSRO to act more
slowly to apply the changed surveillance procedures and methodologies
to the impacted obligors, securities, and money market instruments.
Consequently, the Commission preliminarily believes that the best
approach is to require the NRSRO to apply the changed surveillance
procedures and methodologies to the impacted obligors, securities, and
money market instruments within a reasonable amount of time given the
circumstances.
Proposed paragraph (a)(4)(i) of new Rule 17g-8 would implement
Sections 15E(r)(2)(C), 15E(r)(3)(B), and 15E(r)(3)(D) of the Exchange
Act as they all relate to disclosing information about material changes
to procedures and methodologies (including changes to qualitative and
quantitative data and models) an NRSRO uses to determine credit
ratings.\360\ Specifically, Section 15E(r)(2)(C) provides that the
Commission's rules shall require an NRSRO to ensure that when material
changes are made to credit rating procedures and methodologies
(including changes to qualitative and quantitative data and models),
the NRSRO publicly discloses the reason for the change.\361\ Section
15E(r)(3)(B) provides that the Commission's rules shall require an
NRSRO to notify users of credit ratings when a material change is made
to a procedure or methodology, including to a qualitative model or
quantitative input.\362\ Finally, Section 15E(r)(3)(D) provides that
that the Commission's rules shall require an NRSRO to notify users of
credit ratings when a material change is made to a procedure or
methodology, including to a qualitative model or quantitative input, of
the likelihood the change will result in a change in current credit
ratings.\363\
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\360\ See proposed paragraph (a)(4)(i) of new Rule 17g-8, 15
U.S.C. 78o-7(r)(2)(B), 15 U.S.C. 78o-7(r)(3)(B), and 15 U.S.C. 78o-
7(r)(3)(D).
\361\ See 15 U.S.C. 78o-7(r)(2)(C).
\362\ See 15 U.S.C. 78o-7(r)(3)(B).
\363\ See 15 U.S.C. 78o-7(r)(3)(D).
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Consequently, Section 15E(r)(3)(B) requires the NRSRO to notify
users of a change, Section 15E(r)(2)(C) requires the NRSRO to publish
the reason for a change, and Section 15E(r)(3)(D) requires the NRSRO to
disclose the potential impact of the change on existing credit
ratings.\364\ The Commission preliminarily believes that the mandates
set forth in these sections are explicit and, consequently, proposes
rule text that would mirror the statutory text.\365\ Moreover, because
the objective of the provision is to provide disclosure to investors
and users of credit ratings, the Commission preliminarily believes
proposed paragraph (a)(4)(i) of Rule 17g-8 should specify that these
disclosures be published on an easily accessible portion of the NRSRO's
corporate Internet Web site.\366\ This would be consistent with the
Commission's proposed Internet disclosure requirements for Form NRSRO
under paragraph (i) of Rule 17g-1 and the ratings history information
under proposed new paragraph (b)(1) of Rule 17g-1. For these reasons,
proposed paragraph (a)(4)(i) of new Rule 17g-8 would require the NRSRO
to have policies and procedures that are reasonably designed to ensure
that the NRSRO promptly publishes on an easily accessible portion of
its corporate Internet Web site material changes to the procedures and
methodologies, including to qualitative models or quantitative inputs,
the NRSRO uses to determine credit ratings, the reason for the changes,
and the likelihood the changes will result in changes to any current
ratings.\367\
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\364\ 15 U.S.C. 78o-7(r)(3)(B), 15 U.S.C. 78o-7(r)(2)(C), and 15
U.S. C. 78o-7(r)(3)(D).
\365\ Compare proposed paragraph (a)(4)(ii) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(3)(B), 15 U.S.C. 78o-7(r)(2)(C), and 15 U.S.
C. 78o-7(r)(3)(D).
\366\ As discussed above in Section II.E.1.b of this release,
the Commission preliminarily believes there is no alternative means
of disclosure that makes information as ``readily accessible'' as an
Internet Web site. In addition, as discussed in that section of this
release, the Commission preliminarily believes that information
would be disclosed on an ``easily accessible'' portion of a
corporate Internet Web site if it could be accessed through a
clearly and prominently labeled hyperlink on the homepage of the
NRSRO's corporate Internet Web site.
\367\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
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Proposed paragraph (a)(4)(ii) of new Rule 17g-8 would implement
Sections 15E(r)(3)(C) of the Exchange Act.\368\ This section provides
that the Commission's rules shall require an NRSRO to notify users of
credit ratings when a significant error is identified in a procedure or
methodology, including a qualitative or quantitative model, that may
result in credit rating actions.\369\ The Commission preliminarily
believes that the mandate set forth in the statute is explicit and,
consequently, proposes rule text that would mirror the statutory
text.\370\ Moreover, as with the proposed paragraph (a)(4)(i)
disclosures, the Commission preliminarily believes proposed paragraph
(a)(4)(ii) of Rule 17g-8 should specify that these disclosures be
published on the NRSRO's corporate Internet Web site. Therefore,
proposed paragraph (a)(4)(ii) of new Rule 17g-8 would require the NRSRO
to have policies and procedures that are reasonably designed to ensure
the NRSRO promptly publishes on an easily accessible portion of its
corporate Internet Web site significant errors identified in a
procedure or methodology, including a qualitative or quantitative
model, the NRSRO uses to determine credit ratings that may result in a
change in current credit ratings.\371\
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\368\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8 and 15
U.S.C. 78o-7(r)(3)(C).
\369\ See 15 U.S.C. 78o-7(r)(3)(C).
\370\ Compare proposed paragraph (a)(4)(ii) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(3)(C).
\371\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
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Proposed paragraph (a)(5) of new Rule 17g-8 would implement
Section15E(r)(3)(A) of the Exchange Act.\372\ This section provides
that the Commission's rules shall require an NRSRO to notify users of
credit ratings of the version of a procedure or methodology, including
the qualitative methodology or quantitative inputs, used with respect
to a particular credit rating.\373\ The Commission preliminarily
believes that the mandate set forth in the statute is explicit and,
consequently, proposes rule text that would mirror the statutory
text.\374\ Therefore, proposed
[[Page 33455]]
paragraph (a)(5) of new Rule 17g-8 would require the NRSRO to have
policies and procedures that are reasonably designed to ensure that it
discloses the version of a credit rating procedure or methodology,
including the qualitative methodology or quantitative inputs, used with
respect to a particular credit rating.\375\
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\372\ See proposed paragraph (a)(5) of new Rule 17g-8 and 15
U.S. C. 78o-7(r)(3)(A).
\373\ 15 U.S.C. 78o-7(r)(3)(A).
\374\ Compare proposed paragraph (a)(5) of new Rule 17g-8, with
15 U.S.C. 78o-7(r)(3)(A).
\375\ See proposed paragraph (a)(5) of new Rule 17g-8. In
addition, because this would be a rating-by-rating disclosure, the
Commission is proposing, as discussed in Section II.G.3 of this
release, that disclosure of the version of a credit rating procedure
or methodology be part of the rule implementing Section 15E(s) of
the Exchange Act, which specifies, among other things, that the
Commission adopt rules requiring an NRSRO to generate a form to be
included with the publication of a credit rating. See 15 U.S.C. 78o-
7(s) and proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (a) of new Rule 17g-8. The Commission also seeks
comment on the following:
1. Are there alternatives to implementing Section 15E(r) of the
Exchange Act (i.e., other than requiring policies and procedures
reasonably designed to achieve the objectives identified in the
statute) that the Commission should consider? If so, please identify
those alternatives and explain how they would better achieve the goals
of Section 15E(r)?
2. Would proposed paragraph (a)(1) of new Rule 17g-8 requiring an
NRSRO to have policies and procedures that are reasonably designed to
achieve the objective that the procedures and methodologies, including
qualitative and quantitative data and models, the NRSRO uses to
determine credit ratings are approved by its board of directors or
another body performing a function similar to that of a board of
directors appropriately meet the mandate identified in Section
15E(r)(1)(A) of the Exchange Act? If not, how could the proposal be
modified to provide more guidance to NRSROs about how to design their
policies and procedures?
3. Would proposed paragraph (a)(2) of new Rule 17g-8 requiring an
NRSRO to have policies and procedures that are reasonably designed to
ensure that the procedures and methodologies, including qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are developed and modified in accordance with the policies and
procedures of the NRSRO appropriately meet the mandate identified in
Section 15E(r)(1)(B) of the Exchange Act? If not, how should the
proposal be modified to provide more guidance to NRSROs about how to
design their policies and procedures? In addition, how would this
proposed requirement relate to the requirement in Section 15E(c)(3)(A)
of the Exchange Act requiring an NRSRO to establish, maintain, enforce,
and document an effective internal control structure governing the
implementation of and adherence to policies, procedures, and
methodologies for determining credit ratings. For example, would
procedures established under proposed paragraph (a)(2) of Rule 17g-8 be
part of the internal control structure or would they be designed to
achieve different goals?
4. Would proposed paragraph (a)(3)(i) of new Rule 17g-8 requiring
an NRSRO to have policies and procedures that are reasonably designed
to ensure that material changes to the procedures and methodologies,
including changes to qualitative and quantitative data and models, the
NRSRO uses to determine credit ratings are applied consistently to all
credit ratings to which the changed procedures or methodologies apply
appropriately meet the mandate identified in Section 15E(r)(2)(A) of
the Exchange Act? If not, how should the proposal be modified to
provide more guidance to NRSROs about how to design their policies and
procedures?
5. Would proposed paragraph (a)(3)(ii) of new Rule 17g-8 requiring
an NRSRO to have policies and procedures that are reasonably designed
to ensure that material changes to the procedures and methodologies,
including changes to qualitative and quantitative data and models, the
NRSRO uses to determine credit ratings are, to the extent that the
changes are to surveillance or monitoring procedures and methodologies,
applied to then-current credit ratings within a reasonable period of
time taking into consideration the number of ratings impacted, the
complexity of the procedures and methodologies used to determine the
credit ratings, and the type of obligor, security, or money market
instrument being rated appropriately meet the mandate identified in
Section 15E(r)(2)(B) of the Exchange Act? If not, how should the
proposal be modified to provide more guidance to NRSROs about how to
design their policies and procedures?
6. With respect to proposed paragraph (a)(3)(ii) of new Rule 17g-8,
should the Commission consider prescribing specific time frames such as
1, 2, 3, 4, 5, 6 or more months to apply the new procedures and
methodologies to existing credit ratings? Should the time frame depend
on the methodology used to determine credit ratings (i.e., quantitative
as opposed to qualitative)? As another alternative, should the
Commission prescribe a timeframe based on the number of outstanding
credit ratings? For example, should the Commission consider requiring
that the new procedures and methodologies be applied to existing credit
ratings in tranches such as 10 credit ratings per week or 60 credit
ratings per month or some other ratio of the period of time to the
number of credit ratings? Should such a ratio depend on the methodology
used to determine credit ratings (i.e., quantitative as opposed to
qualitative)?
7. Would proposed paragraph (a)(4)(i) of new Rule 17g-8 requiring
an NRSRO to have policies and procedures that are reasonably designed
to ensure that the NRSRO promptly publishes on an easily accessible
portion of its corporate Internet Web site material changes to the
procedures and methodologies, including to qualitative models or
quantitative inputs, the NRSRO uses to determine credit ratings, the
reason for the changes, and the likelihood the changes will result in
changes to any current ratings appropriately meet the mandates
identified in Sections 15E(r)(3)(B), 15E(r)(2)(C) and 15E(r)(3)(D) of
the Exchange Act? If not, how should the proposal be modified to
provide more guidance to NRSROs about how to design their policies and
procedures?
8. Would proposed paragraph (a)(4)(ii) of new Rule 17g-8 requiring
an NRSRO to have policies and procedures that are reasonably designed
to ensure the NRSRO promptly publishes on an easily accessible portion
of its corporate Internet Web site significant errors identified in a
procedure or methodology, including a qualitative or quantitative
model, the NRSRO uses to determine credit ratings that may result in a
change in current credit ratings appropriately meet the mandates
identified in Section 15E(r)(3)(C) of the Exchange Act? If not, how
should the proposal be modified to provide more guidance to NRSROs
about how to design their policies and procedures? For example, should
the Commission define ``significant error''? If so, how should the term
be defined? Should the definition establish a materiality threshold? If
so, how should such a threshold be prescribed? Similarly, should the
Commission interpret the term ``may result in a change in current
credit ratings'' to, for example, clarify the level of likelihood
necessary to trigger the reporting requirement? For example, should
there be a reasonable likelihood that the error may result in a change
in current credit ratings?
9. Would proposed paragraph (a)(5) of new Rule 17g-8 requiring an
NRSRO to
[[Page 33456]]
have policies and procedures that are reasonably designed to ensure
that it discloses the version of a credit rating procedure or
methodology, including the qualitative methodology or quantitative
inputs, used with respect to a particular credit rating appropriately
meet the mandates identified in Sections 15E(r)(3)(A) of the Exchange
Act? If not, how should the proposal be modified to provide more
guidance to NRSROs about how to design their policies and procedures?
2. Proposed Amendment to Rule 17g-2
For the reasons discussed in Section II.A.2 of this release, the
Commission preliminarily believes that the policies and procedures that
would be required pursuant to proposed paragraph (a) of new Rule 17g-8
should be subject to the record retention and production requirements
of Rule 17g-2.\376\ Consequently, the Commission proposes adding new
paragraph (b)(13) to Rule 17g-2 to identify the policies and procedures
an NRSRO is required to establish, maintain, enforce, and document
pursuant to proposed paragraph (a) of new Rule 17g-8 as a record that
must be retained.\377\
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\376\ 17 CFR 240.17g-2.
\377\ See proposed new paragraph (b)(13) to Rule 17g-2; see also
Section 17(a)(1) of the Exchange Act, which 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. 15 U.S.C. 78q(a)(1).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (a)(9) of Rule 17g-2.
G. Form and Certifications To Accompany Credit Ratings
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new paragraph (s).\378\ Sections 15E(s)(1) through
(4), among other things, set forth provisions specifying Commission
rulemaking with respect to disclosures an NRSRO must make with the
publication of a credit rating.\379\ The Commission proposes to
implement these provisions by adding new paragraph (a) to Rule 17g-
7.\380\ As discussed in detail below, the prefatory text of proposed
new paragraph (a) would require an NRSRO to publish two items when
taking a rating action: (1) A form containing information about the
credit rating resulting from or subject to the rating action; \381\ and
(2) any certification of a provider of third-party due diligence
services received by the NRSRO that relates to the credit rating.\382\
Proposed paragraph (a)(1) of Rule 17g-7 would contain three primary
components: paragraph (a)(1)(i) prescribing the format of the form;
\383\ paragraph (a)(1)(ii) prescribing the content of the form; \384\
and paragraph (a)(1)(iii) prescribing an attestation requirement for
the form.\385\ Proposed paragraph (a)(2) of Rule 17g-7 would identify
the certification from a provider of third-party due diligence services
as an item to be published with the rating action.\386\
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\378\ See 15 U.S.C. 78o-7(s).
\379\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(s)(1)-(4). Section 15E(s)(4) of the Exchange Act also establishes
requirements for issuers and underwriters of asset-backed
securities, NRSROs, and providers of third-party due diligence
services with respect to third-party due diligence services relating
to asset-backed securities. See 15 U.S.C. 78o-7(s)(4)(A)-(D). The
Commission's proposals to implement additional provisions in Section
15E(s)(4) are discussed below in Section II.H of this release.
\380\ See proposed new paragraph (a) of Rule 17g-7.
\381\ See proposed new paragraph (a)(1) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Sections 15E(s)(1), (2), and (3) of the
Exchange Act. See 15 U.S.C. 78o-7(s)(1), (2), and (3).
\382\ See proposed new paragraph (a)(2) of Rule 17g-7. As
discussed below, this paragraph would implement, in part, rulemaking
specified in Section 15E(s)(4) of the Exchange Act. See 15 U.S.C.
78o-7(s)(4).
\383\ See proposed new paragraph (a)(1)(i) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Section 15E(s)(2) of the Exchange Act. See
15 U.S.C. 78o-7(s)(2).
\384\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Section 15E(s)(3) of the Exchange Act. See
15 U.S.C. 78o-7(s)(3).
\385\ See proposed new paragraph (a)(1)(iii) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Section 15E(q)(2)(F) of the Exchange Act.
See 15 U.S.C. 78o-7(q)(2)(F).
\386\ See proposed paragraph (a)(2) of Rule 17g-7.
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1. Paragraph (a)--Prefatory Text
Section 15E(s)(1) of the Exchange Act provides that the Commission
shall require, by rule, an NRSRO to prescribe a form to accompany the
publication of each credit rating that discloses: (1) Information
relating to the assumptions underlying the credit rating procedures and
methodologies; the data that was relied on to determine the credit
rating; and if applicable, how the NRSRO used servicer or remittance
reports, and with what frequency, to conduct surveillance of the credit
rating; and (2) information that can be used by investors and other
users of credit ratings to better understand credit ratings in each
class of credit rating issued by the NRSRO.\387\ In addition, Section
15E(s)(2)(C) provides that the form shall be made readily available to
users of credit ratings, in electronic or paper form, as the Commission
may, by rule, determine.\388\ Finally, Section 15E(s)(4)(D) of the
Exchange Act provides that the Commission shall adopt rules requiring
an NRSRO at the time it produces a credit rating, to disclose any
certifications from providers of third-party due diligence services to
the public in a manner that allows the public to determine the adequacy
and level of due diligence services provided by the third-party.\389\
The Commission proposes to implement Sections 15E(s)(1), 15E(s)(2)(C),
and 15E(s)(4)(D) of the Exchange Act, in large part, through the
prefatory text of proposed paragraph (a) of Rule 17g-7.\390\
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\387\ See 15 U.S.C. 78o-7(s)(1)(A) and (B).
\388\ See 15 U.S.C. 78o-7(s)(2)(C).
\389\ See 15 U.S.C. 78o-7(s)(4)(D).
\390\ See proposed new paragraph (a) of Rule 17g-7. As discussed
below, the Commission proposes to implement Section
15E(s)(1)(A)(iii) of the Exchange Act--which relates to the use of
servicer or remittance reports--in proposed paragraph (a)(1)(i)(G)
of Rule 17g-7 because it specifies a particular item of information
that would need to be disclosed in the form. See 15 U.S.C. 78o-
7(a)(1)(i)(G).
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The first sentence of the proposed prefatory text would provide
that an NRSRO must publish the items described in paragraphs (a)(1) and
(a)(2) of the proposed rule, as applicable, when taking a rating action
with respect to credit rating assigned to an obligor, security, or
money market instrument in a class of credit ratings for which the
NRSRO is registered.\391\ Proposed paragraph (a)(1) would identify the
form and proposed paragraph (a)(2) would identify the certification
from a provider of third-party due diligence services.\392\ The
Commission preliminarily intends that the requirement to publish the
form and, when applicable, the certification would be triggered each
time an NRSRO takes a rating action with respect to an obligor,
security, or money market instrument.\393\ Consequently, the second
sentence of the prefatory text of paragraph (a) would define the term
``rating action'' to mean any of the following: the publication of an
expected or preliminary credit rating assigned to an obligor, security,
or
[[Page 33457]]
money market instrument before the publication of an initial credit
rating; an initial credit rating; an upgrade or downgrade of an
existing credit rating (including a downgrade to, or assignment of,
default); a placement of an existing credit rating on credit watch or
review; an affirmation of an existing credit rating; and a withdrawal
of an existing credit rating. The inclusion of expected or preliminary
credit ratings in the list of ``rating actions'' would incorporate the
requirements in the note to current Rule 17g-7.\394\ As the Commission
explained when adopting Rule 17g-7, the definition of ``credit rating''
in the note is designed to address pre-sale reports, which are
typically issued by an NRSRO with respect to an asset-backed security
at the time the issuer commences the offering and typically include an
expected or preliminary rating and a summary of the important features
of a transaction.\395\ Consequently, disclosure at the time of issuance
of a pre-sale report is particularly important to investors, since such
reports provide them with important information prior to the point at
which they make an investment decision.\396\ The Commission
preliminarily believes that the importance of providing investors with
timely information to enable them to make informed investment decisions
applies equally to the broader range of disclosures mandated by Section
15E(s) of the Exchange Act.\397\ Accordingly, the Commission is
proposing that the requirement to publish the form and any
certifications be triggered upon the issuance of an expected or
preliminary credit rating.\398\ Furthermore, as the Commission stated
when adopting Rule 17g-7, the term ``preliminary credit rating''
includes any credit rating, any range of ratings, or any other
indications of a credit rating published prior to the assignment of an
initial credit rating for a new issuance.\399\
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\391\ See proposed new paragraph (a) of Rule 17g-7.
\392\ See proposed new paragraphs (a)(1) and (a)(2) of Rule 17g-
7.
\393\ In other words, the form and any certifications would need
to be included when the NRSRO publishes an initial credit rating,
publishes an upgrade of an existing credit rating, publishes a
downgrade of an existing credit rating (including to a default
category), publishes a credit rating as being on credit watch or
review, publishes an affirmation of an existing credit rating, or
withdraws a credit rating.
\394\ See Note to 17 CFR 240.17g-7, which provides that for the
purposes of the rule's current requirements, a ``credit rating''
includes any expected or preliminary credit rating issued by an
NRSRO.
\395\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4503-4505 (Jan. 26, 2011).
\396\ Id.
\397\ 15 U.S.C. 78o-7(s).
\398\ See proposed new paragraph (a) of Rule 17g-7.
\399\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4503-4505 (Jan. 26, 2011).
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The third sentence of the proposed prefatory text would provide
that the items described in the form and any applicable certifications
must be published in the same medium and made available to the same
persons who can receive or access the credit rating that is the result
of the rating action or the subject of rating action.\400\ In other
words, if the NRSRO publishes its credit ratings via a press release
disseminated through its corporate Internet Web site and/or through
other electronic information providers, the form and any applicable
certifications would need to be disseminated through the same venues.
The Commission preliminarily believes one way to accomplish this
disclosure would be to publish the credit rating and information in the
press release on the form along with the required contents of the form
(discussed below) and, if applicable, to attach any relevant
certifications to the form.\401\ In addition, the form and any
certifications would need to be disseminated to the same persons who
can receive or access the credit rating that is the result of the
rating action or the subject of the rating action. Consequently, if the
NRSRO publishes credit ratings for free on its corporate Internet Web
site, it would need to make the form and any certifications similarly
available. Alternatively, if the NRSRO operates under the subscriber-
pay business model, it would need to disseminate the form and any
certifications to the subscribers only.
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\400\ See proposed new paragraph (a) of Rule 17g-7. A credit
rating would be the ``result'' of a rating action in the case where
the rating action is either the publication of an expected or
preliminary credit rating assigned to an obligor, security, or money
market instrument before the publication of an initial credit
rating; an initial credit rating; or an upgrade or downgrade of an
existing credit rating (including a downgrade to, or assignment of,
default). A credit rating would be the ``subject'' of a rating
action in the case where the rating action is either a placement of
an existing credit rating on credit watch or review; an affirmation
of an existing credit rating; or a withdrawal of an existing credit
rating.
\401\ As discussed below, the Commission is proposing that the
required contents of the form include the credit rating.
Consequently, if adopted, an NRSRO would be required to include the
credit rating on the form regardless of whether the NRSRO also
publishes the credit rating on a separate record. If the NRSRO
publishes the credit rating on a separate record, the NRSRO would be
required to publish the form (which would also contain the credit
rating) with the separate record under proposed new paragraph (a) of
Rule 17g-7.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed prefatory text to paragraph (a) of Rule 17g-7. The Commission
also seeks comment on the following:
1. What practical issues should the Commission consider in
implementing the proposal that an NRSRO publish the form and the
certifications every time the NRSRO takes a rating action? For example,
should the certifications only be required to be included with the
publication of an expected, preliminary, or initial credit rating or do
they remain relevant for the term of the rated security or money market
instrument and, therefore, should they continue to be published with
subsequent rating actions? How could the proposal be modified to
address any practical issues identified without undermining the goal of
making this information available to users of the NRSRO's credit
ratings?
2. What practical issues should the Commission consider in
implementing the proposal that an NRSRO publish the form and the
certifications in the same medium and make it available to the same
persons who can receive or access the credit rating resulting from or
subject to the rating action? How could the proposal be modified to
address any practical issues identified without undermining the goal of
making this information available to users of the NRSRO's credit
ratings?
3. What practical issues should the Commission consider in
implementing the proposal to apply provisions of the current note to
Rule 17g-7--that the term ``rating action'' includes the publication of
any expected or preliminary credit rating by the NRSRO--to all of the
information required under Rule 17g-7 as it would be amended under
these proposals? How could the proposal be modified to address any such
practical issues without undermining the goal of the disclosure
requirements currently contained in Rule 17g-7, that is, to make
available to investors, if a credit rating is issued with respect to an
asset-backed security, a description of: (1) The representations,
warranties, and enforcement mechanisms available to investors; and (2)
how they differ from the representations, warranties, and enforcement
mechanisms in issuances of similar securities?
4. The Commission has proposed to require issuers of asset-backed
securities using a registration statement on proposed Form SF-3 to file
a preliminary prospectus, under proposed Rule 424(h), containing
transaction-specific information at least 5 business days in advance of
the first sale of securities in the offering in order to allow
investors additional time to analyze the specific structure, assets,
and contractual rights regarding each transaction.\402\ Should the
Commission
[[Page 33458]]
explicitly require that the disclosures required by Rule 17g-7 be
provided no later than the time of the proposed Rule 424(h) preliminary
prospectus?
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\402\ See Asset Backed Securities, Securities Act Release No.
9117 (Apr. 7, 2010), 75 FR 23328 (May 3, 2010).
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5. If the NRSRO publishes its credit ratings via a press release
disseminated through its corporate Internet Web site and/or through
other electronic information providers, would it be appropriate to
permit the NRSRO to accomplish the required disclosure by publishing
the credit rating and information in the press release on the form
along with the required contents of the form (as discussed below) and,
if applicable, attaching any relevant certifications to the form? What
other methods could be used to make the required disclosures?
2. Paragraph (a)(1)(i)--Format of the Form
Proposed new paragraph (a)(1) of Rule 17g-7 would identify a form
generated by the NRSRO that meets the requirements of proposed new
paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii) of Rule 17g-7 as the
first item that must be included with a credit rating.\403\ In this
regard, Section 15E(s)(2) of the Exchange Act provides that the form
developed by the NRSRO shall: (1) Be easy to use and helpful for users
of credit ratings to understand the information contained in the
report; \404\ (2) require the NRSRO to provide the required
quantitative content specified in Section 15E(s)(3)(B) in a manner that
is directly comparable across types of securities; \405\ and (3) be
made readily available to users of credit ratings, in electronic or
paper form, as the Commission may, by rule, determine.\406\ The
Commission preliminarily believes that the provisions identified in
items (1) and (2) above are high-level objectives that an NRSRO should
be required to achieve in developing the presentation of the form. As
discussed next, Section 15E(s)(3) of the Exchange Act identifies very
specific items of information that the Commission's rule shall require
an NRSRO to include in the form.\407\ Given the specificity in Section
15E(s)(3), the Commission preliminarily believes it would be
appropriate to use the higher level objectives specified in Section
15E(s)(2) to prescribe presentation requirements for the form.\408\
Consequently, the Commission is proposing rule text that would mirror
the statutory text.\409\ In particular, proposed new paragraph
(a)(1)(i)(A) of Rule 17g-7 would provide that the form generated by the
NRSRO would need to be easy to use and helpful for users of credit
ratings to understand the information contained in the form.\410\ For
example, the Commission preliminarily believes that a form that
presents the required information in complex mathematical equations
would not achieve this objective.
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\403\ See proposed new paragraph (a)(1) of Rule 17g-7.
\404\ See 15 U.S.C. 78o-7(s)(2)(A).
\405\ See 15 U.S.C. 78o-7(s)(2)(B).
\406\ See 15 U.S.C. 78o-7(s)(2)(C). As discussed above, the
Commission proposes to implement Section 15E(s)(2)(C) of the
Exchange Act through the prefatory text in proposed new paragraph
(a) of Rule 17g-7.
\407\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
\408\ See 15 U.S.C. 78o-7(s)(2) and 15 U.S.C. 78o-7(s)(3).
\409\ See proposed new paragraphs (a)(1)(i)(A) and (B) of Rule
17g-7.
\410\ Compare new paragraph (a)(1)(i)(A) of Rule 17g-7, with 15
U.S.C. 78o-7(s)(2)(A).
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Similarly, proposed new paragraph (a)(1)(i)(B) of Rule 17g-7 would
mirror the statutory text by requiring that the content described in
proposed new paragraphs (a)(1)(ii)(K), (L) and (M) of Rule 17g-7 be
disclosed in a manner that is directly comparable across types of
obligors, securities, and money market instruments.\411\ As discussed
below, Section 15E(s)(3) of the Exchange Act identifies qualitative and
quantitative information that must be included in the form.\412\
Section 15E(s)(2)(B) provides that the quantitative content identified
in Section 15E(s)(3)(B) be directly comparable across types of
securities.\413\ The Commission is proposing that the quantitative
content specified in Section 15E(s)(3)(B) of the Exchange Act be
disclosed in the form pursuant to new paragraphs (a)(1)(ii)(K), (L),
and (M) of Rule 17g-7.\414\ Consequently, as proposed, new paragraph
(a)(1)(i)(B) of Rule 17g-7 would implement Section 15E(s)(2)(B) by
requiring an NRSRO to present this quantitative information in a manner
that is directly comparable across types of obligors, securities, and
money market instruments.
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\411\ Compare new paragraph (a)(1)(i)(B) of Rule 17g-7, with 15
U.S.C. 78o-7(s)(2)(B). See also 15 U.S.C. 78o-7(s)(2)(B) and 15
U.S.C. 78o-7(s)(3)(B). While the statutory text only refers to
``securities,'' Section 3(a)(60) of the Exchange Act defines the
term ``credit rating'' to mean an ``assessment of the
creditworthiness of an obligor as an entity or with respect to
specific securities or money market instruments.'' See 15 U.S.C.
78c(a)(60). The Commission believes it would be appropriate to
expand this presentation requirement for the form to include credit
ratings of ``obligors'' and ``money market instruments'' to ensure
that it applies to all types of credit ratings and to be consistent
with the Commission's existing and proposed rules for NRSROs, which
commonly apply to credit ratings of ``obligors, securities, and
money market instruments.'' See, e.g., 17 CFR 240.17g-2 and 17 CFR
240.17g-3.
\412\ See 15 U.S.C. 78o-7(s)(3).
\413\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
\414\ See proposed new paragraphs (a)(1)(ii)(K), (L), and (M) of
Rule 17g-7 and 15 U.S.C. 78o-7(s)(3)(B)).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (a)(1)(ii) of proposed Rule 17g-7. The Commission
also seeks comment on the following:
1. Is the objective that the form be easy to use and helpful for
users of credit ratings to understand the information contained in the
report sufficiently clear to provide NRSROs with guidance on how to
present the information in the form in accordance with this proposed
requirement? If not, how should the proposal be modified to provide
better guidance? Commenters should provide specific suggested rule text
and explain the rationale for it.
2. Is the objective that the content described in proposed
paragraphs (a)(1)(ii)(K), (L) and (M) of Rule 17g-7 be disclosed in a
manner that is directly comparable across types of obligors,
securities, and money market instruments sufficiently clear to provide
NRSROs with guidance on how to present this information in the form in
accordance with this proposed requirement? If not, how should the
proposal be modified to provide better guidance? Commenters should
provide specific suggested rule text and explain the rationale for it.
In addition, how would adding ``obligors'' and ``money market
instruments'' to the presentation requirement expand its scope?
Finally, the Commission requests commenters to provide examples of
disclosures in these areas that are being made now (if such disclosures
are being made) and how the disclosures might be presented under the
proposed requirements.
3. Should the Commission require that the information an NRSRO must
include in the form be presented in a certain order to enhance
comparability? For example, should the Commission require that the
information be disclosed in the order in which it is identified in
proposed paragraph (a)(1)(ii) of Rule 17g-7 discussed below? Are there
other means of enhancing the comparability of forms among NRSROs? For
example, should the Commission require a more standardized format for
the form?
3. Paragraph (a)(1)(ii)--Content of the Form
Section 15E(s)(3) of the Exchange Act provides that the Commission
shall require, by rule, that the form accompanying the publication of a
credit rating contain specifically
[[Page 33459]]
identified items of information.\415\ In particular, Section
15E(s)(3)(A) identifies items of ``qualitative content'' and Section
15E(s)(3)(B) identifies items of ``quantitative content.'' \416\ The
Commission preliminarily believes that the items of information
identified in Sections 15E(s)(3)(A) and (B) are explicit and,
consequently, proposes rule text that would mirror the statutory
text.\417\ In addition, the Commission also is proposing that certain
additional information be included in the form.
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\415\ See 15 U.S.C. 78o-7(s)(3).
\416\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
\417\ Compare proposed new paragraph (a)(1)(ii) of Rule 17g-7,
with 15 U.S.C. 78o-7(s)(3).
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Prefatory Text of Paragraph (a)(1)(ii). The prefatory text of
proposed new paragraph (a)(1)(ii) of Rule 17g-7 would provide that the
form generated by the NRSRO must contain information about the credit
rating identified in paragraphs (a)(1)(ii)(A) through (N).\418\
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\418\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7.
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Paragraph (a)(1)(ii)(A). The first item of information would be
identified in proposed new paragraph (a)(1)(ii)(A) of Rule 17g-7.\419\
This paragraph would implement, in part, Section 15E(s)(3)(A)(i) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form the credit ratings produced by the
NRSRO.\420\ Specifically, paragraph (a)(1)(ii)(A) of Rule 17g-7 would
require the NRSRO to include the symbol, number, or score in the rating
scale used by the NRSRO to denote the credit rating categories and
notches within categories assigned to the obligor, security, or money
market instrument that is the subject of the rating action and the
identity of the obligor, security, or money market instrument.\421\ In
other words, the form would need to identify the symbol, number, or
score representing the notch in the applicable rating scale assigned to
the obligor, security, or money market instrument, which, as proposed
in the prefatory text to paragraph (a) of Rule 17g-7, would include a
preliminary credit rating, an initial credit rating, an upgrade or
downgrade of an existing credit rating (including a downgrade to, or
assignment of, default), a placement of an existing credit rating on
watch or review, an affirmation of an existing credit rating, or
withdrawal of an existing credit rating.\422\
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\419\ See proposed new paragraph (a)(1)(ii)(A) of Rule 17g-7.
\420\ See 15 U.S.C. 78o-7(s)(3)(A)(i).
\421\ Id.
\422\ See proposed new paragraph (a) of Rule 17g-7.
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In addition, under proposed new paragraph (a)(1)(ii)(A) of Rule
17g-7, the form would need to contain the identity of the obligor,
security, or money market instrument that is the subject of the rating
action. The Commission preliminarily believes that the identity of the
obligor would be the person's legal name and any other name the obligor
uses in its business. Furthermore, the Commission preliminarily
believes that the identity of the security or money market instrument
would be the name of the security or money market instrument, if
applicable, and a description of the security or money market
instrument. For example, a bond could be identified as ``senior
unsecured debt issued by Company XYZ maturing in 2015.'' Providing the
CUSIP for the security or money market instrument also could be a way
to further identify it. The Commission preliminarily believes that the
disclosure on the form of the identity of the obligor, security, or
money market instrument must be sufficient to notify (and not confuse)
users of the form as to the identity of rated obligor, security, or
money market instrument. As discussed above, the Commission is
proposing in new paragraph (a)(1)(i)(A) of Rule 17g-7 that the NRSRO
must generate a form that is easy to use and helpful for users of
credit ratings to understand the information contained in the
form.\423\ The Commission preliminarily believes a form that does not
clearly identify the obligor, security, or money market instrument
subject to the rating action would not meet this requirement.
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\423\ See proposed new paragraph (a)(1)(i)(A) of Rule 17g-7.
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Paragraph (a)(1)(ii)(B). The second item of information would be
identified in proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.\424\
This paragraph would implement, in part, Section 15E(r)(3)(A) of the
Exchange Act.\425\ As discussed above in Section II.F.1 of this
release, Section 15E(r)(3)(A) provides that the rules adopted by the
Commission must ensure an NRSRO notifies users of credit ratings of the
version of a procedure or methodology, including the qualitative
methodology or quantitative inputs, used with respect to a particular
credit rating.\426\ The Commission is proposing to implement Section
15E(r)(3)(A), in part, through paragraph (a)(5) of new Rule 17g-8.\427\
Proposed paragraph (a)(5) of new Rule 17g-8 would require an NRSRO to
have policies and procedures that are reasonably designed to ensure the
NRSRO discloses the version of a credit rating procedure or
methodology, including the qualitative methodology or quantitative
inputs, used with respect to a particular credit rating.
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\424\ See proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.
\425\ See 15 U.S.C. 78o-7(r)(3)(A).
\426\ Id.
\427\ See proposed paragraph (a)(5) of new Rule 17g-8.
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The Commission proposes to further implement Section 15E(r)(3)(A)
of the Exchange Act through proposed paragraph (a)(1)(ii)(B) of Rule
17g-7. Specifically, paragraph (a)(1)(ii)(B) would require the NRSRO to
disclose on the form the version of the procedure or methodology used
to determine the credit rating.\428\ The Commission preliminarily
believes that this disclosure could be made by identifying the name of
the procedure or methodology (including any number used to denote the
version), the date the procedure was implemented, and an Internet URL
where further information about the procedure or methodology can be
obtained.\429\ The Commission preliminarily believes that proposed
paragraph (a)(1)(ii)(B) of Rule 17g-7 would complement and work in
conjunction with proposed paragraph (a)(5) of new Rule 17g-8.\430\ Rule
17g-7 would require the disclosure and Rule 17g-8 would require the
NRSRO to have policies and procedures that are reasonably designed to
ensure the disclosure is made.\431\
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\428\ See proposed paragraph (a)(1)(ii)(B) of Rule 17g-7.
\429\ For example, a disclosure could resemble: ``RMBS Rating
Methodology 3.0, implemented February 12, 2011. For further
information go to [insert website address].''
\430\ See 15 U.S.C. 78o-7(r)(3)(A), proposed new paragraph
(a)(1)(ii)(B) of Rule 17g-7, and proposed paragraph (a)(5) of Rule
17g-8.
\431\ See proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7 and
proposed paragraph (a)(5) of Rule 17g-8.
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The Commission also notes that Section 15E(s)(1)(B) of the Exchange
Act provides that the Commission shall require, by rule, each NRSRO to
prescribe a form to accompany the publication of a credit rating that
discloses information that can be used by investors and other users of
credit ratings to better understand credit ratings in each class of
credit rating issued by the NRSRO.\432\ The Commission preliminarily
believes that disclosing the version of the procedure or methodology
used to determine the credit rating would promote this goal. For
example, credit rating methodologies that are predominantly
quantitative rely on models to produce credit ratings. These models
periodically are updated and released as newer or different versions of
the
[[Page 33460]]
previous model. The Commission preliminarily believes disclosing the
version of a model used to produce a credit rating would help investors
and other users of credit ratings better understand the credit rating
and how the determination of the credit rating may differ from similar
products rated using an earlier version of the model.
---------------------------------------------------------------------------
\432\ See 15 U.S.C. 78o-7(s)(1)(B).
---------------------------------------------------------------------------
Paragraph (a)(1)(ii)(C). The third item of information would be
identified in proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.\433\
This paragraph would implement Section 15E(s)(3)(A)(ii) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form the main assumptions and principles used in
constructing procedures and methodologies, including qualitative
methodologies and quantitative inputs and assumptions about the
correlation of defaults across underlying assets used in rating
structured products.\434\ The Commission preliminarily believes that
the statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(C) of
Rule 17g-7 would mirror the statutory text.\435\ In particular,
proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7 would require the
NRSRO to disclose in the form the main assumptions and principles used
in constructing the procedures and methodologies used to determine the
credit rating, including qualitative methodologies and quantitative
inputs and, if the credit rating is for a structured finance product,
assumptions about the correlation of defaults across the underlying
assets.\436\
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\433\ See proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.
\434\ See 15 U.S.C. 78o-7(s)(3)(A)(ii).
\435\ Compare 15 U.S.C. 78o-7(s)(3)(A)(ii), with proposed new
paragraph (a)(1)(ii)(C) of Rule 17g-7.
\436\ See proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.
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Paragraph (a)(1)(ii)(D). The fourth item of information would be
identified in proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.\437\
This paragraph would implement Section 15E(s)(3)(A)(iii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form the potential limitations of the
credit ratings and the types of risks excluded from the credit ratings
that the NRSRO does not comment on, including liquidity, market, and
other risks.\438\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(D) of
Rule 17g-7 would mirror the statutory text.\439\ In particular,
proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7 would require the
NRSRO to disclose in the form the potential limitations of the credit
rating, including the types of risks excluded from the credit rating
that the NRSRO does not comment on, including, as applicable,
liquidity, market, and other risks.\440\
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\437\ See proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.
\438\ See 15 U.S.C. 78o-7(s)(3)(A)(iii).
\439\ Compare 15 U.S.C. 78o-7(s)(3)(A)(iii), with proposed new
paragraph (a)(1)(ii)(D) of Rule 17g-7.
\440\ See proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.
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Paragraph (a)(1)(ii)(E). The fifth item of information would be
identified in proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.\441\
This paragraph would implement Section 15E(s)(3)(A)(iv) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form information on the uncertainty of the credit
rating, including: (1) Information on the reliability, accuracy, and
quality of the data relied on in determining the credit rating; and (2)
a statement relating to the extent to which data essential to the
determination of the credit rating were reliable or limited, including
any limits on the scope of historical data; and any limits in
accessibility to certain documents or other types of information that
would have better informed the credit rating.\442\ The Commission
preliminarily believes that the statutory text is explicit with respect
to the information to be disclosed and, consequently proposed new
paragraph (a)(1)(ii)(E) of Rule 17g-7 would mirror the statutory
text.\443\ In particular, proposed new paragraph (a)(1)(ii)(E) of Rule
17g-7 would require the NRSRO to disclose in the form information on
the uncertainty of the credit rating, including: (1) Information on the
reliability, accuracy, and quality of the data relied on in determining
the credit rating; and (2) a statement relating to the extent to which
data essential to the determination of the credit rating were reliable
or limited, including: any limits on the scope of historical data; and
any limits in accessibility to certain documents or other types of
information that would have better informed the credit rating.\444\
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\441\ See proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.
\442\ See 15 U.S.C. 78o-7(s)(3)(A)(iv).
\443\ Compare 15 U.S.C. 78o-7(s)(3)(A)(iv), with proposed new
paragraph (a)(1)(ii)(E) of Rule 17g-7.
\444\ See proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.
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Paragraph (a)(1)(ii)(F). The sixth item of information would be
identified in proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.\445\
This paragraph would implement Section 15E(s)(3)(A)(v) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form whether and to what extent third-party due
diligence services have been used by the NRSRO, a description of the
information that such third-party reviewed in conducting due diligence
services, and a description of the findings and conclusions of such
third-party.\446\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(F) of
Rule 17g-7 would mirror the statutory text.\447\ In particular,
proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would require the
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by the NRSRO, a description of the
information that such third-party reviewed in conducting due diligence
services, and a description of the findings or conclusions of such
third-party.\448\
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\445\ See proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.
\446\ See 15 U.S.C. 78o-7(s)(3)(A)(v).
\447\ Compare 15 U.S.C. 78o-7(s)(3)(A)(v), with proposed new
paragraph (a)(1)(ii)(F) of Rule 17g-7.
\448\ See proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.
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The Commission notes that Section 15E(s)(4)(A) of the Exchange Act
contains a requirement that the issuer or underwriter of any asset-
backed security shall make publicly available the findings and
conclusions of any third-party due diligence report obtained by the
issuer or underwriter.\449\ In addition, Section 15E(s)(4)(B) of the
Exchange Act contains a self-executing requirement providing that in
any case in which third-party due diligence services are employed by an
NRSRO, an issuer, or an underwriter, the person providing the due
diligence services shall provide to any NRSRO that produces a rating to
which such services relate, written certification in a format
prescribed, by rule, by the Commission.\450\ Finally, as discussed
above in Section II.G.1 of this release and below in Section II.G.5,
the NRSRO would be required to disclose with the publication of a
credit rating any certifications it receives from a provider of third-
party due diligence services pursuant to Section 15E(s)(4)(B)
[[Page 33461]]
of the Exchange Act.\451\ The Commission preliminarily believes that
the disclosure that would be required pursuant to proposed paragraph
(a)(1)(ii)(F) of Rule 17g-7 would need to describe how the NRSRO used
the findings and conclusions of any third-party due diligence report
made publicly available by an issuer or underwriter pursuant to Section
15E(s)(4)(A) of the Exchange Act.\452\ Similarly, the Commission
preliminarily believes that the disclosure would need to describe how
the NRSRO used any certifications it receives from providers of third-
party due diligence services pursuant to Section 15E(s)(4)(B) of the
Exchange Act.\453\
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\449\ See 15 U.S.C. 78o-7(s)(4)(A). The Commission's proposals
for implementing this provision are discussed below in Section
II.H.1 of this release.
\450\ See 15 U.S.C. 78o-7(s)(4)(B). The Commission's proposals
for implementing this provision are discussed below in Sections
II.H.2 and II.H.3 of this release.
\451\ See proposed prefatory text of paragraph (a) and proposed
paragraph (a)(2) of Rule 17g-7.
\452\ See 15 U.S.C. 78o-7(s)(4)(A).
\453\ See 15 U.S.C. 78o-7(s)(4)(B).
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Paragraph (a)(1)(ii)(G). The seventh item of information would be
identified in proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.\454\
This paragraph would implement Section 15E(s)(1)(A)(iii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose, if applicable, how the NRSRO used servicer or
remittance reports, and with what frequency, to conduct surveillance of
the credit rating.\455\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(G) of
Rule 17g-7 would mirror the statutory text.\456\ In particular,
proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7 would require the
NRSRO to disclose in the form, if applicable, how servicer or
remittance reports were used, and with what frequency, to conduct
surveillance of the credit rating.\457\
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\454\ See proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.
\455\ See 15 U.S.C. 78o-7(s)(1)(A)(iii).
\456\ Compare 15 U.S.C. 78o-7(s)(1)(A)(iii), with proposed new
paragraph (a)(1)(ii)(G) of Rule 17g-7.
\457\ See proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.
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Paragraph (a)(1)(ii)(H). The eighth item of information would be
identified in proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.\458\
This paragraph would implement Section 15E(s)(3)(A)(vi) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form a description of the data about any obligor,
issuer, security, or money market instrument that were relied upon for
the purpose of determining the credit rating.\459\ The Commission
preliminarily believes that the statutory text is explicit with respect
to the information to be disclosed and, consequently proposed new
paragraph (a)(1)(ii)(H) of Rule 17g-7 would mirror the statutory
text.\460\ In particular, proposed new paragraph (a)(1)(ii)(H) of Rule
17g-7 would require the NRSRO to disclose in the form a description of
the data about any obligor, issuer, security, or money market
instrument that was relied upon for the purpose of determining the
credit rating.\461\
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\458\ See proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.
\459\ See 15 U.S.C. 78o-7(s)(3)(A)(vi).
\460\ Compare 15 U.S.C. 78o-7(s)(3)(A)(vi), with proposed new
paragraph (a)(1)(ii)(H) of Rule 17g-7.
\461\ See proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.
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Paragraph (a)(1)(ii)(I). The ninth item of information would be
identified in proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.\462\
This paragraph would implement Section 15E(s)(3)(A)(vii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form a statement containing an overall
assessment of the quality of information available and considered in
producing a rating for the obligor, security, or money market
instrument, in relation to the quality of information available to the
NRSRO in rating similar obligors, securities, and money market
instruments.\463\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently, proposed new paragraph (a)(1)(ii)(I) of
Rule 17g-7 would mirror the statutory text.\464\ In particular,
proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7 would require the
NRSRO to disclose in the form a statement containing an overall
assessment of the quality of information available and considered in
producing a rating for an obligor, security, or money market
instrument, in relation to the quality of information available to the
NRSRO in rating similar obligors, securities, or money market
instruments.\465\
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\462\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
\463\ See 15 U.S.C. 78o-7(s)(3)(A)(vii). The Commission notes
that the end of the statutory text refers to ratings of ``similar
issuances.'' Id. However, the preceding text refers to rating an
``obligor, security, or money market instrument.'' Id. As discussed
earlier, a credit rating of an ``obligor'' commonly means the rating
of the obligor as an entity rather than a rating of securities or
money market instruments issued by the obligor. Consequently, the
rating of an obligor may not relate to an ``issuance'' of a
particular security or money market instrument. Therefore, the
Commission proposes in new paragraph (a)(1)(ii)(I) of Rule 17g-7 to
use the term ``similar obligors, securities, or money market
instruments'' instead of the term ``similar issuances'' in the
statutory text.
\464\ Compare 15 U.S.C. 78o-7(s)(3)(A)(vii), with proposed new
paragraph (a)(1)(ii)(I) of Rule 17g-7.
\465\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
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Paragraph (a)(1)(ii)(J). The tenth item of information would be
identified in proposed new paragraph (a)(1)(ii)(J) of Rule 17g-7.\466\
This paragraph would implement, in part, Section 15E(s)(3)(A)(viii) of
the Exchange Act, which provides that the Commission's rule shall
require the NRSRO to disclose in the form information relating to
conflicts of interest of the NRSRO.\467\ The Commission preliminarily
believes that the statutory text of Section 15E(s)(3)(A)(viii) is
relatively general in that it does not specify the type of information
about conflicts of interest that should be disclosed.\468\ Accordingly,
the Commission is proposing to identify three specific items of
information that, at a minimum, would need to be disclosed about
conflicts of interest.\469\
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\466\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
\467\ See 15 U.S.C. 78o-7(s)(3)(A)(viii).
\468\ Id.
\469\ See proposed new paragraph (a)(1)(ii)(J) of Rule 17g-7.
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The first type of disclosure would be identified in proposed new
paragraph (a)(1)(ii)(J)(1) of Rule 17g-7, which would require the NRSRO
to classify the credit rating as either ``solicited'' or
``unsolicited.'' \470\ Proposed new paragraphs (a)(1)(ii)(J)(1)(i),
(ii) and (iii) of Rule 17g-7 would define ``solicited'' and
``unsolicited'' credit ratings.\471\ In this regard, the Commission is
proposing two different sub-categories for solicited ratings:
``solicited sell-side'' and ``solicited buy-side.'' \472\ Proposed new
paragraph (a)(1)(ii)(J)(1)(i) of Rule 17g-7 would define ``Solicited
sell-side'' to mean the credit rating was paid for by the obligor being
rated or the issuer, underwriter, depositor, or sponsor of the security
or money market instrument being rated.\473\ In other words, the
``solicited sell-side'' classification would be used for issuer-paid
credit ratings. Proposed new paragraph (a)(1)(ii)(J)(1)(ii) of Rule
17g-7 would define ``Solicited buy-side'' to mean the credit rating was
paid for by a person other than the obligor being rated or the issuer,
underwriter, depositor, or sponsor of the security or money market
instrument being rated. For example, a potential investor in a security
may pay
[[Page 33462]]
an NRSRO to determine a credit rating for the security. The Commission
preliminarily believes this distinction is relevant because, depending
on the type of entity paying for the rating, the potential conflict may
exert different types of undue influence on the NRSRO. For example, a
sell-side purchaser of the credit rating presumably would want the
highest rating possible. However, a buy-side purchaser could want a
lower credit rating if the purchaser is maintaining a short position or
desiring a higher interest rate.
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\470\ See proposed new paragraph (a)(1)(ii)(J)(1) of Rule 17g-7.
\471\ See proposed new paragraphs (a)(1)(ii)(J)(1)(i), (ii) and
(iii) of Rule 17g-7.
\472\ See proposed new paragraph (a)(1)(ii)(J)(1)(i) and (ii) of
Rule 17g-7.
\473\ See proposed new paragraph (a)(1)(ii)(J)(1)(i) of Rule
17g-7.
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Proposed new paragraph (a)(1)(ii)(J)(1)(iii) of Rule 17g-7 would
define an ``unsolicited'' credit rating to mean a credit rating the
NRSRO was not paid to determine.\474\ The Commission preliminarily
intends this definition to include credit ratings funded by selling
subscriptions to access the credit ratings (so-called ``subscriber-paid
credit ratings''). However, if a subscriber paid the NRSRO to determine
a credit rating for a specific obligor, security, or money market
instrument, the credit rating would need to be classified as either
``solicited sell-side'' if the subscriber also was the obligor being
rated or the issuer, underwriter, depositor, or sponsor of the security
or money market instrument being rated, or ``solicited buy-side'' if
the subscriber was not the obligor being rated or the issuer,
underwriter, depositor, or sponsor of the security or money market
instrument being rated. This would apply, for example, if the
subscriber was an investor or potential investor in the security or
money market instrument and hired the NRSRO to specifically rate the
security or money market instrument. In such a case, the credit rating
would need to be classified as ``solicited buy-side.''
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\474\ See proposed new paragraph (a)(1)(ii)(J)(1)(iii) of Rule
17g-7.
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The second type of conflict disclosure would be identified in
proposed new paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.\475\ This
paragraph would provide that if the credit rating is classified as
either ``solicited sell-side'' or ``solicited buy-side'' the NRSRO
would be required to disclose whether the NRSRO provided services other
than determining credit ratings to the person that paid for the rating
during the most recently ended fiscal year.\476\ In other words, the
NRSRO would be required to indicate whether the person who purchased
the credit rating was a client with respect to other services provided
by the NRSRO. The Commission preliminarily believes clients paying an
NRSRO for services in addition to determining credit ratings may pose
an increased risk of exerting undue influence on the NRSRO with respect
to its determination of credit ratings.\477\ The Commission has adopted
rules that address consulting and advisory services under authority in
Section 15E(h)(2)(B).\478\ The Commission preliminarily believes that
the proposed disclosure requirement about other services would
complement these requirements.
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\475\ See proposed new paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.
\476\ Id.
\477\ In this regard, the Commission notes that Section 939H of
the Dodd-Frank Act contains a sense of the Congress that the
Commission should exercise rulemaking authority under Section
15E(h)(2)(B) of the Exchange Act to prevent improper conflicts of
interest arising from employees of NRSROs providing services to
issuers of securities that are unrelated to the issuance of credit
ratings, including consulting, advisory, and other services. See
Public Law 111-203 Sec. 939H.
\478\ See 17 CFR 240.17g-5(a) and (b)(3), (4) and (5) and 17 CFR
240.17g-5(c).
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The third type of conflict disclosure would be identified in
proposed new paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.\479\ This
paragraph would require disclosure of information about a conflict of
interest influencing a credit rating action discovered as a result of a
look-back review conducted pursuant to Section 15E(h)(4)(A) of the
Exchange Act and proposed paragraph (c) of new Rule 17g-8.\480\
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\479\ See proposed new paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.
\480\ This information is discussed in detail above in Section
II.C.1 of this release.
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Paragraph (a)(1)(ii)(K). The eleventh item of information would be
identified in proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.\481\
This paragraph would implement Section 15E(s)(3)(B)(i) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form an explanation or measure of the potential
volatility of the credit rating, including: (1) Any factors that might
lead to a change in the credit ratings; and (2) the magnitude of the
change that a user can expect under different market conditions.\482\
The Commission preliminarily believes that the statutory text is
explicit with respect to the information to be disclosed and,
consequently proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7 would
mirror the statutory text.\483\ In particular, proposed new paragraph
(a)(1)(ii)(K) of Rule 17g-7 would require the NRSRO to disclose in the
form an explanation or measure of the potential volatility of the
credit rating, including: (1) Any factors that might lead to a change
in the credit rating; and (2) the magnitude of the change that could
occur under different market conditions.\484\
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\481\ See proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.
\482\ See 15 U.S.C. 78o-7(s)(3)(B)(i).
\483\ Compare 15 U.S.C. 78o-7(s)(3)(B)(i), with proposed new
paragraph (a)(1)(ii)(K) of Rule 17g-7.
\484\ See proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.
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Paragraph (a)(1)(ii)(L). The twelfth item of information would be
identified in proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.\485\
This paragraph would implement Section 15E(s)(3)(B)(ii) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form information on the content of the credit
rating, including: (1) The historical performance of the credit rating;
and (2) the expected probability of default and the expected loss in
the event of default.\486\ The Commission preliminarily believes that
the statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(L) of
Rule 17g-7 would mirror the statutory text.\487\ In particular,
proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7 would require the
NRSRO to disclose in the form information on the content of the rating,
including: (1) If applicable, the historical performance of the rating;
and (2) the expected probability of default and the expected loss in
the event of default.\488\
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\485\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
\486\ See 15 U.S.C. 78o-7(s)(3)(B)(ii).
\487\ Compare 15 U.S.C. 78o-7(s)(3)(B)(ii), with proposed new
paragraph (a)(1)(ii)(L) of Rule 17g-7.
\488\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
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Paragraph (a)(1)(ii)(M). The thirteenth item of information would
be identified in proposed new paragraph (a)(1)(ii)(M) of Rule 17g-
7.\489\ This paragraph would implement Section 15E(s)(3)(B)(iii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form information on the sensitivity of the
credit rating to assumptions made by the NRSRO, including: (1) Five
assumptions made in the ratings process that, without accounting for
any other factor, would have the greatest impact on a rating if the
assumptions were proven false or inaccurate; and (2) an analysis, using
specific examples, of how each of the 5 assumptions identified impacts
a credit rating.\490\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(M) of
Rule 17g-7 would mirror
[[Page 33463]]
the statutory text.\491\ In particular, proposed new paragraph
(a)(1)(ii)(M) of Rule 17g-7 would require the NRSRO to disclose in the
form information on the sensitivity of the rating to assumptions made
by the NRSRO, including: (1) 5 assumptions made in the ratings process
that, without accounting for any other factor, would have the greatest
impact on a rating if the assumptions were proven false or inaccurate;
and (2) an analysis, using specific examples, of how each of the 5
assumptions identified in the form impacts a rating.\492\
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\489\ See proposed new paragraph (a)(1)(ii)(M) of Rule 17g-7.
\490\ See 15 U.S.C. 78o-7(s)(3)(B)(iii).
\491\ Compare 15 U.S.C. 78o-7(s)(3)(B)(iii), with proposed new
paragraph (a)(1)(ii)(M) of Rule 17g-7.
\492\ See proposed new paragraph (a)(1)(ii)(M) of Rule 17g-7.
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Paragraph (a)(1)(ii)(N). Finally, the fourteenth item of
information would be identified in proposed new paragraph (a)(1)(ii)(N)
of Rule 17g-7.\493\ This paragraph would contain the current disclosure
requirement in Rule 17g-7.\494\ In particular, the current requirements
in paragraphs (a) and (b) of Rule 17g-7 would be contained in proposed
new paragraph (a)(1)(ii)(N).\495\ Specifically, this paragraph would
provide that if the credit rating is issued with respect to an asset-
backed security, as that term is defined in Section 3(a)(77) of the
Exchange Act, the NRSRO must include in the form a description of: (1)
The representations, warranties, and enforcement mechanisms available
to investors; and (2) how they differ from the representations,
warranties, and enforcement mechanisms in issuances of similar
securities.
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\493\ See proposed new paragraph (a)(1)(ii)(N) of Rule 17g-7.
\494\ See 17 CFR 240.17g-7. As discussed above Section II.G.1 of
this release, the definition of ``credit rating'' in the third
sentence of the prefatory text to proposed new paragraph (a) of Rule
17g-7 would contain the provisions in the current Note to 17 CFR
240.17g-7, which provides that for the purposes of the rule's
current requirements, a ``credit rating'' includes any expected or
preliminary credit rating issued by an NRSRO.
\495\ Compare 17 CFR 240.17g-7(a) and (b), with proposed new
paragraph (a)(1)(ii)(N) of Rule 17g-7.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (a)(1)(ii) of proposed Rule 17g-7. The Commission
also seeks comment on the following:
1. With respect to proposed paragraph (a)(1)(ii)(A), should the
Commission consider requiring the disclosure of information in addition
to the identity of the obligor's legal name and any other name that the
obligor uses in its business? Are there additional or alternative ways
to identify the obligor? Also, provide examples of how this disclosure
might appear on the form.
2. With respect to proposed paragraph (a)(1)(ii)(A), should the
Commission consider requiring the disclosure of information in addition
to the name of the security or money market instrument, if applicable,
and a description of the security or money market instrument? Are there
additional or alternative ways to identify the security or money market
instrument? Would disclosing the CUSIP alone be sufficient to identify
the security or money market instrument? If so, should the Commission
consider requiring that the CUSIP be disclosed? Also, provide examples
of how this disclosure might appear on the form.
3. With respect to proposed paragraph (a)(1)(ii)(B), would the
disclosure of the version of the procedure or methodology used to
determine the credit rating in conjunction with proposed paragraph
(a)(5) of Rule 17g-8 achieve the goals of Section 15E(r)(3)(A) of the
Exchange Act? If not, what alternative or additional requirements
should the Commission consider? Also, provide examples of how this
disclosure might appear on the form.
4. Proposed paragraph (a)(1)(ii)(C) of Rule 17g-7 would require an
NRSRO to disclose in the form the main assumptions and principles used
in constructing the procedures and methodologies used to determine the
credit rating, including qualitative methodologies and quantitative
inputs and, if the credit rating is for a structured finance product,
assumptions about the correlation of defaults across the underlying
assets. Is this proposed requirement sufficiently explicit with respect
to the information that would need to be disclosed? If not, what
additional detail should the Commission provide in terms of the
information that would need to be disclosed? Also, provide examples of
how this disclosure might appear on the form. In addition, would the
proposal require the disclosure of proprietary information? If so, what
type or types of proprietary information would be disclosed? How could
this issue be addressed?
5. Proposed paragraph (a)(1)(ii)(D) of Rule 17g-7 would require the
NRSRO to disclose in the form the potential limitations of the credit
rating, including the types of risks excluded from the credit rating
that the NRSRO does not comment on, including, as applicable,
liquidity, market, and other risks. Is this proposed requirement
sufficiently explicit with respect to the information that would need
to be disclosed? If not, what additional detail should the Commission
provide in terms of the information that would need to be disclosed?
Also, provide examples of how this disclosure might appear on the form.
6. Proposed paragraph (a)(1)(ii)(E) of Rule 17g-7 require the NRSRO
to disclose in the form information on the uncertainty of the credit
rating, including: (1) Information on the reliability, accuracy, and
quality of the data relied on in determining the credit rating; and (2)
a statement relating to the extent to which data essential to the
determination of the credit rating were reliable or limited, including:
Any limits on the scope of historical data; and any limits in
accessibility to certain documents or other types of information that
would have better informed the credit rating. Is this proposed
requirement sufficiently explicit with respect to the information that
would need to be disclosed? If not, what additional detail should the
Commission provide in terms of the information that would need to be
disclosed? Also, provide examples of how this disclosure might appear
on the form. In addition, would the proposal require the disclosure of
proprietary information? If so, what type or types of proprietary
information would be disclosed? How could this issue be addressed?
7. Proposed paragraph (a)(1)(ii)(F) of Rule 17g-7 would require the
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by NRSRO organization, a description
of the information that such third-party reviewed in conducting due
diligence services, and a description of the findings or conclusions of
such third-party? Is this proposed requirement sufficiently explicit
with respect to the information that would need to be disclosed? If
not, what additional detail should the Commission provide in terms of
the information that would need to be disclosed? Also, provide examples
of how this disclosure might appear on the form.
8. With respect to proposed paragraph (a)(1)(ii)(F) of Rule 17g-7,
how should the findings and conclusions of any third-party due
diligence report made publicly available by the issuer or underwriter
pursuant to Section 15E(s)(4)(A) of the Exchange Act be incorporated
into the disclosure if used by the NRSRO? Similarly, how should any
certifications the NRSRO receives from providers of third-party due
diligence services pursuant to Section 15E(s)(4)(B) of the Exchange Act
be
[[Page 33464]]
incorporated into the disclosure if used by the NRSRO? Also, provide
examples of how this disclosure might appear on the form.
9. Proposed paragraph (a)(1)(ii)(G) of Rule 17g-7 would require the
NRSRO to disclose in the form, if applicable, how servicer or
remittance reports were used, and with what frequency, to conduct
surveillance of the credit rating? Is this proposed requirement
sufficiently explicit with respect to the information that would need
to be disclosed? If not, what additional detail should the Commission
provide in terms of the information that would need to be disclosed?
Also, provide examples of how this disclosure might appear on the form.
10. Proposed paragraph (a)(1)(ii)(H) of Rule 17g-7 would require
the NRSRO to disclose in the form a description of the data about any
obligor, issuer, security, or money market instrument that was relied
upon for the purpose of determining the credit rating? Is this proposed
requirement sufficiently explicit with respect to the information that
would need to be disclosed? If not, what additional detail should the
Commission provide in terms of the information that would need to be
disclosed? Also, provide examples of how this disclosure might appear
on the form.
11. Proposed paragraph (a)(1)(ii)(I) of Rule 17g-7 would require
the NRSRO to disclose in the form a statement containing an overall
assessment of the quality of information available and considered in
producing a rating for an obligor, security, or money market
instrument, in relation to the quality of information available to the
NRSRO in rating similar obligors, securities, or money market
instruments. Is this proposed requirement sufficiently explicit with
respect to the information that would need to be disclosed? If not,
what additional detail should the Commission provide in terms of the
information that would need to be disclosed? Also, provide examples of
how this disclosure might appear on the form.
12. With respect to proposed paragraph (a)(1)(ii)(J)(1) of Rule
17g-7, are the proposed definitions of ``solicited sell-side'',
``solicited buy-side'', and ``unsolicited'' credit ratings sufficiently
clear? If not, how should the definitions be augmented or altered?
Also, provide examples of how this disclosure might appear on the form.
13. With respect to proposed paragraph (a)(1)(ii)(J)(1) of Rule
17g-7, would distinguishing between ``solicited sell-side'' and
``solicited buy-side'' credit ratings provide useful disclosure of
potentially different conflicts of interest? Alternatively, should the
disclosure more simply require classification of whether the credit
rating was ``solicited'' or ``unsolicited''? Also, provide examples of
how this disclosure might appear on the form.
14. With respect to proposed paragraph (a)(1)(ii)(J)(2) of Rule
17g-7, would the proposed disclosure of whether the NRSRO provided
other services to the person that paid for the credit rating during the
most recently ended fiscal year provide useful disclosure of potential
conflicts of interest? Also, provide examples of how this disclosure
might appear on the form.
15. With respect to proposed paragraph (a)(1)(ii)(J) of Rule 17g-7,
is there other information about conflicts of interest that the
Commission should consider requiring to be disclosed in the form?
Commenters should provide specific examples of such information and
explain how it would provide useful information. Also, provide examples
of how this disclosure might appear on the form.
16. Proposed paragraph (a)(1)(ii)(K) of Rule 17g-7 would require
the NRSRO to disclose in the form an explanation or measure of the
potential volatility of the credit rating, including: (1) Any factors
that might lead to a change in the credit rating; and (2) the magnitude
of the change that could occur under different market conditions. Is
this proposed requirement sufficiently explicit with respect to the
information that would need to be disclosed? If not, what additional
detail should the Commission provide in terms of the information that
would need to be disclosed? Also, provide examples of how this
disclosure might appear on the form. Should the Commission provide
guidance on the types of factors that should be disclosed to establish
a materiality threshold? If so, describe the factors and the
corresponding materiality threshold. Furthermore, should the Commission
define the term ``might lead to a change in the credit rating'' to
establish the level of probability necessary to trigger the disclosure?
If so, how should the term be defined?
17. Proposed paragraph (a)(1)(ii)(L) of Rule 17g-7 would require
the NRSRO to disclose in the form information on the content of the
rating, including: (1) If applicable, the historical performance of the
rating; and (2) the expected probability of default and the expected
loss in the event of default. Is this proposed requirement sufficiently
explicit with respect to the information that would need to be
disclosed? If not, what additional detail should the Commission provide
in terms of the information that would need to be disclosed? Also,
provide examples of how this disclosure might appear on the form.
18. With respect to proposed paragraph (a)(1)(ii)(M) of Rule 17g-7
would require the NRSRO to disclose in the form information on the
sensitivity of the rating to assumptions made by the NRSRO, including:
(1) 5 assumptions made in the ratings process that, without accounting
for any other factor, would have the greatest impact on a rating if the
assumptions were proven false or inaccurate; and (2) an analysis, using
specific examples, of how each of the 5 assumptions identified in the
form impacts a rating? Is this proposed requirement sufficiently
explicit with respect to the information that would need to be
disclosed? If not, what additional detail should the Commission provide
in terms of the information that would need to be disclosed? Also,
provide examples of how this disclosure might appear on the form. In
addition, would the proposal require the disclosure of proprietary
information? If so, what type or types of proprietary information would
be affected? How could this issue be addressed?
19. Is the proposal to codify the current requirements in
paragraphs (a) and (b) of Rule 17g-7 in proposed paragraph
(a)(1)(ii)(N) of Rule 17g-7 appropriate? For example, would this re-
designation change those requirements in some manner?
4. Paragraph (a)(1)(iii)--Attestation Requirement
Section 15E(q)(2)(F) of the Exchange Act provides that the
Commission's rules must require an NRSRO to include an attestation with
any credit rating it issues affirming that no part of the rating was
influenced by any other business activities, that the rating was based
solely on the merits of the instruments being rated, and that such
rating was an independent evaluation of the risks and merits of the
instrument.\496\ While Section 15E(q) relates to disclosure of
information about the performance of credit ratings, the Commission
preliminarily believes this attestation provision would more
appropriately be implemented with respect to disclosures that must be
made when a specific rating action is published. Consequently, the
Commission proposes that it be part of the form that would be required
to accompany a credit rating pursuant to
[[Page 33465]]
rulemaking under Section 15E(s) of the Exchange Act as opposed to a
part of the proposed disclosures of Transition/Default Matrices in
Exhibit 1 to Form NRSRO or credit rating histories that would implement
Section 15E(q).\497\
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\496\ See 15 U.S.C. 78o-7(q)(2)(F).
\497\ See 15 U.S.C. 78o-7(s) and 15 U.S.C. 78o-7(q).
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Consequently, the Commission proposes to implement this attestation
requirement as part of the rule requirement for an NRSRO to generate a
form to accompany the publication of a credit rating.\498\ In
particular, under the proposal, the NRSRO would be required to attach
to the form a signed statement by a person within the NRSRO stating
that the person has responsibility for the credit rating and, to the
best knowledge of the person: (1) No part of the credit rating was
influenced by any other business activities; (2) the credit rating was
based solely upon the merits of the obligor, security, or money market
instrument being rated; and (3) the credit rating was an independent
evaluation of the risks and merits of the obligor, security, or money
market instrument.\499\ Thus, the proposed requirement would mirror the
statutory text in terms of the representations that would need to be
made in the attestation.\500\
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\498\ See 15 U.S.C. 78o-7(s).
\499\ See proposed new paragraphs (a)(1)(iii)(A)-(C) of Rule
17g-7.
\500\ Compare proposed new paragraphs (a)(1)(iii)(A)-(C) of Rule
17g-7, with 15 U.S.C. 78o-7(q)(2)(F).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (a)(1)(iii) of proposed Rule 17g-7. The Commission
also seeks comment on the following:
1. Are there alternative means of implementing Section 15E(q)(2)(F)
with respect to the attestation requirement? For example, should
Section 15E(q)(2)(F) be implemented in proposed provisions requiring
NRSROs to disclose information about the performance of credit ratings
(i.e., the proposed Form NRSRO Exhibit 1 Transition/Default Matrices
and/or the proposed ratings histories disclosure requirement)? If so,
how would the attestation requirement be made a part of either of these
other proposals?
2. What person within the NRSRO has responsibility for the credit
rating and the other information that would be required to be disclosed
in the form and, consequently, could make the attestation? For example,
could the lead analyst, the chair of the rating committee, a senior
manager, or some other person make the proposed attestation?
5. Paragraph (a)(2)--Certification of Third-Party Due Diligence
Provider
Section 15E(s)(4)(B) of the Exchange Act requires a third-party
providing due diligence services to an NRSRO, issuer, or underwriter
with respect to an Exchange Act-ABS \501\ to provide a written
certification to any NRSRO that produces a credit rating to which the
due diligence services relate.\502\ Section 15E(s)(4)(D) of the
Exchange Act provides that the Commission shall adopt a rule requiring
an NRSRO that receives a certification from a provider of third-party
due diligence services to disclose the certification to the public in a
manner that allows the public to determine the adequacy and level of
the due diligence services provided by the third-party.\503\ The
Commission preliminarily believes that this goal could best be achieved
by requiring the NRSRO to disclose any such certifications with the
publication of the NRSRO's credit rating to which the certification
relates. Therefore, the Commission is proposing to add a new paragraph
(a)(2) to Rule 17g-7 that, in conjunction with the proposed prefatory
text of paragraph (a), would provide that the NRSRO must include with
the publication of a credit rating any written certification related to
the credit rating received from a provider of third-party due diligence
services pursuant to Section 15E(s)(4)(B) of the Exchange Act.\504\
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\501\ See 15 U.S.C. 78o-7(s)(4)(A)-(D). As noted earlier, 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 an ``asset-backed security'' as defined in Section 3(a)(77)
of the Exchange Act (15 U.S.C. 78c(a)(77)) and other types of
structured debt instruments such as CDOs, including synthetic and
hybrid CDOs. The term ``Exchange Act-ABS'' as used throughout this
release refers more narrowly to an ``asset-backed security'' as
defined in Section 3(a)(77) of the Exchange Act. 15 U.S.C.
78c(a)(77).
\502\ See 15 U.S.C. 78o-7(s)(4)(B).
\503\ See 15 U.S.C. 78o-7(s)(4)(D).
\504\ See proposed paragraph (a)(2) of Rule 17g-7.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (a)(2) of Rule 17g-7. The Commission also seeks
comment on the following:
1. Would it be appropriate to require the inclusion of the
certification of the provider of third-party due diligence services
with the publication of the credit rating and the form containing
information about the credit rating? Is there an alternative means of
disclosing the certifications that would be reasonably designed to
ensure they are disseminated to users of the NRSRO's credit ratings? If
so, describe the method of disclosure.
H. Third-Party Due Diligence for Asset-Backed Securities
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new paragraph (s), which, as discussed above in
Section II.G of this release, has four subparagraphs: (1), (2), (3) and
(4).\505\ Section 15E(s)(4), ``Due diligence services for asset-backed
securities,'' contains four provisions regarding due diligence services
relating to an Exchange Act-ABS. Section 15E(s)(4)(A) requires the
issuer or underwriter to make publicly available the findings and
conclusions of any third-party due diligence report obtained by the
issuer or underwriter.\506\ Section 15E(s)(4)(B) requires that in any
case in which third-party due diligence services are employed by an
NRSRO, an issuer, or an underwriter, the person providing the due
diligence services shall provide to any NRSRO that produces a rating to
which such services relate, written certification in a format as
provided in Section 15E(s)(4)(C).\507\ Section 15E(s)(4)(C) of the
Exchange Act provides that the Commission shall establish the
appropriate format and content for the written certifications required
under Section 15E(s)(4)(B), to ensure that providers of due diligence
services have conducted a thorough review of data, documentation, and
other relevant information necessary for an NRSRO to provide an
accurate rating.\508\ Finally, Section 15E(s)(4)(D) of the Exchange Act
provides that the Commission shall adopt rules requiring an NRSRO, at
the time at which the NRSRO produces a rating, to disclose the
certification described in Section 15E(s)(4)(B) to the public in a
manner that allows the public to determine the adequacy and level of
due diligence services provided by a third party.\509\
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\505\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(s)(1)-(4).
\506\ See 15 U.S.C. 78o-7(s)(4)(A).
\507\ See 15 U.S.C. 78o-7(s)(4)(B).
\508\ See 15 U.S.C. 78o-7(s)(4)(C).
\509\ See 15 U.S.C. 78o-7(s)(4)(D).
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As discussed below in Section II.H.1 of this release, the
Commission is proposing to implement Section 15E(s)(4)(A) of the
Exchange Act by proposing amendments to Rule 314 of Regulation S-T and
Form ABS-15G, and proposing new Rule 15Ga-2.\510\ In
[[Page 33466]]
addition, as discussed below in Sections II.H.2 and II.H.3 of this
release, the Commission is proposing to implement Sections 15E(s)(4)(B)
and (C) of the Exchange Act by proposing new Rule 17g-10 and a related
form--Form ABS Due Diligence-15E.\511\ As discussed above in Section
II.G.5 of this release, the Commission is proposing to implement
Section 15E(s)(4)(D) by proposing new paragraph (a)(2) to Rule 17g-
7.\512\
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\510\ See proposed amendments to Rule 314 of Regulation S-T and
Form ABS-15G and proposed new Rule 15Ga-2. New Rule 15Ga-2 would be
codified at 17 CFR 240.15Ga-2.
\511\ See proposed new Rule 17g-10 and Form ABS Due Diligence-
15E. New Rule 17g-10 would be codified at 17 CFR 240.17g-10 and Form
ABS Due Diligence 15E would be identified in the Code of Federal
Regulation at 17 CFR 249b.400.
\512\ See proposed new paragraph (a)(2) of Rule 17g-7.
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Before discussing the proposals to implement Sections 15E(s)(4)(A)
through (C), the Commission notes the provisions of Section 15E(s)(4)
raise two fundamental questions: (1) How will a provider of third-party
due diligence services know the identities of the NRSROs producing
credit ratings to which its services relate (particularly NRSROs
producing unsolicited credit ratings); and (2) when must the
certification be provided to the NRSROs? Accordingly, the Commission is
requesting comment on these questions in order to consider further
guidance or rulemaking to better determine how a provider of third-
party due diligence services can comply with the requirement in Section
15E(s)(4)(B) of the Exchange Act.\513\
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\513\ 15 U.S.C. 78o-7(s)(4)(B).
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Request for Comment
The Commission generally requests comment on all aspects of Section
15E(s)(4)(B) of the Exchange Act. The Commission also seeks comment on
the following:
1. How would a provider of third-party due diligence services
identify the NRSROs producing credit ratings to which the due diligence
services relate? For example, would it be sufficient for the provider
of third-party due diligence services to contractually require issuers
and underwriters that employ it to provide these services to identify
the NRSROs engaged by the issuer or underwriter to produce credit
ratings for the Exchange Act-ABS and to identify any other NRSROs the
issuers and underwriters have notice are producing unsolicited credit
ratings for the Exchange Act-ABS? Would issuers and underwriters agree
to such contractual terms or would they use a provider of third-party
due diligence services that does not demand such terms? Even if issuers
and underwriters agree to such contractual terms, would they know the
identity of every NRSRO producing a credit rating for the Exchange Act-
ABS, particularly NRSROs producing unsolicited credit ratings? Would an
appropriate mechanism for providing the certifications to all NRSROs
producing a credit rating for the Exchange Act-ABS be to disclose it
with the information required by paragraph (a)(3) of Rule 17g-5 (which
requires, among other things, the issuer or underwriter to make the
information provided to an NRSRO hired to produce a credit rating for a
structured finance product such as an Exchange Act-ABS available to any
other NRSRO)? \514\
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\514\ 17 CFR 240.17g-5(a)(3).
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2. In the case where an NRSRO (as opposed to the issuer or
underwriter) employs the provider of third-party due diligence
services, how would the NRSRO know of any other NRSROs that are
producing credit ratings to which the due diligence services relate and
provide the identities of such NRSROs to the provider of the third-
party due diligence services? If paragraph (a)(3) of Rule 17g-5 would
be an appropriate mechanism for providing the certifications to all
NRSROs producing a credit rating for the Exchange Act-ABS, could the
hired NRSRO obtain a representation from the issuer or underwriter that
it would make any certifications received by the NRSRO available to
other NRSROs through the process by which the issuer or underwriter
makes the information required by paragraph (a)(3) of Rule 17g-5
available to other NRSROs?
3. Should there be some type of centralized database where NRSROs
producing credit ratings for an Exchange Act-ABS identify themselves
and which would be deemed constructive notice to any provider of third-
party due diligence services that is providing services related to the
Exchange Act-ABS? If so, should the Commission administer this
centralized database or should the issuers and underwriters, providers
of third-party due diligence services, NRSROs, or users of credit
ratings administer this database?
4. Should there be a centralized database where a provider of
third-party due diligence services submits its certification for
publication, and should submitting the certification to such a database
be deemed constructive receipt by an NRSRO producing a credit rating
for an Exchange Act-ABS to which the due diligence services described
in the certification relate? Should this database also be the mechanism
by which issuers and underwriters make publicly available, pursuant to
the requirement in Section 15E(s)(4)(A) of the Exchange Act, the
findings and conclusions of any third-party due diligence report
obtained by the issuer or underwriter? If so, should the Commission
administer this centralized database or should the issuers and
underwriters, providers of third-party due diligence services, NRSROs,
or users of credit ratings administer this database? For example,
should the certification be furnished or filed on the Commission's
EDGAR system?
5. Should there be a reasonableness test in terms of assessing
whether the provider of third-party due diligence services submitted
the certification to all NRSROs required to receive the certification?
For example, should the provider of third-party due diligence services
be required to provide the certification to all NRSROs it knows or
reasonably should know are producing a credit rating for which its
services relate?
6. How soon after the provider of third-party due diligence
services completes its review should the certifications be provided to
all NRSROs required to receive it? For example, should the
certification be provided ``promptly'' or within 24 hours, 2 business
days, 10 business days, or some other period of time?
7. Should the provider of third-party due diligence services be
required to provide the certification to all required NRSROs at the
same time so that no single NRSRO has the benefit of using the
certification before the other NRSROs that are required to receive it?
How would such a requirement be implemented and enforced in practice?
8. Should the requirement to provide the certification to all
NRSROs required to receive it sunset after some period of time after
the due diligence services are completed such as 30, 60, 90, 120, 150,
180 days or some longer period? For example, should the provider of
third-party due diligence services be required to provide the
certification to any NRSRO that produces a credit rating to which its
services relate until the security matures, is called, is pre-paid, or
goes into default?
9. If the provider of third-party due diligence services is hired
to provide due diligence services with respect to an initial issuance
of securities, would it need to provide the certification at some later
time to an NRSRO that does not rate the securities initially but
produces a credit rating after the securities have been outstanding for
a period of time?
1. Proposed Rule 15Ga-2 and Amendments to Form ABS-15G
The Commission is re-proposing rules, with some revisions, to
[[Page 33467]]
implement Section 15E(s)(4)(A) of the Exchange Act, which requires that
an issuer or underwriter of any Exchange Act-ABS make publicly
available the findings and conclusions of any third-party due diligence
report obtained by the issuer or underwriter.\515\ The Commission
previously proposed to implement Section 15E(s)(4)(A) of the Exchange
Act as part of a set of rules proposed to implement Section 945 of the
Dodd-Frank Act.\516\ Under those proposals, an issuer of a registered
Exchange Act-ABS offering would have been required to disclose the
findings and conclusions of any third party engaged to perform a review
obtained by the issuer, as required by Section 15E(s)(4)(A), in the
prospectus.\517\ In the case of unregistered Exchange Act-ABS
offerings, the Commission proposed new Rule 15Ga-2.\518\ This rule
would have required an issuer of Exchange Act-ABS to file a new Form
ABS-15G to disclose the findings and conclusions of any third-party
engaged to perform a review obtained by an issuer with respect to
unregistered transactions.\519\ Proposed Rule 15Ga-2 also would have
required an underwriter of Exchange Act-ABS to file Form ABS-15G with
the same information for reports obtained by an underwriter in
registered and unregistered transactions.\520\ Finally, proposed Form
ABS-15G would have been required to be filed with the Commission on
EDGAR five business days prior to the first sale of the offering.\521\
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\515\ See 15 U.S.C. 78o-7(s)(4)(A).
\516\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, Securities Act Release No. 9150 (Oct. 13, 2010), 75 FR
64182 (Oct. 19, 2010). In the same release in which the Commission
proposed to implement Section 15E(s)(4)(A), the Commission also
proposed to implement Section 7(d) of the Securities Act (15 U.S.C.
77g(d)), as added by Public Law 111-203 Sec. 945. Section 7(d) of
the Securities Act requires the Commission to adopt rules that, with
respect to a registration statement for an asset-backed security,
will require the issuer of the security to: (1) Perform a review of
the assets underlying the asset-backed security; and (2) disclose
the nature of the review. See 15 U.S.C. 77g(d)(1) and (2). The
Commission implemented this provision by adopting new rule 17 CFR
230.193 (``Rule 193'') and amendments to 17 CFR 229.1111 (``Item
1111 of Regulation AB''). See Issuer Review of Assets in Offerings
of Asset-Backed Securities, Securities Act Release No. 9176 (Jan.
20, 2011), 76 FR 4231 (Jan. 25, 2011).
\517\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 75 FR at 64188-64190 (Oct. 19, 2010).
\518\ Id.
\519\ Id.
\520\ Id.
\521\ Id.
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With respect to these proposals, the Commission requested comment
on, among other things, whether rules implementing Section 15E(s)(4)(A)
of the Exchange Act should be part of a later rulemaking under Section
15E.\522\ Some commenters stated that Section 15E(s)(4) should be read
as a whole, and that it would be inappropriate to consider subsection
(A) alone.\523\ These commenters suggested postponing implementation of
Section 15E(s)(4)(A) until the Commission implements Section
15E(s)(4)(B), (C) and (D).\524\ These commenters argued that Rule 15Ga-
2, as proposed, would have ``construe[d] Section 15E(s)(4)(A) in a
vacuum, divorced from Congress' intent to regulate NRSROs and the
credit ratings process.'' \525\ These commenters also argued that
proposed Rule 15Ga-2 was inappropriately broad. One such commenter
suggested that Rule 15Ga-2 be modified to apply only to any third-party
due diligence report prepared for an issuer or underwriter of Exchange
Act-ABS specifically for the purpose of having the issuer or
underwriter share the report with an NRSRO issuing a credit rating for
the securities.\526\
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\522\ Id.
\523\ See comment letters from American Bar Association
(``ABA''); National Association of Bond Lawyers (``NABL'')
(responding to Issuer Review of Asset in Offerings of Asset-Backed
Securities, 75 FR 64182 (Oct. 19, 2010)). The comment letters are
available at http://sec.gov/comments/s7-26-10/s72610.shtml.
\524\ See comment letters from ABA and NABL.
\525\ See comment letters from ABA and NABL.
\526\ See comment letter from ABA.
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In January 2011, the Commission adopted rules implementing Section
7(d) of the Securities Act and, at the same time, deferred action on
implementing Section 15E(s)(4)(A).\527\ After considering the comment
letters relating to Section 15E(s)(4)(A), the Commission is re-
proposing Rule 15Ga-2 with revisions.\528\ As proposed in October 2010,
Rule 15Ga-2 would have required issuers and underwriters of Exchange
Act-ABS to file Form ABS-15G containing, or provide prospectus
disclosure with respect to, the findings and conclusions of any report
of a third-party engaged for purposes of performing a review of the
pool assets obtained by the issuer or underwriter.\529\ As noted above,
the Commission included this proposal in the context of rulemaking with
respect to issuer review of assets required by Section 7(d) of the
Securities Act.\530\
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\527\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 76 FR 4231 (Jan. 25, 2011). Although the Commission
deferred action on implementing Section 15E(s)(4)(A), the Commission
adopted, in a separate release, new Form ABS-15G to implement
Section 943 of the Dodd-Frank Act. See Disclosure for Asset-Backed
Securities Required by Section 943 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, 76 FR 4489 (Jan. 26, 2011).
\528\ See proposed new Rule 15Ga-2. The Commission also is
proposing conforming amendments to Form ABS-15G.
\529\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 75 FR at 64188-64190 (Oct. 19, 2010).
\530\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 76 FR 4231 (Jan. 25, 2011).
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After reviewing the comments, the Commission now believes that
Section 15E(s)(4)(A) of the Exchange Act, when considered in the
context of Sections 15E(s)(4)(B), (C) and (D), should be interpreted
more narrowly to relate to those provisions.\531\ Therefore, as re-
proposed, Rule 15Ga-2 would require an issuer or underwriter of any
Exchange Act-ABS that is to be rated by an NRSRO to furnish a Form ABS-
15G on the EDGAR system containing the findings and conclusions of any
third-party ``due diligence report'' obtained by the issuer or
underwriter.\532\ The rule would define ``due diligence report'' as any
report containing findings and conclusions relating to ``due diligence
services'' as defined in proposed new Rule 17g-10 discussed below in
Section II.H.2 of this release. Under the re-proposal, the disclosure
would be furnished using Form ABS-15G for both registered and
unregistered offerings of Exchange Act-ABS.\533\ Thus, unlike the
October 2010 proposal, discussed above, issuers in registered Exchange
Act-ABS offerings would not be required to include the disclosure in
their prospectuses.
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\531\ See 15 U.S.C 78o-7(s)(4)(A) through (D), which relate to
due diligence performed by third-parties with respect to Exchange
Act-ABS.
\532\ See proposed new Rule 15Ga-2 and conforming changes to
Form ABS-15G. For purposes of this rule, consistent with the
definition of ``issuer'' in proposed new Rule 17g-10, the issuer is
the depositor or sponsor that participates in the issuance of
Exchange Act-ABS. See discussion below in Section II.H.2 of this
release.
\533\ The Commission is proposing that the form be deemed
``furnished'' rather than ``filed'' for purposes of Section 18 of
the Exchange Act (15 U.S.C. 78r) and the liabilities of that
section, unless the issuer specifically states that the form be
considered ``filed'' under the Exchange Act or incorporates it by
reference into a filing under the Securities Act or the Exchange
Act.
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In addition, under the Commission's re-proposal, an issuer or
underwriter would not need to furnish Form ABS-15G if the issuer or
underwriter obtains a representation from each NRSRO engaged to produce
a credit rating for the Exchange Act-ABS that can be reasonably relied
on that the NRSRO will publicly disclose the findings and conclusions
of any third-party due diligence report obtained by the issuer or
underwriter with the publication of the credit rating five business
days prior to the first sale in the offering in an information
disclosure form generated pursuant to proposed new paragraph
[[Page 33468]]
(a)(1) of Rule 17g-7.\534\ As discussed above in Section II.G.3 of this
release, proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would
implement Section 15E(s)(3)(A)(v) of the Exchange Act by requiring an
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by the NRSRO, a description of the
information that such third party reviewed in conducting due diligence
services, and a description of the findings or conclusions of such
third-party. In addition, as discussed below in Section II.H.3 of this
release, the Commission is proposing that the certification a provider
of third-party due diligence services would need to provide to an NRSRO
producing a credit rating for an Exchange Act-ABS pursuant to Section
15E(s)(4)(B) and (C) include a summary of the findings and conclusions
of the provider of third-party due diligence services.\535\ And, as
discussed above in Section II.G.5 of this release, an NRSRO would be
required to include the certification with the publication of the
credit rating.\536\
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\534\ See 15 U.S.C. 78o-7(s)(3)(A)(v). In this context, the
Commission preliminarily believes that the term ``publicly
disclose'' means make the findings and conclusions readily available
to any users of credit ratings. Consequently, an NRSRO that agreed
to make the findings and conclusions available only to its
subscribers or prospective investors in the Exchange Act-ABS would
not satisfy this proposed requirement.
\535\ See Item 5 of proposed new Form ABS Due Diligence-15E.
\536\ See proposed new paragraph (a)(2) of Rule 17g-7.
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For these reasons, having the issuer and underwriter publicly
disclose the same information an NRSRO must, when applicable, disclose
pursuant to proposed new paragraphs (a)(1)(ii)(F) and (a)(2) of Rule
17g-7 with the publication of a credit rating would be redundant.
Moreover, as discussed earlier, potential investors in Exchange Act-ABS
may be accustomed to receiving and reviewing expected or preliminary
credit ratings issued by NRSROs prior to making an investment decision
and proposed new paragraph (a) of Rule 17g-7 would require the form and
any certifications to be included with the issuance of such credit
ratings. Therefore, the Commission believes that an effective means of
disseminating this information to investors and other users of credit
ratings would be to include it with the publication of the credit
rating. Also, because the form would contain substantial additional
information, consolidating the information in one disclosure would
benefit investors and other users of credit ratings.
As noted above, the issuer or underwriter would not need to furnish
Form ABS-15G if it obtained a representation from each NRSRO engaged to
produce a credit rating upon which the issuer or underwriter could
reasonably rely.\537\ The Commission preliminarily recognizes, however,
that there may be instances where, notwithstanding an issuer's or
underwriter's reasonable reliance on a representation by an NRSRO
engaged to produce a credit rating to publicly disclose the required
information, the NRSRO fails to make such information publicly
available in its information disclosure form pursuant to proposed Rule
17g-7(a)(1) five business days prior to the first sale in the
offering.\538\ Therefore, the Commission proposes to require that an
issuer or underwriter furnish, two business days prior to the first
sale in the offering, Form ABS-15G with the information required by
proposed Rule 15Ga-2 if the NRSRO fails to comply with its
representation to make such information publicly available in an
information disclosure form generated pursuant to proposed paragraph
(a)(1) of Rule 17g-7 five business days prior to the first sale in the
offering. Under the proposal, issuers or underwriters would be
permitted to reasonably rely on a representation by an NRSRO to meet
their obligation to publicly disclose the information required to be
provided in Form ABS-15G. However, they would continue to be
responsible for furnishing Form ABS-15G two business days prior to the
first sale in the offering if the NRSRO does not publicly disclose the
information five business days prior to the first sale in the offering.
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\537\ The issuer or underwriter would be required to provide to
the Commission, upon request, information regarding the manner in
which it obtained the representation. The Commission notes that in
most cases the NRSROs likely would have an independent obligation to
disclose the information pursuant to the proposed amendments to Rule
17g-7 and proposed new Rule 17g-10 and Form ABS Due Diligence-15E.
\538\ The NRSRO's failure to disclose the certification would be
a violation of proposed paragraph (a) of Rule 17g-7.
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This ``reasonable reliance'' provision would parallel requirements
in paragraph (a)(3) of Rule 17g-5 that require an NRSRO to obtain
certain representations from arrangers of structured finance products
that hire the NRSRO to determine a credit rating for the structured
finance product.\539\ When adopting this requirement the Commission
stated, ``The question of whether reliance was reasonable will depend
on the facts and circumstances of a given situation.'' \540\ The
Commission further stated, ``The factors relevant to this analysis
would include, but not be limited to: (1) Ongoing or prior failures by
the arranger to adhere to the representations; or (2) a pattern of
conduct by the arranger where it fails to promptly correct breaches of
its representations.'' \541\ The Commission preliminarily believes that
the same would hold true with respect to relying on the representations
from NRSROs obtained for the purposes of proposed Rule 15Ga-2.
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\539\ See 17 CFR 17g-5(a)(3); see also Amendments to Rules for
Nationally Recognized Statistical Rating Organizations, 74 FR at
63844-63850 (Dec. 4, 2009).
\540\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63847 (Dec. 4, 2009).
\541\ Id.
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The Commission notes that Rule 193, adopted to implement Section
7(d) of the Securities Act, requires issuers of registered Exchange
Act-ABS to perform a review of the pool assets underlying the asset-
backed security.\542\ This review must be designed and effected to
provide reasonable assurance that the prospectus disclosure regarding
the pool assets is accurate in all material respects.\543\ Although
third-party due diligence reports may be relevant to the review,
neither Section 7(d) of the Securities Act nor Rule 193 ties the review
to third-party due diligence reports.\544\ Rule 193 permits, though
does not require, an issuer to rely on one or more third parties to
fulfill its obligation to perform the required review.\545\
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\542\ See 17 CFR 230.193.
\543\ Id.
\544\ See 15 U.S.C. 77g(d) and 17 CFR 230.193.
\545\ Id.
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The Commission recognizes Exchange Act-ABS issuers may routinely
hire third-parties to conduct various types of reviews and believes
that issuers may employ third parties to assist in satisfying their
obligations to perform a review under Rule 193.\546\ The Commission
also recognizes that an issuer of Exchange Act-ABS may obtain a third-
party due diligence report from a third party the issuer has engaged to
assist in performing its Rule 193 review. Nonetheless, the Commission
believes that the third-party due diligence reports referenced in
Section 15E(s)(4) of the Exchange Act are not the same as the review
required by Section 7(d) of the Securities Act and Rule 193.\547\
Instead, Section 15E(s)(4) of the Exchange Act and, consequently,
proposed Rule 15Ga-2 relate to a
[[Page 33469]]
particular type of report that is relevant to the determination of a
credit rating by an NRSRO. By contrast, Section 7(d) of the Securities
Act and Rule 193 relate to a more general concept of an issuer review
of the assets underlying an Exchange Act-ABS, one aspect of which may
(or may not) include a third-party due diligence report. As a result,
the treatment of due diligence reports under proposed Rule 15Ga-2 is
not predicated on the use of third-party due diligence services to
assist with reviews under Rule 193.\548\ For these reasons, the
Commission also is proposing that Rule 15Ga-2 apply only with respect
to Exchange-Act ABS that are to be rated by an NRSRO.\549\
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\546\ The Commission also notes that an issuer may rely on
multiple third-parties to fulfill its Rule 193 review obligation,
provided the issuer complies with the requirements of Rule 193 for
each third party.
\547\ Compare 15 U.S.C. 77g(d) and 17 CFR 230.193, with 15
U.S.C. 78o-7(s)(4).
\548\ The Commission does not intend for all third-parties from
whom the issuer obtains a third-party due diligence report, as
defined in proposed Rule 15Ga-2, to be named in the registration
statement and consent to being named as an expert, in accordance
with the requirements in Rule 193, solely because an issuer files
Form ABS-15G. If the issuer's prospectus disclosure attributes the
findings and conclusions of the Rule 193 review to the third-party
from whom it obtains a third-party due diligence report, however,
the third-party would be required to be named in the registration
statement and consent to being named as an expert in accordance with
Rule 436 under the Securities Act.
\549\ See proposed new Rule 15Ga-2.
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As noted above, the disclosure required by proposed Rule 15Ga-2
would be required to be provided in Form ABS-15G. Unlike the first
proposal, the Commission now proposes to require issuers in registered
Exchange Act-ABS transactions to include the disclosure required by
proposed Rule 15Ga-2 in Form ABS-15G, rather than in the prospectus.
Whether the findings and conclusions of a third-party are part of the
Rule 193 review and, therefore, included in the prospectus disclosure
is dictated by the requirements of Rule 193 and Item 1111 of Regulation
AB.\550\ The Commission is not proposing to separately require that
disclosure provided in connection with Rule 15Ga-2 regarding any third-
party due diligence report be provided in the prospectus for a
registered offering, because the information required by proposed Rule
15Ga-2 only pertains to the findings and conclusions of a third-party
due diligence report relevant to the determination of a credit rating.
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\550\ See 17 CFR 230.193 and 17 CFR 229.1111.
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As stated above, Section 15E(s)(4)(A) applies to issuers and
underwriters of both registered and unregistered offerings of Exchange
Act-ABS. Thus, proposed Rule 15Ga-2 would apply to a municipal entity
that sponsors or issues Exchange Act-ABS (``municipal Exchange Act-
ABS'') or an underwriter of municipal Exchange Act-ABS, if the
municipal entity or underwriter of the offering obtains a third-party
due-diligence report, as defined by the proposed rule, and the
municipal Exchange Act-ABS is to be rated by an NRSRO. Since Section
15E(s)(4) relates to oversight of NRSROs, commenters to the first
proposal noted that a significant difference between municipal Exchange
Act-ABS and more typical Exchange Act-ABS is that the Municipal
Securities Rulemaking Board \551\ collects and publicly disseminates
market information and information about municipal securities issuers
and offerings on its centralized public database, the Electronic
Municipal Market Access system (``EMMA'').\552\ Consistent with
suggestions from commenters and the Commission's approach in
implementing Section 943 of the Dodd-Frank Act,\553\ the Commission
proposes to permit municipal securitizers of Exchange Act-ABS, or
underwriters in the offering, to provide the information required by
Form ABS-15G on EMMA.\554\ The Commission believes this would limit the
cost and burden on issuers and underwriters of municipal Exchange Act-
ABS subject to the new rule, as well as provide the disclosure for
investors in the same location as other disclosures regarding municipal
ABS. Since Section 15E(s)(4) relates to oversight of NRSROs and the
ratings process, the Commission preliminarily believes it is not
appropriate to exempt any particular issuers if they receive a rating
for the securities.\555\
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\551\ The MSRB, a self-regulatory organization subject to
oversight by the Commission, regulates securities firms and banks
that underwrite, trade and sell municipal securities.
\552\ See comment letters from Minnesota Housing Finance Agency,
NABL, and the National Council of State Housing Agencies (responding
to proposals in Issuer Review of Assets in Offerings of Asset-Backed
Securities, 75 FR 64182 (Oct. 19, 2010)).
\553\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR 4489 (Jan. 26, 2011).
\554\ See proposed amendments to Rule 314 of Regulation S-T. 17
CFR 232.314. A municipal securitizer is defined as a securitizer (as
that term in defined in Section 15(G)(a) of the Exchange Act (----
U.S.C. ------)) that is any State or Territory of the United States,
the District of Columbia, any political subdivision of any State,
Territory, or the District of Columbia, or any public
instrumentality of one or more States, Territories, or the District
of Columbia.
\555\ As noted earlier, the Commission is soliciting comment in
Section II.M.4.a of this release with respect Items 6 and 7 of Form
NRSRO about how certain types of obligors, securities, and money
market instruments should be classified for purposes of providing
the approximate number of credit ratings outstanding in each class
of credit rating for which an applicant is seeking registration
(Item 6) or an NRSRO is registered (Item 7). In this regard, the
Commission solicits comment on whether municipal structured finance
issuers should be classified as (1) issuers of asset-backed
securities identified in Section 15E(a)(62)(A)(iv) of the Exchange
Act as broadened to include any rated security or money market
instrument issued by an asset pool or as part of any asset-backed
securities transaction; or (2) issuers of government securities,
municipal securities, or securities issued by a foreign government
identified in Section 15E(a)(62)(A)(v) of the Exchange Act. The
Commission is requesting comment on this matter with respect to
disclosing the number of credit ratings outstanding in a particular
class of credit ratings in Form NRSRO (and potentially for purposes
of the proposed amendments to Exhibit 1 to Form NRSRO and the
disclosure of information about the histories of credit ratings
under proposed new paragraph (b) of Rule 17g-7). The Commission, in
seeking comment on these matters, is not suggesting an issuer of
municipal Exchange Act-ABS should be exempt from requirements in the
securities laws that apply to Exchange Act-ABS because it might
appropriately be classified as an issuer of government securities,
municipal securities, or securities issued by a foreign government
identified in Section 15E(a)(62)(A)(v) of the Exchange Act for
purposes of Items 6 and 7 of Form NRSRO.
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The Commission recognizes that public disclosure of information
relating to an unregistered Exchange Act-ABS offering could raise
concerns regarding the reliance by an issuer or underwriter on the
private offering exemptions and safe harbors under the Securities
Act.\556\ As noted above, the Commission intends for Form ABS-15G to be
used for both registered and unregistered ABS offerings. The Commission
is of the view that issuers and underwriters can disclose information
required by Rule 15Ga-2 without jeopardizing reliance on those
exemptions and safe harbors, provided the only information made
publicly available on the form is that which is required by the
proposed rule, and the issuer does not otherwise use Form ABS-15G to
offer or sell securities in a manner that conditions the market for
offers or sales of its securities.\557\
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\556\ See 15 U.S.C. 77d(2), 17 CFR 230.144A, and 17 CFR 230.501-
508.
\557\ Furnishing proposed Form ABS-15G would not foreclose the
reliance of an issuer on the private offering exemption in the
Securities Act and the safe harbor for offshore transactions from
the registration provisions in Section 5. 15 U.S.C. 77e.
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The Commission is proposing that the disclosures--whether made by
the engaged NRSROs or the issuer or underwriter--be made five business
days prior to the first sale of the offering. Since the form an NRSRO
would be required to include with a credit rating pursuant to proposed
new paragraph (a) of Rule 17g-7 would not be required to be filed with
the Commission, the Commission believes it would be consistent to
permit issuers and underwriters to furnish, rather than file, Form ABS-
15G. The Commission proposes that Form ABS-15G be signed by the senior
officer of the depositor in charge of securitization, if the form were
provided to include the findings and conclusions of a third-party hired
by the
[[Page 33470]]
issuer. The Commission believes that requiring the senior officer of
the depositor in charge of securitization to sign the form is
consistent with other signature requirements for filings relating to
Exchange Act-ABS.\558\ If the form included the findings and
conclusions of a third-party engaged by the underwriter, then the form
would be signed by a duly authorized officer of the underwriter. The
Commission believes that requiring Form ABS-15G be signed by a duly
authorized officer of the underwriter would provide an incentive for
the person who signs the form to review it for accuracy.
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\558\ See, e.g., signature requirement for Form 10-K (17 CFR
249.312). It is also consistent with the Commission's proposed
signature requirements for the registration statements for offerings
of asset-backed securities. See Asset-Backed Securities, 75 FR 23328
(May 3, 2010).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-15G.
The Commission also seeks comment on the following:
1. Is proposed Rule 15Ga-2 appropriate? Is the proposed definition
of ``third-party due diligence report'' appropriate? Is there an
alternative definition that would be consistent with the requirements
of Section 15E(s)(4)?
2. The Commission is proposing to require disclosure regarding the
findings and conclusions of third-party due diligence reports for both
registered and unregistered transactions. Is there any reason Section
15E(s)(4)(A) of the Exchange Act should not apply to both registered
and unregistered Exchange Act-ABS transactions? If the requirement
applies to both registered and unregistered transactions, should the
universe of Exchange Act-ABS offerings that would be subject to the
requirement be defined, as proposed, as an offering of Exchange Act-
ABS, as that term is defined in Section 3(a)(77) of the Exchange Act?
3. Proposed Rule 15Ga-2 would apply only if the Exchange Act-ABS is
to be rated by a NRSRO. Is that appropriate? \559\ Why or why not?
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\559\ For example, Fannie Mae and Freddie Mac are government
sponsored enterprises (``GSEs'') that purchase mortgage loans and
issue or guarantee mortgage-backed securities. Mortgage-backed
securities issued or guaranteed by these GSEs have been, and
continue to be, exempt from registration under the Securities Act
and reporting requirements under Sections 13 or 15 of the Exchange
Act. These securities have not been, and are not currently, rated by
credit rating agencies.
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4. Should the Commission exempt any issuers, underwriters or other
parties from this requirement? As proposed, Rule 15Ga-2 would apply to
issuers and underwriters of Exchange Act-ABS that are exempted
securities as defined in Section 3(a)(12) of the Exchange Act,
including government securities and municipal securities. Should
issuers or underwriters of such exempted securities be exempt from this
provision? \560\ Is the proposed accommodation for municipal Exchange
Act-ABS appropriate?
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\560\ Exchange Act ``exempted securities'' include government
securities and municipal securities, as defined under the Exchange
Act. For example, mortgage-backed securities issued by the
Government National Mortgage Association are fully modified pass-
through securities guaranteed by the full faith and credit of the
United States government. See http://www.ginniemae.gov/.
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5. Is the proposal to not require the issuer or underwriter to
furnish Form ABS-15G if it obtains the necessary representations from
the NRSROs engaged to produce credit ratings for the Exchange Act-ABS
appropriate? For example, would investors and other users of credit
ratings benefit from having issuers and underwriters and NRSROs
disclose the findings and conclusions of the provider of third-party
due diligence services? In addition, would NRSROs engaged to determine
a credit rating for an Exchange Act-ABS agree to make the disclosure?
Could potential concerns among NRSROs about making the disclosure be
addressed by permitting them to rely on the disclosure the provider of
third-party due diligence services would need to make about the
findings and conclusions of the review in Item 5 of proposed new Form
Due Diligence-15E discussed below in Section II.H.3 of this release?
Under proposed Rule 15Ga-2, an issuer or underwriter would not be
required to furnish Form ABS-15G if it receives a representation from
an NRSRO that can be reasonably relied upon that the NRSRO will
publicly disclose the required information five business days prior to
the first sale in the offering in an information disclosure form
generated pursuant to Rule 17g-7(a)(1). Should the Commission, as
proposed, also require an issuer or underwriter to furnish Form ABS-15G
if the NRSRO fails to publicly disclose in an information disclosure
form the required disclosure five business days prior to the first sale
in the offering? If so, should the issuer or underwriter be required,
as proposed, to furnish Form ABS-15G two business days prior to the
first sale in the offering? Should the requirement instead be three
days before? Alternatively, should the Commission require that the
issuer or underwriter wait another five business days after furnishing
Form ABS-15G before the first sale? If not, how long in advance of the
first sale should issuers or underwriters be required to furnish Form
ABS-15G? Should an issuer or underwriter not be required to furnish
Form ABS-15G two business days prior to the first sale in the offering
if the NRSRO fails to publicly disclose the required information five
business days prior to the first sale, but does publicly disclose the
information on the fourth or third business day prior to the first sale
since an issuer's or underwriter's furnishing in that case would result
in duplicative disclosure? If so, how could an NRSRO be properly
incentivized to publicly disclose the required information five
business days prior to the first sale in the offering?
6. Does the proposal to require an issuer or underwriter to furnish
Form ABS-15G in the event that the NRSRO fails to fulfill its
representation offset the effectiveness or benefit of the proposal to
permit issuers and underwriters to reasonably rely on a representation
from an NRSRO?
7. Under the proposal, the issuer or underwriter would be required
to provide to the Commission, upon request, information regarding the
manner in which it obtained the representation of the NRSRO engaged to
produce credit ratings. Are there any other provisions that should be
added to ensure compliance with the proposal not to require the issuer
or underwriter to furnish Form ABS-15G if it obtains the necessary
representations from the NRSRO?
8. Are there other appropriate means of making the findings and
conclusions of third-party due diligence reports ``publicly available''
as required by Section 15E(s)(4)(A) of the Exchange Act? Is furnishing
information regarding the findings and conclusions of the report of the
provider of third-party due diligence services on proposed Form ABS-15G
on EDGAR (except with respect to offerings of municipal Exchange Act-
ABS) an appropriate way for issuers in unregistered offerings and for
underwriters in registered and unregistered offerings to make this
information publicly available? Should the Form ABS-15G be required to
be filed instead?
9. Would the proposed requirement that Form ABS-15G be furnished
five business days prior to first sale provide investors with
sufficient time to review the findings and conclusions contained
therein? Would it provide NRSROs with sufficient time to take the
included information into account in determining a rating? If not, what
would be a more appropriate deadline and why? Are five business days
also appropriate in
[[Page 33471]]
unregistered offerings? Is there reason to require a different number
of days in unregistered offerings?
10. Is the proposed signature requirement for Form ABS-15G
appropriate? Is it necessary? Conversely, are there other appropriate
individuals that are better suited to sign the form?
11. Should issuers of registered Exchange Act-ABS offerings be
required to furnish the information required by proposed Rule 15Ga-2 on
Form ABS-15G and not be required to provide the information in a
prospectus that is filed with the Commission, as proposed? Why or why
not?
2. Proposed New Rule 17g-10
As noted above, Section 15E(s)(4)(C) of the Exchange Act provides
that the Commission shall establish the appropriate format and content
for the written certifications required under Section 15E(s)(4)(B), to
ensure that providers of due diligence services have conducted a
thorough review of data, documentation, and other relevant information
necessary for an NRSRO to provide an accurate rating for an Exchange
Act-ABS.\561\ The Commission preliminarily believes providers of third-
party due diligence services most commonly are hired by issuers and
underwriters to perform reviews of pools of mortgages that will be
securitized into an RMBS; accordingly, the following discussion of
proposed Rule 17g-10 and Form ABS Due Diligence-15E centers on
RMBS.\562\ The proposed rule and form, however, would apply to all
Exchange Act-ABS. Generally, in the RMBS context, the provider of
third-party due diligence services is hired by the entity (e.g., the
underwriter, sponsor, or depositor) purchasing the pool of mortgage
loans for the purpose of securitizing them.\563\ In conducting a
review, the provider of third-party due diligence services analyzes a
sample (for example, 25%) of the loans in the pool for one or more of
the following purposes: (1) To assess the quality of the loan-by-loan
data in the electronic file (``loan-tape'') that aggregates the
information for the pool by comparing the information on the loan tape
for each loan in the sample with the information contained on the hard-
copy documents in the loan file; (2) to determine whether each loan in
the sample adheres to the underwriting guidelines of the loan
originator; (3) to assess the validity of the appraised value of the
property indicated on the loan tape that collateralizes each loan in
the sample; and (4) to determine whether the originator complied with
Federal, state, and local laws in making each loan in the sample. The
NRSROs most active in rating RMBS have incorporated requirements for
the engagement of providers of third-party due diligence services by
the entities requesting such ratings (for example, the underwriter or
sponsor of the RMBS) into their procedures and methodologies for
determining RMBS credit ratings.\564\ Moreover, the procedures and
methodologies of these NRSROs prescribe the minimum scope and manner of
the review of the provider of third-party due diligence services
necessary to obtain a credit rating for the RMBS, including the minimum
sample size of the loans to be selected from the pool.\565\
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\561\ See 15 U.S.C. 78o-7(s)(4)(C).
\562\ See, e.g., Testimony of Vicki Beal, Senior Vice President,
Clayton Holdings, before the Financial Crisis Inquiry Commission
(Sept. 23, 2010).
\563\ Id.
\564\ See, e.g., US RMBS Ratings Criteria, Fitch, Inc.
(``Fitch'') (Dec. 3, 2009) (``In addition to Fitch's originator/
issuer review and ResiLogic loan-level asset analysis of the
mortgage pool, Fitch will require third-party loan-level reviews on
all residential mortgage pools that Fitch is asked to rate. The
reviews will be conducted by a ``due diligence'' company (review
company) prior to Fitch providing a rating on the transaction.'');
Criteria for Evaluating Independent Third-Party Loan Level Reviews
for US RMBS, Moody's Investors Service, Inc. (``Moody's'') (Nov. 24,
2008) (``Moody's will not rate a transaction unless it has received
a report from the third-party review firm as to the TPR scope,
procedure and findings. The report must include a narrative summary
of the review and an initial TPR findings report.''); Incorporating
Third-Party Due Diligence Results Into The U.S. RMBS Rating Process,
Standard & Poor's Ratings Services (``S&P'') (Nov. 25, 2008)
(``Standard & Poor's believes that using third-party due diligence
results in our rating analysis will increase transparency and
strengthen the rating process. Our due diligence review ratings
criteria will be effective Dec. 1, 2008, and are intended to
increase our insight into the quality and validity of the
information used to originate the mortgage loans pooled into
securities.'').
\565\ For example, for established originators and loan
programs, Fitch requires the randomly selected minimum sample size
to be the larger of 200 loans or 10% of the pool for prime loans and
the larger of 400 loans or 20% of the pool for Alt-A/subprime and
all other product types. Moreover, if originators or their loan
programs have had less than two years of performance history, Fitch
requires that the sample size should be doubled. Moody's defines its
minimum sample size through statistical techniques. Specifically,
Moody's requires that the sample size must not be less than that
computed using a 95% confidence level, a 5% precision level, and an
assumed error rate equal to the higher of the historic error rate
for the originator or a Minimum Assumed Error Rate. S&P requires a
sample that is the greater of either the number of loans needed for
a statistically valid sample, or a 10% random sample for subprime
and 5% sample for prime. At a minimum, S&P states that the number of
loans in the sample should be 200 for subprime, and 100 for prime.
S&P defines a statistically valid sample as the number of loans
based on a 5% one-tailed level of significance with a 2% level of
precision. S&P also expects that the number of loans in the sample
also will be a function of an estimate of an error rate.
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To implement the rulemaking mandated by Section 15E(s)(4)(C) of the
Exchange Act, the Commission is proposing new Rule 17g-10 and related
Form ABS Due Diligence-15E.\566\ Proposed new Rule 17g-10 would contain
three paragraphs: (a), (b) and (c).\567\ Proposed paragraph (a) would
provide that the written certification required pursuant to Section
15E(s)(4)(B) of the Exchange Act must be on Form ABS Due Diligence-
15E.\568\ In other words, a provider of third-party due diligence
services would need to use Form ABS Due Diligence-15E to meet the
requirement in Section 15E(s)(4)(B) of the Exchange Act.\569\
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\566\ See proposed new Rule 17g-10 and new Form ABS Due
Diligence-15E.
\567\ See proposed paragraphs (a), (b) and (c) of Rule 17g-10.
\568\ See proposed paragraph (a) of new Rule 17g-10.
\569\ See 15 U.S.C. 78o-7(s)(4)(B) and proposed paragraph (a) of
new Rule 17g-10.
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Proposed paragraph (b) of new Rule 17g-10 would provide that the
written certification must be signed by an individual who is duly
authorized by the person providing the third-party due diligence
services to make such a certification.\570\ This proposal is designed
to ensure that the person executing the certification on behalf of the
provider of third-party due diligence services has responsibilities
that will make the person aware of the basis for the information being
provided in the form. This proposed requirement parallels paragraph (b)
of Rule 17g-3, which requires an NRSRO to attach to the financial
reports required by that rule a signed statement by a duly authorized
person associated with the NRSRO stating, among other things, that the
person has responsibility for the financial reports.\571\
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\570\ See proposed paragraph (b) of Rule 17g-10.
\571\ See 17 CFR 240.17g-3(b).
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Proposed paragraph (c) of new Rule 17g-10 would contain four
definitions to be used for the purposes of Section 15E(s)(4)(B) and
Rule 17g-10.\572\ Proposed paragraph (c)(1) would define the meaning of
``due diligence services.'' \573\ The Commission preliminarily believes
such a definition is necessary because, while the requirements of
Section 15E(s)(4)(B) are triggered, among other things, by providing
due diligence services, the Dodd-Frank Act does not define the type of
activities that constitute ``due diligence services'' in the Exchange
Act-
[[Page 33472]]
ABS context.\574\ Consequently, the Commission preliminarily believes a
definition would provide guidance to those entities providing due
diligence services as to when the requirements of the statute and
proposed new Rule 17g-10 would apply. In addition, a definition could
help avoid overly broad interpretations of the meaning of ``due
diligence services'' that cause entities not providing due diligence
services to needlessly provide certifications to NRSROs.
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\572\ See proposed paragraph (c) of new Rule 17g-10 and 15
U.S.C. 78o-7(s)(4)(B).
\573\ See proposed paragraph (c)(1) of new Rule 17g-10.
\574\ See 15 U.S.C. 78o-7(s)(4)(B).
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The Commission intends the definition of ``due diligence services''
in the Exchange Act-ABS context to cover services provided by entities
typically considered to be providers of third-party due diligence
services in the securitization market and does not intend it to cover
every type of person that might perform some type of diligence in the
offering process. As discussed below, the Commission believes that the
scope of Section 15E(s)(4)(A) is intended to address third-party due
diligence reports obtained by issuers or underwriters from these
specialized providers of due diligence services that are relevant to
the determination of a credit rating for an Exchange Act-ABS by an
NRSRO.
The Commission preliminarily believes, as discussed above, there
are four categories of reviews undertaken by entities commonly
understood as providers of third-party due diligence services for
issuances of RMBS that NRSROs have deemed relevant for determining
credit ratings for such Exchange Act-ABS.\575\ Consequently, the
proposed definition would identify each of the four categories. In
addition, because the Commission's understanding of due diligence
services largely is based on such services as applied to pools of
mortgage loans, the Commission is proposing a catchall component to the
proposed definition.\576\ The proposed catchall would be designed to
apply to due diligence services used for pools of other asset classes
(e.g., commercial loans, corporate loans, student loans, or credit card
receivables) to the extent that providers of third-party due diligence
services currently provide or in the future begin providing due
diligence services with respect to other asset classes and those
services, because of the different nature of the assets, do not fall
into one of the four other categories.
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\575\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009),
Criteria for Evaluating Independent Third-Party Loan Level Reviews
for US RMBS, Moody's (Nov. 24, 2008), Incorporating Third-Party Due
Diligence Results Into The U.S. RMBS Rating Process, S&P (Nov. 25,
2008).
\576\ See proposed paragraph (c)(1)(v) of new Rule 17g-10.
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Under the Commission's proposed definition of ``due diligence
services,'' an entity would be deemed to have provided ``due diligence
services'' if it engaged in a review of the assets underlying an
Exchange Act-ABS for the purpose of making findings with respect to any
one of the five types of activities identified in proposed paragraphs
(c)(1)(i) through (v) of new Rule 17g-10 (i.e., the components of the
proposed definition would be disjunctive).\577\ The first category of
``due diligence service'' would be identified in proposed paragraph
(c)(1)(i) of new Rule 17g-10 as a review of the assets underlying an
Exchange Act-ABS for the purpose of making findings with respect to the
quality or integrity of the information or data about the assets
provided, directly or indirectly, by the securitizer or originator of
the assets.\578\ This type of review could entail comparing the data on
loan-tape with the data on the hard-copy documentation in an underlying
sampled loan file to verify that the loan-tape data matches and
correctly represents the content of the loan file under review.\579\
The provider of due diligence services would need to note any
differences (exceptions) between the loan-tape data and the information
in the loan file. This type of review also could entail verifying that
the loan-tape contains all the information about the underlying assets
the NRSRO requires for the purpose of determining a credit rating and
whether that information is presented in the format required by the
NRSRO.\580\ For example, some NRSROs may specify items of data (``data
fields'') about a mortgage loan that must be included on the loan tape
for an RMBS such as occupancy status, property type, loan purpose,
documentation type, current FICO score of the borrower, combined
original loan to value ratio, total debt-to-income ratio, and zip code
of the residence.\581\
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\577\ See proposed paragraphs (c)(1)(i)-(v) of new Rule 17g-10.
\578\ See proposed paragraphs (c)(1)(i) of new Rule 17g-10.
\579\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009).
\580\ Id.
\581\ See, e.g., Incorporating Third-Party Due Diligence Results
Into The U.S. RMBS Rating Process, S&P (Nov. 25, 2008).
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The second category of ``due diligence service'' would be
identified in proposed paragraph (c)(1)(ii) of new Rule 17g-10 as a
review of the assets underlying an Exchange Act-ABS for the purpose of
making findings with respect to whether the origination of the assets
conformed to stated underwriting or credit extension guidelines,
standards, criteria, or other requirements.\582\ This type of review
could entail reviewing whether a sampled loan meets the originator's
underwriting guidelines or, if not, that the originator provided a
reasonable and documented exception to support the decision to make the
loan.\583\ This type of review also could entail how the originator
verified information in a sampled loan underlying an RMBS such as the
borrower's occupancy status with respect to the residence (e.g.,
primary residence, second home, or rental property), the borrower's
income, the borrower's assets, and the borrower's employment
status.\584\
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\582\ See proposed paragraphs (c)(1)(ii) of new Rule 17g-10.
\583\ See, e.g., Criteria for Evaluating Independent Third-Party
Loan Level Reviews for US RMBS, Moody's (Nov. 24, 2008).
\584\ See, e.g., Incorporating Third-Party Due Diligence Results
Into The U.S. RMBS Rating Process, S&P (Nov. 25, 2008).
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The third category of ``due diligence service'' would be identified
in proposed paragraph (c)(1)(iii) of new Rule 17g-10 as a review of the
assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to the value of collateral securing such
assets.\585\ This type of review could entail analyzing how the
originator verified the value of the asset. For example, for an RMBS,
an NRSRO might require that the review consider the quality of the
appraiser of the property and the quality of the appraisal.\586\ This
could include reviewing whether the appraiser used a valuation
model.\587\ It also could require the provider of third-party due
diligence services to separately use a valuation model if the reviewer
believes that the original appraised value of the property is less than
the value presented by the originator.\588\
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\585\ See proposed paragraphs (c)(1)(iii) of new Rule 17g-10.
\586\ See, e.g., Criteria for Evaluating Independent Third-Party
Loan Level Reviews for US RMBS, Moody's (Nov. 24, 2008).
\587\ Id.
\588\ Id.
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The fourth category of ``due diligence service'' would be
identified in proposed paragraph (c)(1)(iv) of new Rule 17g-10 as a
review of the assets underlying an Exchange Act-ABS for the purpose of
making findings with respect to whether the originator of the assets
complied with Federal, state, or local laws or regulations.\589\ This
type of review could entail--with respect to an RMBS--analyzing legal
documentation
[[Page 33473]]
in a sampled loan file to verify the loan was made in conformance with,
for example, with ``truth-in-lending'' regulations such as Regulation
Z.\590\
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\589\ See proposed paragraphs (c)(1)(iv) of new Rule 17g-10.
\590\ See 12 CFR 226.1 et seq.
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The fifth category of ``due diligence services''--the catchall--
would be identified in proposed paragraph (c)(1)(v) of new Rule 17g-10
as a review of the assets underlying an Exchange Act-ABS for the
purpose of making findings with respect to any other factor or
characteristic of such assets that would be material to the likelihood
that the issuer of the Exchange Act-ABS will pay interest and principal
according to its terms and conditions.\591\ The Commission
preliminarily believes that findings relevant to whether the issuer of
the Exchange Act-ABS will pay interest and principal according to its
terms and conditions (i.e., not default) would be relevant to
determining a credit rating given that the statutory definition of
``credit rating'' is ``an assessment of the creditworthiness of an
obligor as an entity or with respect to specific securities or money
market instruments.'' \592\ The Commission also preliminarily believes
that reviews of the assets underlying an Exchange Act-ABS that are
designed to generate findings that would not be relevant to determining
a credit rating would be outside the scope of proposed catchall
definition and, therefore, outside the scope of Section 15E(s)(4)(B) of
the Exchange Act and Rule 17g-10.\593\
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\591\ See proposed paragraphs (c)(1)(v) of new Rule 17g-10.
\592\ See 15 U.S.C. 78c(60).
\593\ See 15 U.S.C. 78o-7(s)(4)(B) and proposed new Rule 17g-10.
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Proposed paragraph (c)(2) of new Rule 17g-10 would define the term
``issuer'' as including a sponsor, as defined in 17 CFR 229.1011, or
depositor, as defined in 17 CFR 229.1011, that participates in the
issuance of an Exchange Act-ABS.\594\ The Commission preliminarily
believes this definition is necessary because the requirements of
Section 15E(s)(4)(B) of the Exchange Act are triggered, among other
things, when third-party due diligence services are employed by an
``issuer.'' \595\ The term ``issuer'' could be interpreted by entities
subject to Section 15E(s)(4)(B) of the Exchange Act and new Rule 17g-10
as meaning the legal entity issuing the Exchange Act-ABS. However, the
issuer of an Exchange Act-ABS typically is a passive entity such as a
statutory trust. Consequently, a sponsor initiates an Exchange Act-ABS
transaction by selling or pledging to a specially created issuing
entity a group of financial assets that the sponsor either has
originated itself or has purchased in the secondary market. In some
instances, the transfer of assets is a two-step process: the financial
assets are transferred by the sponsor first to an intermediate entity,
the depositor, and then the depositor transfers the assets to the
issuing entity for the particular transaction. Because the issuer is
passive, the sponsor, depositor, or underwriter would be more likely to
employ a provider of third-party due diligence services. Consequently,
if the term ``issuer'' were narrowly interpreted to mean the passive
entity, the objectives of Section 15E(s)(4)(B) of the Exchange Act
potentially could be undermined in that the requirement to make the
disclosure would not be triggered.
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\594\ See proposed paragraph (c)(2) of new Rule 17g-10. The
Commission interprets the term ``issuer'' in Section 15G(a)(3)(A) of
the Exchange Act to refer to the depositor of an asset-backed
security. This treatment is consistent with the Commission's
historical regulatory approach to that term, including the
Securities Act and the rules promulgated under the Securities Act
and the Exchange Act. See, e.g., 17 CFR 230.191 and 17 CFR 240.3b-
19.
\595\ See 15 U.S.C. 78o-7(s)(4)(B).
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The Commission is proposing to define the terms ``originator'' and
``securitizer'' in proposed paragraphs (c)(3) and (c)(4), respectively,
of new Rule 17g-10 because the proposed definition of ``due diligence
services'' in proposed paragraph (c)(1) would use those terms.\596\ The
Commission preliminarily believes defining these terms would provide
greater clarity as to the proposed meaning of ``due diligence
services.'' Moreover, Section 941 of the Dodd-Frank Act added new
Section 15G of the Exchange Act.\597\ Section 15G(a) contains
definitions of ``originator'' and ``securitizer'' to be used for the
purposes of that section.\598\ Consequently, there are existing
definitions the Commission can utilize for the purposes of new Rule
17g-10. For these reasons, proposed paragraph (c)(3) of new Rule 17g-10
would provide that the term ``originator'' has the same meaning as in
Section 15G of the Exchange Act (15 U.S.C. 78o-9).\599\ Similarly,
proposed paragraph (c)(4) of new Rule 17g-10 would provide that the
term ``securitizer'' has the same meaning as in Section 15G of the
Exchange Act (15 U.S.C. 78o-9).\600\
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\596\ See proposed paragraphs (c)(3) and (c)(4) of new Rule 17g-
10; see also proposed paragraphs (c)(1)(i) and (iv) using the term
``originator'' and proposed paragraph (c)(1)(i) using the term
``securitizer.''
\597\ See Public Law 111-203 Sec. 941 and 15 U.S.C. 78o-9.
\598\ See 15 U.S.C. 78o-9(a)(3) and (4).
\599\ See proposed paragraph (c)(3) of new Rule 17g-10. Section
15G(a)(4) of the Exchange Act defines the term ``originator'' to
mean ``a person who--(A) through the extension of credit or
otherwise, creates a financial asset that collateralizes and asset-
backed security; and (B) sells an asset directly or indirectly to a
securitizer.'' See 15 U.S.C. 78o-9(a)(4).
\600\ See proposed paragraph (c)(4) of new Rule 17g-10. Section
15G(a)(3) of the Exchange Act defines the term ``securitizer'' to
mean: ``(A) an issuer of an asset-backed security; or (B) a person
who organizes and initiates an asset-backed securities transaction
by selling or transferring assets, either directly or indirectly,
including through an affiliate, to the issuer.'' See 15 U.S.C. 78o-
9(a)(3).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new Rule 17g-10. The Commission also seeks comment on the
following:
1. The Commission understands that ``provider of third-party due
diligence services'' is a phrase used as a term of art in the
securitization market, and the proposed rules are intended to apply to
those entities that are commonly identified by that term. Would the
proposed definition of ``due diligence services'' provide sufficient
guidance to those entities providing due diligence services as to when
the requirements of the self-executing provision in Section
15E(s)(4)(B) and proposed new Rule 17g-10 would apply? How could the
proposal be modified to provide clearer guidance?
2. Should, as proposed, the definition of ``due diligence
services'' apply to Exchange Act-ABS only or should it apply more
broadly to structured finance products? If it should apply more
broadly, what types of structured finance products that are not
Exchange Act-ABS should the definition include within its scope? In
addition, are providers of third-party due diligence services used with
respect to these types of structured finance products? If so, explain
how the results of those services are relevant to the determination of
a credit rating?
3. Does the first category of ``due diligence service'' identified
in proposed paragraph (c)(1)(i) of new Rule 17g-10 (i.e., a review of
the assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to the quality or integrity of the information or
data about the assets provided, directly or indirectly, by the
securitizer or originator of the assets) appropriately describe a form
of due diligence service for Exchange Act-ABS that is provided to
issuers or underwriters by a provider of third-party due diligence
services? For example, is this component of the definition too broad or
narrow? If so, how should this component of the definition be refined?
Alternatively, should it be omitted from the definition as reflecting
activity that is not a third-party due diligence service?
[[Page 33474]]
4. Does the second category of ``due diligence service'' identified
in proposed paragraph (c)(1)(ii) of new Rule 17g-10 (i.e., a review of
the assets underlying Exchange Act-ABS for the purpose of making
findings with respect to whether the origination of the assets
conformed to underwriting or credit extension guidelines, standards,
criteria or other requirements) appropriately describe a form of due
diligence service for Exchange Act-ABS that is provided to issuers or
underwriters by a provider of third-party due diligence services? For
example, is this component of the definition too broad or narrow? If
so, how should this component of the definition be refined?
Alternatively, should it be omitted from the definition as reflecting
activity that is not a third-party due diligence service?
5. Does the third category of ``due diligence service'' identified
in paragraph (c)(1)(iii) of new Rule 17g-10 (i.e., a review of the
assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to the value of collateral securing such assets)
appropriately describe a form of due diligence service for Exchange
Act-ABS that is provided to issuers or underwriters by a provider of
third-party due diligence services? For example, is this component of
the definition too broad or narrow? If so, how should this component of
the definition be refined? Alternatively, should it be omitted from the
definition as reflecting activity that is not a third-party due
diligence service?
6. Does the fourth category of ``due diligence service'' identified
in paragraph (c)(1)(iv) of new Rule 17g-10 (i.e., a review of the
assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to whether the originator of the assets complied
with Federal, state or local laws or regulations) appropriately
describe a form of due diligence service for Exchange Act-ABS that is
provided to issuers or underwriters by a provider of third-party due
diligence services? For example, is this component of the definition
too broad or narrow? If so, how should this component of the definition
be refined? Alternatively, should it be omitted from the definition as
reflecting activity that is not a third-party due diligence service?
7. Would the catchall component of the definition of ``due
diligence services'' identified in proposed paragraph (c)(1)(v) of new
Rule 17g-10 (i.e., a review of the assets underlying an Exchange Act-
ABS for the purpose of making findings with respect to any other factor
or characteristic of such assets that would be material to the
likelihood that the Exchange Act-ABS will pay interest and principal
according to its terms and conditions) adequately capture existing or
future third-party due diligence services not identified in proposed
paragraphs (c)(1)(i) through (iv) of new Rule 17g-10? For example, is
this component of the definition too broad or narrow? If so, how should
this component of the definition be refined? Alternatively, should it
be omitted from the definition?
8. Are there other types of due diligence services for Exchange
Act-ABS provided to issuers or underwriters by a provider of third-
party due diligence services that are not identified in the
Commission's proposed definition that should be included? For example,
would the proposed definitions capture third-party due diligence
services provided with respect to an Exchange Act-ABS after it has been
issued? If proposed definitions would not capture due diligence
services provided post-issuance or any other services commonly
understood as third-party due diligence services, describe such
services and provide suggested rule text for how they could be
incorporated into the definition. Also, provide an explanation as to
how such services would be relevant to the determination of a credit
rating.
9. Would the inclusion of the proposed definition of ``issuer'' in
new Rule 17g-10 identify the types of entities that should trigger the
requirements of the proposed rule? For example, is the proposed
definition too broad or narrow? If so, how should the proposed
definition be refined?
10. Would the inclusion of the proposed definition of
``originator'' in new Rule 17g-10 identify the types of entities that
should trigger the requirements of the proposed rule? For example, is
the proposed definition too broad or narrow? If so, how should the
proposed definition be refined?
11. Would the inclusion of the proposed definition of
``securitizer'' in new Rule 17g-10 identify the types of entities that
should trigger the requirements of the proposed rule? For example, is
the proposed definition too broad or narrow? If so, how should the
proposed definition be refined?
3. Proposed Form ABS Due Diligence-15E
Section 15E(s)(4)(C) of the Exchange Act specifies that the
Commission shall establish the appropriate format and content for the
written certifications required under Section 15E(s)(4)(B), to ensure
that providers of due diligence services have conducted a thorough
review of data, documentation, and other relevant information necessary
for an NRSRO to provide an accurate rating.\601\ The Commission is
proposing to prescribe the format of the certification in Form ABS Due
Diligence-15E.\602\ The proposed form would contain five line items
identifying information the provider of third-party due diligence
services would need to set forth in the form. It also would contain a
signature line with a corresponding representation.\603\
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\601\ See 15 U.S.C. 78o-7(s)(4)(C).
\602\ See proposed new Rule 17 CFR 249b.400 and proposed Form
ABS Due Diligence-15E.
\603\ Id.
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Item 1 of proposed Form ABS Due Diligence-15E would elicit the
identity and address of the provider of third-party due diligence
services.\604\ This would notify users of the certification as to which
third party conducted the review described in the certification. Item 2
of proposed Form ABS Due Diligence-15E would elicit the identity and
address of the issuer, underwriter, or NRSRO that employed the provider
of third party due diligence services.\605\ This would notify users of
the certification as to the person that employed the third-party to
conduct the review described in the certification.
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\604\ See Item 1 to proposed Form ABS Due Diligence-15E.
\605\ See Item 2 to proposed Form ABS Due Diligence-15E.
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Item 3 of proposed Form ABS Due Diligence-15E would instruct the
provider of third-party due diligence services to identify each NRSRO
whose published criteria for performing due diligence the third party
satisfied in performing the due diligence review.\606\ As noted above,
the NRSROs most active in rating RMBS have incorporated into their
procedures and methodologies for determining RMBS credit ratings
minimum steps a provider of third party due diligence services must
take in conducting due diligence.\607\ Consequently, the instructions
for Item 3 would provide that if the manner and scope of the due
diligence provided by the third party satisfied the criteria for due
diligence published by an NRSRO, the third party should identify the
NRSRO and the title and date of the published criteria in a table
provided on the form.\608\ The table and instructions would permit the
identification of more
[[Page 33475]]
than one NRSRO.\609\ This would allow the third party to reflect in a
single form that it conducted due diligence services in a manner that
satisfied the due diligence requirements of multiple NRSROs. As such,
Item 3 would be designed to elicit a representation from the provider
of the third-party due diligence services that it satisfied a given
NRSRO's published due diligence standards.
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\606\ See Item 3 to proposed Form ABS Due Diligence 15E.
\607\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009)
Criteria for Evaluating Independent Third-Party Loan Level Reviews
for US RMBS, Moody's (Nov. 24, 2008) Incorporating Third-Party Due
Diligence Results Into the U.S. RMBS Rating Process, S&P (Nov. 25,
2008).
\608\ Id.
\609\ Id.
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Items 4 and 5 of proposed Form ABS Due Diligence-15E would require
the provider of the third-party due diligence services to describe,
respectively: (1) The scope and manner of the due diligence performed;
and (2) the findings and conclusions resulting from the review. The
instructions for Items 4 and 5 would require the summaries to be
provided in attachments to the form, which would be considered part of
the form.
As discussed above in Section II.H.1 of this release, the
Commission is proposing to implement Section 15E(s)(4)(A) of the
Exchange Act by requiring the issuer or underwriter of an Exchange Act-
ABS to disclose the findings and conclusions of a provider of third-
party due diligence services by furnishing Form ABS-15G on EDGAR
pursuant to proposed Rule 15Ga-2.\610\ Alternatively, the issuer or
underwriter would be permitted to obtain a representation from each
NRSRO engaged to determine a credit rating for the Exchange Act-ABS
that the NRSRO will publicly disclose the findings and conclusions of
the provider of third-party due diligence services in the form that
would need to be published pursuant to proposed new paragraph (a)(1) of
Rule 17g-7. In addition, as discussed above in Section II.G.3 of this
release, proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would
implement Section 15E(s)(3)(A)(v) of the Exchange Act by requiring an
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by the NRSRO, a description of the
information that such third party reviewed in conducting due diligence
services, and a description of the findings or conclusions of such
third party.\611\ The Commission preliminarily believes that requiring
a provider of third-party due diligence services to summarize in Items
4 and 5 of Form ABS Due Diligence-15E the manner and scope of the due
diligence performed and the findings and conclusions resulting from the
due diligence would facilitate these other requirements.\612\ For
example, the NRSRO could use the summaries to make the disclosures in
the form generated pursuant to proposed new paragraph (a) of Rule 17g-
7. In addition, the Commission preliminarily believes that the
disclosures would be useful to investors and other users of credit
ratings (as noted above in Section II.G.5, an NRSRO would be required
to disclose the certification with the publication of a credit rating
pursuant to proposed new paragraph (a)(2) of Rule 17g-7).
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\610\ 15 U.S.C. 78o-7(s)(4)(A), proposed new Rule 15Ga-2, and
proposed amendments to Form ABS-15G.
\611\ See 15 U.S.C. 78o-7(s)(3)(A)(v) and proposed new paragraph
(a)(1)(ii)(F) of Rule 17g-7.
\612\ See Items 4 and 5 of proposed Form ABS Due Diligence-15E.
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To this end, the Commission proposes that Item 4 require the
provider of third-party due diligence services to describe the steps
taken in performing the due diligence.\613\ The instructions would
require the third party to provide this description regardless of
whether the third party represented in Item 3 of the form that its
review satisfied published criteria of an NRSRO. In other words, the
third party would not be able to simply rely on a cross-reference to
the NRSRO's published criteria to explain the work completed in
performing the due diligence. Consequently, the instructions to Item 4
would require the third party to describe the scope and manner of the
due diligence services provided in connection with the review of assets
that is sufficiently detailed to provide an understanding of the steps
taken in performing the review. The instructions further would require
that the third party include in the description: (1) The type of assets
that were reviewed; (2) the sample size of the assets reviewed; (3) how
the sample size was determined and, if applicable, computed; (4)
whether the quality or integrity of information or data about the
assets provided, directly or indirectly, by the securitizer or
originator of the assets was reviewed and, if so, how the review was
conducted; (5) whether the origination of the assets conformed to, or
deviated from, stated underwriting or credit extension guidelines; (6)
whether the value of collateral securing such assets was reviewed and,
if so, how the review was conducted; (7) whether the compliance of the
originator of the assets with Federal, state and local laws and
regulations was reviewed and, if so, how the review was conducted; and
(8) any other type of review conducted with respect to the assets. In
other words, the proposed instructions would parallel the Commission's
proposed definition of ``due diligence services'' in paragraph (c)(1)
of proposed new Rule 17g-10.\614\
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\613\ See Item 4 of proposed Form ABS Due Diligence-15E.
\614\ Compare Item 4 of proposed Form ABS Due Diligence 15E,
with paragraph (c)(1) of proposed new Rule 17g-10.
---------------------------------------------------------------------------
As discussed above, the information required by the instructions
would provide the NRSRO and investors and users of credit ratings of
the NRSRO with a description of the nature of the due diligence
performed along with the publication of the credit rating and the form
that would be required under proposed new paragraph (a)(1) of Rule 17g-
7.\615\ The information also would allow the NRSRO and users of credit
ratings to compare whether the provider of third-party due diligence
services, based on its description, appeared to satisfy published
criteria of the NRSRO if such a claim was made in Item 3. Finally, if
no criteria had been published for the type of Exchange Act-ABS or no
claim to satisfying criteria was made in Item 3, the description would
be the sole basis of understanding the due diligence performed.
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\615\ See proposed new paragraph (a) of Rule 17g-7.
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Item 5 of proposed Form ABS Due Diligence-15E would require the
provider of third-party due diligence services to summarize the
findings and conclusions resulting from the due diligence review.\616\
Specifically, the instructions to Item 5 would require the third party
to provide a summary of the findings and conclusions that resulted from
the due diligence services that is sufficiently detailed to provide an
understanding of the findings and conclusions that were conveyed to the
person identified in Item 2 (i.e., conveyed to the issuer, underwriter,
or NRSRO that employed the third party to perform due diligence
services). As discussed above, the reasons for proposing the
requirement to provide such a summary are the same as for Item 4 of
Form ABS Due Diligence-15E.
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\616\ See Item 5 of proposed Form ABS Due Diligence 15E.
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Finally, the individual executing Form ABS Due Diligence-15E on
behalf of a provider of third-party due diligence services would need
to make two representations.\617\ First, the individual would need to
represent that he or she has executed the Form on behalf of, and on the
authority of, the third-party. Second, the individual would need to
represent that the third-party conducted a thorough review in
performing the due diligence described in Item 4 attached to the Form
and that the information and statements
[[Page 33476]]
contained in the Form, including Items 4 and 5 attached to the Form,
which are part of the Form, are accurate in all significant respects.
The Commission is proposing that this representation be made to
implement the provision of Section 15E(s)(4)(C) of the Exchange Act,
which provides that the Commission shall establish the appropriate
format and content of the written certifications ``to ensure that
providers of due diligence services have conducted a thorough review of
data, documentation, and other relevant information necessary for [an
NRSRO] to provide an accurate rating (emphasis added).'' \618\
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\617\ See ``Certification'' of proposed Form ABS Due Diligence-
15E.
\618\ See 15 U.S.C. 78o-7(s)(4)(C).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new Form ABS Due Diligence-15E. The Commission also seeks
comment on the following:
1. Would the proposed format of proposed Form ABS Due Diligence-15E
appropriately achieve the objectives of Section 15E(s)(4)(C) of the
Exchange Act? How could the format be modified to better achieve these
objectives?
2. Should proposed Form ABS Due Diligence-15E be more prescriptive
in terms of the steps a provider of third-party due diligence services
would need to take in performing the review? For example, should the
form specify the minimum sample size a provider of third-party due
diligence services must perform on the assets underlying the Exchange
Act-ABS? If so, should the sample size be the same across all asset
classes and within asset classes? For example, with respect to RMBS,
the scope of due diligence could be based on the type of mortgage loans
(prime, Alt-A, or sub-prime), the quality of the originator of the
loans, the level of documentation provided with the loans or other
characteristics. Moreover, the scope of due diligence required for a
CMBS could involve reviewing every pool asset (rather than a sample),
since the number of underlying loans is much less than in an RMBS and,
therefore, the default of one loan would have a greater impact than the
default of a loan underlying an RMBS. Moreover, the scope of due
diligence required by an NRSRO for an Exchange Act-ABS where the asset
pool composition turns over rapidly because it contains revolving
assets, such as credit card receivables or dealer floor-plan
receivables, could involve different sampling techniques. How would the
Commission account for these variables in prescribing minimum sample
sizes or other procedures that would need to be undertaken by a
provider of third-party due diligence services? What benefits and costs
could result from being more prescriptive? Are there practical issues
to imposing a more prescriptive approach? If so, describe these issues.
3. Would the information disclosed in Item 3 of proposed new Form
ABS Due Diligence-15E identifying each NRSRO whose published criteria
were satisfied by the provider of third-party due diligence services be
useful to the NRSRO producing a credit rating for the Exchange Act-ABS?
If not, how could the proposed instructions for Item 3 be modified to
make it more useful to NRSROs? Are there practical issues to imposing a
more prescriptive approach? If so, describe these issues.
4. Would the summary provided in proposed Item 4 of new Form ABS
Due Diligence-15E about the scope and manner of the due diligence
services provided in connection with the review of assets be useful to
investors, other users of credit ratings, and NRSROs producing a credit
rating for the asset-backed security? If not, how could the proposed
instructions for Item 4 be modified to make it more useful? Are there
practical issues to imposing a more prescriptive approach? If so,
describe these issues.
5. Would the summary provided in proposed Item 5 of new Form ABS
Due Diligence-15E about the findings and conclusions that resulted from
the due diligence services be useful to investors, other users of
credit ratings, and NRSROs producing a credit rating for the asset-
backed security? If not, how could the proposed instructions for Item 5
be modified to make it more useful? Are there practical issues to
imposing a more prescriptive approach? If so, describe these issues.
I. Standards of Training, Experience, and Competence
Section 936 of the Dodd-Frank Act provides that the Commission
shall issue rules that are reasonably designed to ensure that any
person employed by an NRSRO to perform credit ratings: (1) Meets
standards of training, experience, and competence necessary to produce
accurate ratings for the categories of issuers whose securities the
person rates \619\ and (2) is tested for knowledge of the credit rating
process.\620\ The Commission proposes to implement Section 936 by
proposing new Rule 17g-9 and amending Rule 17g-2.\621\
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\619\ See Public Law 111-203 Sec. 936(1).
\620\ See Public Law 111-203 Sec. 936(2).
\621\ See proposed new Rule 17g-9 and proposed new paragraph
(b)(15) of Rule 17g-2.
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1. Proposed New Rule 17g-9
The Commission proposes to implement Section 936 of the Dodd-Frank
through new Rule 17g-9.\622\ As proposed, new Rule 17g-9 would have
three paragraphs: (a), (b) and (c).\623\ Proposed paragraph (a) would
contain a requirement that an NRSRO design and administer standards of
training, experience, and competence.\624\ Proposed paragraph (b) would
identify factors an NRSRO would need to consider in designing the
standards.\625\ Proposed paragraph (c) would prescribe two specific
requirements that would need to be incorporated into an NRSRO's
standards.\626\
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\622\ See proposed new Rule 17g-9. This rule, if adopted, would
be codified at 17 CFR 240.17g-9.
\623\ See proposed paragraphs (a), (b), and (c) of new Rule 17g-
9.
\624\ See proposed paragraph (a) of new Rule 17g-9.
\625\ See proposed paragraph (b) of new Rule 17g-9.
\626\ See proposed paragraph (c) of new Rule 17g-9.
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a. Proposed Paragraph (a)
Proposed paragraph (a) of new Rule 17g-9 would require an NRSRO to
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings that are reasonably designed to achieve the objective
that such individuals produce accurate credit ratings in the classes
and subclasses of credit ratings for which the NRSRO is
registered.\627\ Consequently, the provision, as proposed, would
require the NRSRO to design its own standards.\628\ The Commission
preliminarily believes this approach would be appropriate because of
the varying procedures and methodologies used by NRSROs to determine
credit ratings. The proposed requirement would provide flexibility to
allow each NRSRO to customize the standards according to its unique
procedures and methodologies for determining credit ratings and size.
For example, the standards established by an NRSRO with hundreds or
thousands of credit analysts that produce tens of thousands of credit
ratings across a wide range of asset classes may need to be different
than the standards of a small NRSRO with only a handful of credit
analysts that focus on a particular class of credit ratings.
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\627\ See proposed paragraph (a) of new Rule 17g-9.
\628\ Id.
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At the same time, Section 936(1) provides that the Commission's
rules must be reasonably designed to ensure
[[Page 33477]]
that any person employed by an NRRSRO to perform credit ratings meets
standards of training, experience, and competence necessary to produce
accurate ratings for the categories of issuers whose securities the
person rates.\629\ Accordingly, while the Commission preliminarily
believes that the rule should allow flexibility in terms of the design
of the standards, the Commission also preliminarily believes that to
appropriately implement Section 936(1) the rule should require that the
standards have a common objective. Therefore, proposed paragraph (a) of
new Rule 17g-9 would require that the standards, as established, must
be reasonably designed to achieve the objective that individuals
employed by the NRSRO to determine credit ratings produce accurate
credit ratings in the classes of credit ratings for which the NRSRO is
registered.
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\629\ See Public Law 111-203 Sec. 936(1).
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This approach of identifying an objective--the production of
accurate ratings--and imposing a requirement that the standards be
reasonably designed to achieve the objective parallels Sections 15E(g)
and (h) of the Exchange Act, among other provisions in the securities
laws.\630\ For example, Section 15E(g) of the Exchange Act contains a
self-executing requirement that each NRSRO shall 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 in violation of the Exchange Act, or the rules or
regulations thereunder, of material, nonpublic information by such
NRSRO or any person associated with such NRSRO.\631\ Similarly, Section
15E(h) contains a self-executing requirement that each NRSRO shall
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.\632\
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\630\ See 15 U.S.C. 78o-7(g) and (h).
\631\ See 15 U.S.C. 78o-7(g).
\632\ See 15 U.S.C. 78o-7(h).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (a) of new Rule 17g-9. The Commission also seeks
comment on the following:
1. Would the approach in paragraph (a) of new Rule 17g-9 (i.e.,
identifying an objective for the standards and requiring the NRSRO to
design its own standards to achieve that objective) appropriately
implement Section 936 of the Dodd-Frank Act, particularly when taken
together with the provisions of proposed paragraphs (b) and (c) of new
Rule 17g-9 discussed below? If not, should the Commission specifically
prescribe the requirements of the standards to establish consistent
industry-wide standards? If so, would it be practical to prescribe
consistent industry-wide standards applicable to each NRSRO? Commenters
who believe such an approach would be feasible and appropriate should
identify such a standard and provide suggested rule text.
2. Would the objective identified in proposed paragraph (a) of new
Rule 17g-9 (i.e., standards of training, experience, and competence
that are reasonably designed to achieve the objective that such credit
analysts produce accurate credit ratings) be appropriate? Would it
establish an objective that could be achieved? Would it implement the
goal of Section 936 of the Dodd-Frank Act? Commenters who believe that
the proposed objective is not appropriate should explain why and
provide suggested rule text to modify the objective.
3. Is the objective--the production of ``accurate credit
ratings''--assessable? For example, how should the accuracy of credit
ratings be measured?
4. Would it be feasible to establish a testing program that has
standardized components to review the adequacy of the standards of
training, experience, and competence that an NRSRO maintains, enforces,
and documents pursuant to proposed paragraph (a) of new Rule 17g-9? If
so, what should the components of that testing program be? What would
be the advantages and disadvantages of such a program? Are there
comparable testing programs used in other contexts that would be
relevant in developing such a program?
b. Proposed Paragraph (b)
While proposed paragraph (a) of new Rule 17g-9 would provide that
the NRSRO must design the standards, proposed paragraph (b) would
identify factors the NRSRO must consider when designing the
standards.\633\ The Commission intends the identified factors to
provide guidance to NRSROs about the Commission's expectations for the
design of the standards of training, experience, and competence. It
also is intended to provide benchmarks that Commission examiners could
use to evaluate whether a given NRSRO's standards are reasonably
designed to meet the objective set forth in proposed paragraph (a).
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\633\ See proposed paragraph (b) of new Rule 17g-9.
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Proposed paragraph (b) of new Rule 17g-9 would require the NRSRO to
consider each factor in the context of the potentially varying roles of
the individuals employed by the NRSRO to determine credit ratings. More
specifically, the Commission preliminarily believes that the design of
the standards must account for different functions and responsibilities
of such individuals as well as the different procedures and
methodologies they use to determine credit ratings. The Commission is
not proposing that the NRSRO design a standard for each individual.
Rather, the Commission preliminarily believes that the standards,
particularly of a large NRSRO with hundreds or thousands of credit
analysts, should account for groups of individuals who are not
similarly situated, for example, in terms of years of experience,
education level, responsibility, and complexity of the procedures and
methodologies they use to determine credit ratings.
The first factor--identified in proposed paragraph (b)(1) of Rule
17g-9--would require the NRSRO, when establishing the standards of
training, experience, and competence, to consider if the credit rating
procedures and methodologies used by the individual involve qualitative
analysis, the knowledge necessary to effectively evaluate and process
the data relevant to the creditworthiness of the obligor being rated or
the issuer of the securities or money market instruments being
rated.\634\ The Commission intends proposed paragraph (b)(1) to require
the NRSRO to consider the fact that qualitative analysis relies, in
large part, on identifying and assimilating relevant information about
an obligor or issuer and making judgments on how that information
impacts the creditworthiness of the obligor or the issuer.
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\634\ See proposed paragraph (b)(1) of new Rule 17g-9.
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The second factor--identified in proposed paragraph (b)(2) of Rule
17g-9--would require the NRSRO, when establishing the standards of
training, experience, and competence, to consider if the credit rating
procedures and methodologies used by the individual involve
quantitative analysis, the technical expertise necessary to understand
any models and model inputs that are a part of the procedures
[[Page 33478]]
and methodologies.\635\ The Commission intends proposed paragraph
(b)(2) to require the NRSRO to consider the fact that quantitative
analysis relies, in large part, on mathematical techniques and,
consequently, credit analysts using quantitative models would need to
have relevant technical expertise.
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\635\ See proposed paragraph (b)(2) of new Rule 17g-9.
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The third factor--identified in proposed paragraph (b)(3) of Rule
17g-9--would require the NRSRO, when establishing the standards of
training, experience, and competence, to consider the classes and
subclasses of credit ratings for which each individual participates in
determining credit ratings and the factors relevant to such classes and
subclasses, including the geographic location, sector, industry,
regulatory and legal framework, and underlying assets, applicable to
the obligors or issuers in the classes and subclasses.\636\ The
Commission intends proposed paragraph (b)(3) to require the NRSRO to
consider the fact that different types of obligors and issuers have
unique characteristics that may be relevant to the creditworthiness of
the obligor or the issuer. For example, the knowledge and competence
necessary to rate an operating company is different from that necessary
to rate an asset-backed security or a municipal security. Moreover,
there may be differences within classes of credit ratings. For example,
rating an RMBS requires different knowledge than rating a CMBS, and
rating a company in the oil industry requires different knowledge than
rating a company in the telecommunications industry.
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\636\ See proposed paragraph (b)(3) of new Rule 17g-9.
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The fourth factor--identified in proposed paragraph (b)(4) of Rule
17g-9--would require the NRSRO to consider, when establishing the
standards of training, experience, and competence, the complexity of
the obligors, securities, or money market instruments being rated by
the individual.\637\ The Commission intends proposed paragraph (b)(4)
to require the NRSRO to consider the fact that obligors and securities
it rates may vary widely in terms of complexity. For example, more
experience and competence may be necessary to rate a synthetic CDO as
opposed to a typical RMBS or a global financial company as opposed to a
community bank.
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\637\ See proposed paragraph (b)(4) of new Rule 17g-9.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (b) of new Rule 17g-9. The Commission also seeks
comment on the following:
1. Are there any other factors in addition to, or as an alternative
to, the four factors identified in paragraphs (b)(1) through (4) an
NRSRO should consider when establishing standards of training,
experience, and competence? For example, should the proposed rule
require an NRSRO to consider the number of initial credit ratings the
individual is expected to participate in determining annually and the
number of credit ratings the individual is expected to participate in
monitoring annually? If so, how should these factors be taken into
consideration? Identify any additional or alternative factors and
provide suggested rule text.
2. Should the factor identified in proposed paragraph (b)(1) of
Rule 17g-9 (i.e., if the credit rating procedures and methodologies
used by the individual involve qualitative analysis, the knowledge
necessary to effectively evaluate and process the data relevant to the
creditworthiness of the obligor being rated or the issuer of the
securities or money market instruments being rated) be considered when
the NRSRO designs its standards of training, experience, and competence
for the individuals it employs to determine credit ratings? If not,
should proposed paragraph (b)(1) be modified to provide better guidance
for designing the standards? If so, how should it be modified?
Alternatively, should it be omitted from the rule? If so, explain why.
3. Should the factor identified in proposed paragraph (b)(2) of
Rule 17g-9 (i.e., if the credit rating procedures and methodologies
used by the individual involve quantitative analysis, the technical
expertise necessary to understand any models and model inputs that are
a part of the procedures and methodologies) be considered when the
NRSRO designs its standards of training, experience, and competence for
the individuals it employs to determine credit ratings? If not, should
proposed paragraph (b)(2) be modified to provide better guidance for
designing the standards? If so, how should it be modified?
Alternatively, should it be omitted from the rule? If so, explain why.
4. Should the factor identified in proposed paragraph (b)(3) of
Rule 17g-9 (i.e., the classes and subclasses of credit ratings for
which the individual participates in determining credit ratings and the
factors relevant to such classes and subclasses, including the
geographic location, sector, industry, regulatory and legal framework,
and underlying assets, applicable to the obligors or issuers in the
classes and subclasses) be considered when the NRSRO designs its
standards of training, experience, and competence for the individuals
it employs to determine credit ratings? If not, should proposed
paragraph (b)(3) be modified to provide better guidance for designing
the standards? If so, how should it be modified? Alternatively, should
it be omitted from the rule? If so, explain why.
5. Should the factor identified in proposed paragraph (b)(4) of
Rule 17g-9 (i.e., the complexity of the obligors, securities, or money
market instruments being rated by the individuals) be considered when
the NRSRO designs its standards of training, experience, and competence
for the individuals it employs to determine credit ratings? If not,
should proposed paragraph (b)(4) be modified to provide better guidance
for designing the standards? If so, how should it be modified?
Alternatively, should it be omitted from the rule? If so, explain why.
c. Proposed Paragraph (c)
Proposed paragraph (c) of new Rule 17g-9 would prescribe two
requirements that an NRSRO must incorporate into its standards of
training, experience, and competence.\638\ The first requirement would
be prescribed in proposed paragraph (c)(1) of new Rule 17g-9.\639\ This
paragraph would provide that the standards of training, experience, and
competence must include a requirement for periodic testing of the
individuals employed by the NRSRO to determine credit ratings on their
knowledge of the procedures and methodologies used by the NRSRO to
determine credit ratings in the classes or subclasses of credit ratings
for which the individual participates in determining credit
ratings.\640\ The Commission is proposing this requirement to implement
Section 936(2) of the Dodd-Frank Act, which provides that the
Commission shall issue rules that are reasonably designed to ensure
that any person employed by an NRSRO to perform credit ratings is
tested for knowledge of the credit rating process.\641\ The Commission
preliminarily believes that the frequency and manner of testing should
be established by the NRSRO. For example, the frequency and manner of
testing may depend on whether an NRSRO employs a large number of
[[Page 33479]]
analysts with varying levels of experience to rate a wide range of
obligors, securities, and money market instruments. In this case,
testing may need to be more frequent, particularly with respect to more
junior analysts. On the other hand, an NRSRO that employs few analysts
who focus on rating a specific type of obligor, security, or money
market instrument may need less frequent testing, particularly if the
analysts are experienced. However, the Commission notes that the
testing program--as with all aspects of the standards--would need to be
reasonably designed to achieve the objective that the credit analysts
produce accurate credit ratings in the classes of credit ratings for
which the NRSRO is registered.\642\ Consequently, an NRSRO would need
to establish a training schedule that is consistent with achieving this
objective.
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\638\ See proposed paragraphs (c)(1) and (2) of new Rule 17g-9.
\639\ See proposed paragraph (c)(1) of new Rule 17g-9.
\640\ Id.
\641\ See Public Law 111-203 Sec. 936(2).
\642\ See proposed paragraph (a) of new Rule 17g-9.
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The second requirement would be prescribed in proposed paragraph
(c)(2) of new Rule 17g-9.\643\ This paragraph would provide that the
standards of training, experience, and competence must include a
requirement that at least one individual with three years or more
experience in performing credit analysis participates in the
determination of a credit rating.\644\ The Commission preliminarily
believes three years of experience is appropriate because, among other
things, being in business as a credit rating agency for three years was
a minimum prerequisite to being treated as an NRSRO under the Rating
Agency Act of 2006.\645\ Specifically, prior to being amended by the
Dodd-Frank Act, the first prong of the definition of ``nationally
recognized statistical rating organization,'' provided that the entity
``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 under Section 15E.'' \646\ Moreover, Section
15E(a)(1)(B)(ix) of the Exchange Act requires a credit rating agency
applying for registration as an NRSRO to submit certifications from
qualified institutional buyers (``QIBs'') as specified in Section
15E(a)(1)(C) of the Exchange Act.\647\ Sections 15E(a)(1)(C)(i) through
(iii) of the Exchange Act provide, among other things, that the
applicant must furnish certifications from a minimum of 10 QIBs,
including certifications from no less than two QIBs for each category
of obligor for which the applicant intends to be registered.\648\
Section 15E(a)(1)(C)(iv) provides, among other things, that the
certification must state that the entity meets the definition of a QIB
and has used the credit ratings of the applicant for at least the three
years immediately preceding the date of the certification in the
subject category or categories.\649\
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\643\ See proposed paragraph (c)(2) of new Rule 17g-9.
\644\ Id.
\645\ See Section 3(a)(61)(A) of the Exchange Act, as added by
Section 3(a) of the Rating Agency Act of 2006. See Public Law 109-
291 Sec. 3. Section 932(b) of the Dodd-Frank Act struck
subparagraph (A) of Section 3(a)(61) of the Exchange Act and re-
designated paragraph (B) as paragraph (A). See Public Law 111-203
Sec. 932(b). While the Dodd-Frank Act eliminated the ``three-year''
prong from the definition of NRSRO, the Commission does not believe
this evidences a view that the credit analysts who work for a credit
rating agency need not have any experience. In fact, as noted above,
Section 936(1) of the Dodd-Frank Act, among other things, provides
that the Commission shall issue rules that are reasonably designed
to ensure that any person employed by an NRRSRO to perform credit
ratings meets standards of training, experience, and competence
necessary to produce accurate ratings for the categories of issuers
whose securities the person rates. See Public Law 111-203 Sec.
936(1).
\646\ Id.
\647\ See 15 U.S.C. 78o-7(a)(1)(B)(ix) and 15 U.S.C. 78o-
7(a)(1)(C).
\648\ See 15 U.S.C. 78o-7(a)(1)(C)(i)-(iii).
\649\ See 15 U.S.C. 78o-7(a)(1)(C)(iv).
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The Commission considered these former and current provisions of
Section 15E of the Exchange Act in developing the proposed three-year
requirement in paragraph (c)(2) of new Rule 17g-9. The Commission
preliminarily believes that having at least one person participate in
the determination of a credit rating who has at least three years
experience in performing credit analysis would establish an appropriate
baseline requirement that could be implemented by NRSROs without
causing them to hire new staff or re-allocate staff resources. For
example, in terms of participating in the credit rating, the Commission
preliminarily believes an NRSRO's standard could require that at least
one person with at least three years experience serve on a committee
that votes to approve the credit rating or that reviews and approves a
credit rating action proposed by a junior analyst. Moreover, the
Commission notes that performing credit analysis is not synonymous with
determining credit ratings. Many financial institutions have credit
risk departments staffed by individuals who analyze the
creditworthiness of existing and future counterparties and borrowers.
The Commission preliminarily intends that this type of work would
qualify a credit analyst to meet the three-year requirement in proposed
paragraph (c)(2) of new Rule 17g-9. Consequently, if an NRSRO employed
an individual who performed credit analysis for a financial institution
for more than three years, that individual would qualify for purposes
of the proposed ``three-year'' requirement.
Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (c) of new Rule 17g-9. The Commission also seeks
comment on the following:
1. Would proposed paragraph (c)(1) of new Rule 17g-9 (which would
provide that the standards of training, experience, and competence must
include a requirement for periodic testing of the individuals employed
by the NRSRO to determine credit ratings on their knowledge of the
procedures and methodologies used by the NRSRO to determine credit
ratings in the classes and subclasses of credit ratings for which the
individual is responsible for determining credit ratings) appropriately
implement Section 936(2) of the Dodd-Frank Act? If not, how should
proposed paragraph (c)(1) be modified to better achieve the objective
of Section 936(2)?
2. Should the Commission prescribe the frequency of the periodic
testing that would be mandated under proposed paragraph (c)(1) of new
Rule 17g-9? For example, should an NRSRO be required to administer
testing every six months, every year, every two years?
3. Would proposed paragraph (c)(2) of new Rule 17g-9 (which would
provide that the standards of training, experience, and competence must
include a requirement that at least one individual with three years or
more experience in performing credit analysis participates in the
determination of a credit rating) be an appropriate measure in terms of
implementing Section 936 of the Dodd-Frank Act? If not, how should
proposed paragraph (c)(2) be modified to better achieve the objective
of Section 936? For example, should the Commission establish a
different minimum number of years such as 1 or 2 years experience or 4,
5, 6, 7, or some larger number of years? Alternatively, should this
proposal be omitted from the rule? If so, explain why?
2. Proposed Amendment to Rule 17g-2
For the reasons discussed in Section II.A.2 of this release, the
Commission preliminarily believes that the standards of training,
experience, and competence an NRSRO would be required, among other
things, to document pursuant to proposed paragraph (a) of new Rule 17g-
9 should be subject to the recordkeeping requirements of Rule
[[Page 33480]]
17g-2.\650\ Consequently, the Commission proposes adding new paragraph
(b)(15) to Rule 17g-2 to identify the standards of training,
experience, and competence the NRSRO must establish, maintain, enforce,
and document pursuant to proposed new Rule 17g-9 as a record that must
be retained.\651\ As a result, the standards would be subject to the
record retention and production requirements in paragraphs (c) through
(f) of Rule 17g-2.\652\
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\650\ 17 CFR 240.17g-2.
\651\ See proposed new paragraph (b)(15) to Rule 17g-2; see also
Section 17(a)(1) of the Exchange Act, which 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. 15 U.S.C. 78q(a)(1).
\652\ See 17 CFR 240.17g-2.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (b)(15) of Rule 17g-2.
J. Universal Rating Symbols
Section 938(a) of the Dodd-Frank Act provides that the Commission
shall require, by rule, each NRSRO to establish, maintain, and enforce
written policies and procedures that: (1) Assess the probability that
an issuer of a security or money market instrument will default, fail
to make timely payments, or otherwise not make payments to investors in
accordance with the terms of the security or money market instrument;
\653\ (2) clearly define and disclose the meaning of any symbol used by
the NRSRO to denote a credit rating; \654\ and (3) apply any symbol
described in item (2) in a manner that is consistent for all types of
securities and money market instruments for which the symbol is
used.\655\ Section 938(b) of the Dodd-Frank Act provides that nothing
in Section 938 shall prohibit an NRSRO from using distinct sets of
symbols to denote credit ratings for different types of securities or
money market instruments.\656\
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\653\ See Public Law 111-203 Sec. 938(a)(1).
\654\ See Public Law 111-203 Sec. 938(a)(2).
\655\ See Public Law 111-203 Sec. 938(a)(3).
\656\ See Public Law 111-203 Sec. 938(b).
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The Commission proposes to implement Section 938(a) of the Dodd-
Frank Act by proposing paragraph (b) of new Rule 17g-8 and by amending
Rule 17g-2.\657\
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\657\ See proposed paragraph (b) of Rule new 17g-8 and proposed
new paragraph (b)(14) of Rule 17g-2. As discussed earlier, the
Commission is proposing that rule requirements specifying policies
and procedures be consolidated in new Rule 17g-8.
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1. Proposed Paragraph (b) of New Rule 17g-8
The Commission preliminarily believes that Section 938(a) of the
Dodd-Frank Act is explicit in prescribing the policies and procedures
the Commission shall require, by rule, of each NRSRO.\658\
Consequently, the Commission proposes that the rule text of proposed
paragraph (b) of new Rule 17g-8 mirror the statutory text.
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\658\ See Public Law 111-203 Sec. 936(a).
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The prefatory text of proposed paragraph (b) of new Rule 17g-8
would provide that an NRSRO must establish, maintain, enforce, and
document policies and procedures that are reasonably designed to
achieve three objectives, which would be identified in paragraphs
(b)(1), (2), and (3).\659\ This proposed provision would mirror the
prefatory text of Section 938(a) of the Dodd-Frank Act except that the
proposed rule text would add the requirement that the NRSRO
``document'' the policies and procedures.\660\ The Commission
preliminarily believes it would be appropriate to add a documentation
requirement because it would mean that an NRSRO would need to put its
policies and procedures into writing. This requirement, coupled with
the Commission's proposal discussed next to apply the record retention
and production provisions of Rule 17g-2 to the policies and procedures,
would be designed to make them more readily available to Commission
examiners. In addition, the Commission believes it is a sound practice
for any organization to document its policies and procedures to promote
better understanding of them among the individuals within the
organization and, therefore compliance with such policies and
procedures.
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\659\ See prefatory text of proposed paragraph (b) of new Rule
17g-8.
\660\ Compare prefatory text of Public Law 111-203 Sec. 938(a),
with prefatory text of proposed paragraph (b) of new Rule 17g-8.
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Proposed paragraph (b)(1) of new Rule 17g-8 would require the NRSRO
to have policies and procedures reasonably designed to assess the
probability that an issuer of a security or money market instrument
will default, fail to make timely payments, or otherwise not make
payments to investors in accordance with the terms of the security or
money market instrument.\661\ This proposed provision would mirror the
text of Section 938(a)(1) of the Dodd-Frank Act.\662\ The Commission
also notes that Section 15E(s)(3)(B)(ii) of the Exchange Act provides
that the Commission's rule requiring an NRSRO to generate a form to
disclose information with the publication of a credit rating requires
disclosure of information on the content of the credit rating,
including: (1) The historical performance of the credit rating; and (2)
the expected probability of default and the expected loss in the event
of default.\663\ As discussed above in Section II.G.3 of this release,
the Commission is proposing to implement this requirement in proposed
new paragraph (a)(1)(ii)(L) of Rule 17g-7.\664\ The Commission
preliminarily believes proposed paragraph (b)(1) of new Rule 17g-8
would work in conjunction the requirement in proposed new paragraph
(a)(1)(ii)(L) of Rule 17g-7 insomuch as the policies and procedures
proposed to be required by the former would assist the NRSRO in making
the disclosure proposed to be required in the latter.
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\661\ See proposed paragraph (b)(1) of new Rule 17g-8.
\662\ Compare text of Public Law 111-203 Sec. 938(a)(1), with
text of proposed paragraph (b)(1) of new Rule 17g-8.
\663\ See 15 U.S.C. 78o-7(s)(3)(B)(ii).
\664\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
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Proposed paragraph (b)(2) of new Rule 17g-8 would require the NRSRO
to have policies and procedures reasonably designed to clearly define
each symbol, number, or score in the rating scale used by the NRSRO to
denote a credit rating category and notches within a category for each
class and subclass of credit ratings for which the NRSRO is registered
and to include such definitions in Exhibit 1 to Form NRSRO.\665\ This
proposed provision would implement Section 938(a)(2) of the Dodd-Frank
Act.\666\ In addition, it would mirror text in the proposed revisions
to the Instructions to Exhibit 1 to Form NRSRO as well as work in
conjunction with the requirements in those instructions.\667\ As
discussed above in Section II.E.1.a of this release, the Commission is
proposing to amend the Instructions for Exhibit 1. One of the proposed
amendments would require the NRSRO to clearly define in Exhibit 1 the
meaning of each symbol, number, or score in the rating scale used by
the applicant or NRSRO to denote a credit rating category and notches
within a category in any Transition/Default Matrix presented in the
Exhibit.\668\ Consequently, taken together, the proposals would require
an NRSRO to have policies and procedures that clearly define the
meaning of each
[[Page 33481]]
symbol, number, or score used by the NRSRO to denote a credit rating
and to disclose those meanings in Exhibit 1 where investors and other
users of credit ratings can find them.
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\665\ See proposed paragraph (b)(2) of new Rule 17g-8.
\666\ Compare text of Public Law 111-203 Sec. 938(a)(2), with
text of proposed paragraph (b)(2) of new Rule 17g-8.
\667\ See Instructions to Exhibit 1 to Form NRSRO.
\668\ See proposed amendments to Instructions to Exhibit 1 to
Form NRSRO.
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Proposed paragraph (b)(3) of new Rule 17g-8 would require the NRSRO
to have policies and procedures reasonably designed to apply any
symbol, number, or score defined pursuant to paragraph (b)(2) of Rule
17g-8 in a manner that is consistent for all types of obligors,
securities, and money market instruments for which the symbol, number,
or score is used.\669\ This proposed provision would mirror the text of
Section 938(a)(3) of the Dodd-Frank Act, except that the proposed rule
text would add the term ``obligors.'' \670\ The Commission proposes
this addition in order to apply the provisions of proposed paragraph
(b)(3) of new Rule 17g-8 to credit ratings of obligors as entities in
addition to credit ratings of securities and money market
instruments.\671\
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\669\ See proposed paragraph (b)(1) of new Rule 17g-8.
\670\ Compare text of Public Law 111-203 Sec. 938(a)(3), with
text of proposed paragraph (b)(3) of new Rule 17g-8.
\671\ See, e.g., the definition of ``credit rating'' in Section
3(a)(60) of the Exchange Act (``The term `credit rating' means an
assessment of the creditworthiness of an obligor as an entity or
with respect to specific securities or money market instruments.'').
15 U.S.C. 78o-7(a)(60).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed paragraph (b) of new Rule 17g-8. The Commission also seeks
comment on the following:
1. Is proposed paragraph (b)(1) of new Rule 17g-8 sufficiently
explicit in terms of the objective that the policies and procedures be
reasonably designed to assess the probability that an issuer of a
security or money market instrument will default, fail to make timely
payments, or otherwise not make payments to investors in accordance
with the terms of the security or money market instrument)? If not,
what additional detail should the Commission provide in terms of the
clarifying the objective?
2. Is proposed paragraph (b)(2) of new Rule 17g-8 sufficiently
explicit in terms of the objective that the policies and procedures be
reasonably designed to clearly define the meaning of each symbol,
number, or score used by the NRSRO to denote a credit rating category
and notches within a category in the rating scale for each class and
subclass of credit ratings for which the NRSRO is registered and to
include such definitions in Exhibit 1 to Form NRSRO? If not, what
additional detail should the Commission provide in terms of the
clarifying the objectives?
3. Is proposed paragraph (b)(3) of new Rule 17g-8 sufficiently
explicit in terms of the objective that the policies and procedures be
reasonably designed to apply any symbol, number, or score defined in a
manner that is consistent for all types of obligors, securities, and
money market instruments for which the symbol, number, or score is
used? If not, what additional detail should the Commission provide in
terms of the clarifying the objective?
2. Proposed Amendment to Rule 17g-2
For the reasons discussed in Section II.A.2 of this release, the
Commission preliminarily believes that the policies and procedures an
NRSRO would be required, among other things, to document pursuant to
proposed paragraph (b) of new Rule 17g-8 should be subject to the
recordkeeping requirements of Rule 17g-2.\672\ Consequently, the
Commission proposes adding new paragraph (b)(14) to Rule 17g-2 to
identify the policies and procedures an NRSRO must establish, maintain,
enforce, and document pursuant to proposed paragraph (b) of new Rule
17g-8 as a record that must be retained.\673\ As a result, the policies
and procedures would be subject to the record retention and production
requirements in paragraphs (c) through (f) of Rule 17g-2.\674\
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\672\ 17 CFR 240.17g-2.
\673\ See proposed new paragraph (b)(14) to Rule 17g-2; see also
Section 17(a)(1) of the Exchange Act, which 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. 15 U.S.C. 78q(a)(1).
\674\ See 17 CFR 240.17g-2.
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (b)(14) of Rule 17g-2.
K. Annual Report of Designated Compliance Officer
Section 932(a)(5) of the Dodd-Frank Act amended Section 15E(j) of
the Exchange Act to re-designate paragraph (j) as paragraph (j)(1) and
to add new paragraphs (j)(2) through (j)(5).\675\ Section 15E(j)(1) of
the Exchange Act contains a self-executing provision that an NRSRO
designate an individual (the ``designated compliance officer'')
responsible for administering the policies and procedures that are
required to be established pursuant to Sections 15E(g) and (h) of the
Exchange Act,\676\ and for compliance with the securities laws and the
rules and regulations thereunder, including those promulgated by the
Commission under Section 15E of the Exchange Act.\677\ Sections
15E(j)(2) through (4) prescribe self-executing requirements with
respect to, among other things, the activities, duties, and
compensation of the designated compliance officer.\678\
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\675\ See Public Law 111-203 Sec. 932(a)(5) and 15 U.S.C. 78o-
7(j)(1) though (5).
\676\ See 15 U.S.C 780-7(g) and (h).
\677\ See 15 U.S.C. 78o-7(j)(1).
\678\ See 15 U.S.C. 78o-7(j)(1) though (4).
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Section 15E(j)(5)(A) of the Exchange Act requires the designated
compliance officer to submit to the NRSRO an annual report on the
compliance of the NRSRO with the securities laws and the policies and
procedures of the NRSRO that includes: (1) A description of any
material changes to the code of ethics and conflict of interest
policies of the NRSRO; and (2) a certification that the report is
accurate and complete.\679\ Section 15E(j)(5)(B) of the Exchange Act
provides that the NRSRO shall file the report required pursuant to
Section 15E(j)(5)(A) together with the financial report that is
required to be submitted to the Commission under Section 15E of the
Exchange Act.\680\
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\679\ See 15 U.S.C. 78o-7(j)(5)(A).
\680\ See 15 U.S.C. 78o-7(j)(5)(B).
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Consequently, Section 15E(j)(5)(B) of the Exchange Act contains a
self-executing provision requiring the NRSRO to file the annual report
of the designated compliance officer ``with the financial report that
is required to be submitted to the Commission under this section.''
\681\ The Commission notes that Section 15E(k) of the Exchange Act
provides that each NRSRO shall, on a confidential basis, file with the
Commission, at intervals determined by the Commission, such financial
statements, certified (if required by the rules or regulations of the
Commission) by an independent public accountant, 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.\682\ The Commission implemented Section 15E(k)
by adopting Rule 17g-3.\683\ Therefore, under the self-executing
provisions in Section 15E(j)(5)(B) of the Exchange Act, an NRSRO must
file the
[[Page 33482]]
report of the designated compliance officer with the reports required
to be submitted pursuant to Rule 17g-3.\684\
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\681\ Id.
\682\ The Dodd-Frank Act replaced the words ``furnish to the
Commission'' with the words ``file with the Commission'' in Section
15E(k) of the Exchange Act. See 15 U.S.C. 78o-7(k).
\683\ See 17 CFR 240.17g-3; see also Oversight of Credit Rating
Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33590-33593 (June 18, 2007).
\684\ See 15 U.S.C. 78o-7(j)(5)(B), 15 U.S.C. 78o-7(k), and 17
CFR 240.17g-3.
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As discussed above in Section II.A.3 of this release, Rule 17g-3
requires an NRSRO to furnish five or, in certain cases, six separate
reports not more than 90 days after the end of the NRSRO's fiscal
year.\685\ In order to further clarify the self-executing requirement
in Section 15E(j)(5)(B) of the Exchange Act, the Commission is
proposing to amend Rule 17g-3 to identify the annual report of the
designated compliance officer as one of the reports that must be filed
with the Commission.\686\ Specifically, the Commission proposes adding
a new paragraph (a)(8) to Rule 17g-3 to identify the report on the
compliance of the NRSRO with the securities laws and the policies and
procedures of the NRSRO required to be filed with the Commission
pursuant to Section 15E(j)(5)(B) of the Exchange Act.\687\ New
paragraph (a)(8) would provide that the report need not be audited.
Furthermore, the Commission preliminarily does not intend to prescribe
how the report must be certified because Section 15E(j)(5)(A)(ii) of
the Exchange Act already provides that the designated compliance
officer must certify that the report is accurate and complete.\688\
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\685\ See 17 CFR 240.17g-3(a)(1)-(6). As discussed above in
Section II.A.3 of this release, the Commission is proposing that
Rule 17g-3 be amended to add a new paragraph (a)(7) to implement
Section 15E(c)(3)(B) of the Exchange Act by requiring an NRSRO to
file the annual report on the NRSRO's internal control structure
with the annual reports. See 15 U.S.C. 78o-7(c)(3)(B).
\686\ See proposed new paragraph (a)(8) of Rule 17g-3.
\687\ Id.
\688\ See 15 U.S.C. 78o-7(j)(5)(A)(ii). Paragraph (b) of Rule
17g-3 provides that the NRSRO must attach to the reports required to
be submitted pursuant to Rule 17g-3 a signed statement by a duly
authorized person that the person has responsibility for the reports
and, to the best knowledge of the person, the reports fairly
present, in all material respects, the information contained in the
reports. See 17 CFR 240.17g-3(b).
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Request for Comment
The Commission generally requests comment on all aspects of
proposed new paragraph (a)(8) of Rule 17g-3. The Commission also seeks
comment on the following:
1. Should an NRSRO be required to attach to the annual report a
signed statement by a duly authorized person (e.g., the designated
compliance officer) stating explicitly that the person has
responsibility for the reports and, to the best knowledge of the
person, the reports fairly present, in all material respects, the
information contained in the reports? For example, because the
designated compliance officer is providing the report to the NRSRO and
the NRSRO, in turn, is submitting the report to the Commission, would
it be appropriate for the Commission to require an additional
certification addressing the submission of the report from the NRSRO to
the Commission?
L. Electronic Submission of Form NRSRO and the Rule 17g-3 Annual
Reports
An NRSRO currently submits the Form NRSROs required under Rule 17g-
1 and the annual reports required under Rule 17g-3 to the Commission in
paper form. The Commission proposes amending Rule 17g-1, the
Instructions to Form NRSRO, Rule 17g-3, and Regulation S-T to require
an NRSRO to use the Commission's EDGAR system to: (1) Electronically
file or furnish, as applicable, Form NRSRO and the information and
documents contained in Exhibits 1 through 9 of Form NRSRO if the
submission is made pursuant to paragraph (e), (f) or (g) of Rule 17g-1
(i.e., an update of registration, an annual certification, or a
withdrawal from registration, respectively) \689\ and (2)
electronically file or furnish, as applicable, the annual reports
required by Rule 17g-3.\690\
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\689\ See 17 CFR 240.17g-1(e), (f), and (g). The electronic
submissions of Form NRSRO and Exhibits 1 through 9 of Form NRSRO
would be made available to the public immediately upon filing.
\690\ See 17 CFR 240.17g-3. An NRSRO is not required to make the
Rule 17g-3 annual reports publicly available and the reports would
not be available to the public on EDGAR. The information collected
pursuant to Rule 17g-3 is, and would continue to be, kept
confidential to the extent permitted by the Freedom of Information
Act (``FIOA''). See 15 U.S.C. 552 et seq.
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Under this proposal, however, an applicant or NRSRO would continue
to submit in paper format Form NRSROs pursuant to paragraphs (a), (b),
(c), and (d) of Rule 17g-1 (initial applications for registration,
applications to register for an additional class of credit ratings,
supplements to an initial application or application to register for an
additional class of credit ratings, and withdrawals of initial
applications or applications to register for an additional class of
credit ratings, respectively).\691\ The Commission preliminarily
believes that these materials are appropriately received in paper form
because of the iterative nature of the NRSRO application process. For
example, an applicant often will have a number of phone conferences and
meetings with the Commission staff during the application process to
clarify the information submitted in the application. These
interactions may result in applicants informally providing additional
information relating to the application and informally amending or
augmenting information provided in the Form and its Exhibits. The
Commission preliminarily believes paper submissions facilitate this
type of iterative process.
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\691\ Paragraph (i) of Rule 17g-1 requires an NRSRO to make Form
NRSRO and information and documents submitted in Exhibits 1 through
9 publicly available within 10 business days of the Commission order
granting an initial application for registration or an application
to register for an additional class of credit ratings. 17 CFR
240.17g-1(i). The initial application for registration contains
information and documents the NRSRO is not required to make publicly
available. This includes Exhibits 10 through 13 to Form NRSRO,
disclosure reporting pages to Form NRSRO, and certifications from
QIBs under Section 15E(a)(1)(C) of the Exchange Act (15 U.S.C. 780-
7(a)(1)(C)).
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In terms of requiring the electronic submission of Form NRSROs
submitted pursuant to paragraph (e), (f), or (g) of Rule 17g-1, the
Commission notes that one of the primary goals of the EDGAR system is
to facilitate the rapid dissemination of financial and business
information in connection with filings the Commission receives.
Although paragraph (i) of Rule 17g-1 currently requires NRSROs to make
the public portions of their current Form NRSROs publicly available
within 10 business days after submission to the Commission, the
Commission believes having all such information available immediately
in one location would make the information more easily available and
searchable to investors and other users of credit ratings. Further, the
Commission believes submissions to the Commission are more valuable to
investors and other users of credit ratings if they are available in
electronic format and that adding the Form NRSRO submissions to the
EDGAR database would provide a more complete picture for the public.
The Commission preliminarily believes that, as a result of the
proposals, the EDGAR page of the Commission's Internet Web site \692\
and the NRSRO page of the Commission's Internet Web site \693\ would be
a comprehensive source containing most public information submitted to
the Commission, as well as other information, related to NRSROs. The
Commission preliminarily believes that the electronic submission of
Form NRSROs would benefit investors and other users of credit ratings
by
[[Page 33483]]
increasing the efficiency of retrieving and comparing NRSRO public
submissions and enabling the investors and other users of credit
ratings to access information more quickly. An investor or other user
of credit ratings would be able to find and review a Form NRSRO on any
computer with an Internet connection by accessing EDGAR data on the
Commission's Internet Web site or through a third party.
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\692\ http://www.sec.gov/investor/pubs/edgarguide.htm.
\693\ http://www.sec.gov/divisions/marketreg/ratingagency.htm.
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In addition, while the Rule 17g-3 annual reports would not be made
public through the EDGAR system, having these reports and the Form
NRSROs available on EDGAR could assist the Commission in its oversight
of NRSROs. For example, Commission examiners could retrieve more easily
the Form NRSROs and annual reports of a specific NRSRO to prepare for
an examination. Moreover, having these records submitted and stored
through the EDGAR system (i.e., in a centralized location) would assist
the Commission from a records management perspective by establishing a
more automated storage process and creating efficiencies in terms of
reducing the volume of paper submissions that must be manually
processed and stored.
Moreover, the Commission preliminarily believes that the electronic
submission of Form NRSRO and Rule 17g-3 annual reports would benefit
NRSROs. For example, NRSROs would avoid the uncertainties, delay, and
expense related to the manual delivery of paper submissions. Further,
NRSROs would benefit from no longer having to submit multiple paper
copies of these forms and reports to the Commission.
As with other entities that make submissions through the EDGAR
systems, these submissions would be subject to the provisions of
Regulation S-T \694\ and the EDGAR Filer Manual. Regulation S-T
includes detailed rules concerning mandatory and permissive electronic
EDGAR submissions. It also provides that requests for confidential
treatment must be made in paper form.\695\ The EDGAR Filer Manual
contains detailed technical specifications concerning EDGAR
submissions. The EDGAR Filer Manual also provides technical guidance
concerning how to begin making submissions on EDGAR by submitting Form
ID to obtain a CIK number \696\ and confidential access codes and how
to maintain and update company data (e.g., how to change company names
and contact information).\697\
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\694\ For a comprehensive discussion of Regulation S-T and
electronic filing, see ``Electronic Filing and the EDGAR System: A
Regulatory Overview,'' available on the Commission's Internet Web
site.
\695\ See 17 CFR 232.101.
\696\ As noted earlier, a CIK number is a ten-digit number
uniquely identifying the person submitting the form or report.
\697\ In the case of name changes, the changes must be made via
the EDGAR filing Internet Web site in advance and the new name would
be reflected in the next EDGAR submission. The name on past
submissions would not change.
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One technical specification the EDGAR Filer Manual includes is the
electronic ``submission type'' for each submission made through the
EDGAR system. The Commission expects the EDGAR electronic submission
types for these documents would be designed to facilitate and expedite
the submission and review of these submissions. Consistent with this
proposal, the Commission preliminarily intends the EDGAR Filer Manual
and the EDGARLink software would provide for two EDGAR electronic
submission types: one for the submission of Form NRSRO and one for the
submission of the annual reports pursuant to Rule 17g-3. The Commission
also preliminarily intends that Form NRSRO would become an electronic,
fillable, form and that the Exhibits would be submitted with the Form.
As noted above, an NRSRO is not required to make the Rule 17g-3
annual reports public. Therefore, the Rule 17g-3 annual reports would
be submitted through the EDGAR system on a confidential basis and would
not be made available to the public to the extent permitted by law. The
Commission anticipates that the EDGAR Filer Manual would provide
guidance for choosing the correct submission type.
Amendments to Rule 17g-1. To implement the electronic submission
through EDGAR of a Form NRSRO submitted to the Commission pursuant to
paragraph (e), (f), or (g) of Rule 17g-1, the Commission proposes to
amend each of those paragraphs to add a second sentence providing that
a Form NRSRO and the information and documents in Exhibits 1 through 9,
filed or furnished, as applicable, under the paragraph must be
submitted electronically to the Commission in the format required by
the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T.\698\
Furthermore, the Commission proposes amending paragraphs (a), (b), (c),
and (d) of Rule 17g-1 to provide that an NRSRO should file ``two paper
copies'' of the Form NRSROs filed pursuant to those paragraphs. This
would be designed to clarify that these filings should continue to be
made in paper. In addition, in the past, some NRSROs have submitted
more than two paper copies of their Form NRSRO submissions. The
Commission believes that the filing of two paper copies is sufficient.
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\698\ See proposed amendments to paragraphs (e), (f), and (g) of
Rule 17g-1.
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Amendments to the Instructions to Form NRSRO. To further implement
the electronic submission through the EDGAR system of Form NRSROs
submitted to the Commission pursuant to paragraphs (e), (f), or (g) of
Rule 17g-1, the Commission proposes amending Instruction A.8 to Form
NRSRO to distinguish between Form NRSRO submissions under paragraph
(a), (b), (c), or (d) of Rule 17g-1 (which would continue to be
submitted in paper form) and submissions under paragraphs (e), (f), or
(g) of Rule 17g-1 (which would be submitted electronically through the
EDGAR system). Currently, Instruction A.8 simply provides the address
where a Form NRSRO submitted under paragraph (a), (b), (c), (d), (e),
(f), or (g) of Rule 17g-1 must be submitted (i.e., the headquarters of
the Commission). The Commission proposes amending Instruction 8.A to
add above the address a sentence that would instruct an applicant to
submit to the Commission at the address indicated below two paper
copies of a Form NRSRO submitted pursuant to paragraph (a), (b), (c),
or (d) of Rule 17g-1.\699\ The Commission further proposes adding a
sentence below the address providing that after registration, an NRSRO
must submit Form NRSRO electronically to the Commission in the format
required by the EDGAR Filer Manual, as defined in Rule 11 of Regulation
S-T, if the submission is made pursuant to paragraphs (e), (f), or (g)
of Rule 17g-1.\700\
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\699\ See proposed amendments to Instruction A.8 of Form NRSRO.
\700\ Id.
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Finally, the Commission proposes amending Instruction A.9 to Form
NRSRO, which currently provides that a Form NRSRO will be considered
furnished to the Commission on the date the Commission receives a
complete and properly executed Form NRSRO that follows all applicable
instructions for the Form.\701\ The Commission proposes amending the
instruction to read as follows: ``A Form NRSRO will be considered filed
with or furnished to, as applicable, the Commission on the date the
Commission receives a complete and properly executed Form NRSRO that
[[Page 33484]]
follows all applicable instructions for the Form, including the
instructions in Item A.8 with respect to how a Form NRSRO must be filed
with or furnished to the Commission.'' \702\ This instruction would be
designed to clarify that a Form NRSRO submitted pursuant to paragraph
(e), (f), or (g) of Rule 17g-1 must be submitted electronically.
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\701\ See Instruction A.9 to Form NRSRO.
\702\ See proposed amendments to Instruction A.9 to Form NRSRO.
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Proposed Amendments to Rule 17g-3. To implement the electronic
submission through the EDGAR system of the Rule 17g-3 annual reports,
the Commission proposes adding two new paragraphs to Rule 17g-3:
paragraphs (d) and (e).\703\ Similar to the proposed amendments to
paragraphs (e), (f), and (g) of Rule 17g-1, proposed new paragraph (d)
of Rule 17g-3 would provide that the reports required by the rule must
be submitted electronically with the Commission in the format required
by the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-
T.\704\ In addition, because the Rule 17g-3 annual reports are not
required to be made public, the Commission proposes adding new
paragraph (e) to Rule 17g-3.\705\ Proposed new paragraph (e) would, in
the first sentence, instruct an NRSRO that information submitted on a
confidential basis and for which confidential treatment has been
requested pursuant to applicable Commission rules will be accorded
confidential treatment to the extent permitted by law.\706\ Proposed
new paragraph (e) of Rule 17g-3 would, in the second sentence, instruct
an NRSRO that confidential treatment may be requested by marking each
page ``Confidential Treatment Requested'' and by complying with
Commission rules governing confidential treatment.\707\
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\703\ See proposed new paragraphs (d) and (e) of Rule 17g-3.
\704\ See proposed new paragraph (d) of Rule 17g-3.
\705\ See proposed new paragraph (e) of Rule 17g-3.
\706\ See the first sentence of proposed new paragraph (e) of
Rule 17g-3.
\707\ See the second sentence of proposed new paragraph (e) of
Rule 17g-3.
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Proposed Amendments to Regulation S-T. Regulation S-T requires the
electronic filing of any amendments and related correspondence and
supplemental information pertaining to a document that is the subject
of mandated EDGAR submission.\708\ The Commission proposes amending
Rule 101 of Regulation S-T \709\ by adding a new paragraph
(a)(1)(xiv).\710\ Proposed new paragraph (a)(1)(xiv) would identify the
Form NRSROs and the information and documents submitted in Exhibits 1
through 9 of Form NRSRO submitted to the Commission pursuant to
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports
submitted pursuant to Rule 17g-3 as submissions that must be made in
electronic format.\711\
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\708\ See 17 CFR 232.101(a)(1).
\709\ 17 CFR 232.101(a)(1).
\710\ See proposed paragraph (a)(1)(xiv) of Rule 101 under
Regulation S-T.
\711\ Related correspondence and supplemental information are
not automatically disseminated publicly through the EDGAR system but
are immediately available to the Commission staff.
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The Commission also is proposing an amendment to Rule 201 of
Regulation S-T.\712\ Rules 201 and 202 \713\ of Regulation S-T address
hardship exemptions from EDGAR filing requirements, and paragraph (b)
of Rule 13 of Regulation S-T \714\ addresses the related issue of
filing date adjustments. Under Rule 201, if an electronic filer
experiences unanticipated technical difficulties that prevent the
timely preparation and submission of an electronic filing, the filer
may file a properly legended paper copy \715\ of the filing under cover
of Form TH no later than one business day after the date on which the
filing was made.\716\ A filer who files in paper form under the
temporary hardship exemption must submit an electronic copy of the
filed paper document within six business days of the filing of the
paper document.\717\
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\712\ 17 CFR 232.201
\713\ 17 CFR 232.202.
\714\ 17 CFR 232.13(b).
\715\ See 17 CFR 232.201(a).
\716\ 17 CFR 239.65, 249.447, 269.10, and 274.404.
\717\ See 17 CFR 232.201(b).
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In addition, an electronic filer may apply for a continuing
hardship exemption under Rule 202 if it cannot file all or part of a
filing without undue burden or expense.\718\ The application must be
made at least 10 business days before the due date of the filing. In
contrast to the self-executing temporary hardship exemption process, a
filer can obtain a continuing hardship exemption only by submitting a
written application, upon which the Commission, or the Commission staff
pursuant to delegated authority, must then act. Under paragraph (b) of
Rule 13 of Regulation S-T, if an electronic filer in good faith
attempts to file a document, but the filing is delayed due to technical
difficulties beyond the filer's control, the filer may request that the
Commission grant an adjustment of the filing date.
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\718\ See 17 CFR 232.202(a).
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The Commission is proposing to make the temporary hardship
exemption in Rule 201 unavailable for the submissions of Form NRSRO and
the information and documents submitted in Exhibits 1 through 9 of Form
NRSRO under paragraph (e), (f), or (g) of Rule 17g-1 and the annual
reports required under Rule 17g-3.\719\ Specifically, the Commission is
proposing to amend paragraph (a) of Rule 201 of Regulation S-T to add
this group of submissions to the list of submissions for which the
temporary hardship exemption is unavailable.\720\ An NRSRO would
continue to have the ability to apply for a continuing hardship
exemption under Rule 202 if it could not submit all or part of an
application without undue burden or expense or for an adjustment of the
due date under paragraph (b) of Rule 13 if there were technical
difficulties beyond the NRSRO's control.
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\719\ The Commission previously has made unavailable the ability
for filers to use the temporary hardship exemption for EDGAR
submissions of beneficial ownership reports filed by officers,
directors and principal security holders under Section 16(a) of the
Exchange Act. See Securities Act Release No. 8230 (May 7, 2003), 68
FR 25788 (May 13, 2010).
\720\ See proposed amendment to paragraph (a) of Rule 201 of
Regulation S-T.
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For the foregoing reasons, the Commission proposes amending
Regulation S-T: (1) to provide for the mandatory electronic submission
of Form NRSRO and the information and documents contained in Exhibits 1
through 9 of Form NRSRO pursuant to paragraphs (e), (f), or (g) of Rule
17g-1 and the annual reports pursuant to Rule 17g-3;\721\ and (2) to
amend paragraph (a) of Rule 201 to make the temporary hardship
exemption unavailable for submissions of Form NRSROs and the
information and documents contained in Exhibits 1 through 9 under
paragraphs (e), (f), or (g) of Rule 17g-1 and the annual reports under
Rule 17g-3.\722\
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\721\ See proposed new paragraph (a)(1)(xiv) to Rule 101 of
Regulation S-T.
\722\ See proposed amendment to paragraph (a) of Rule 201 of
Regulation S-T.
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Request for Comment
The Commission generally requests comment on all aspects of these
proposals to require the electronic submission of Form NRSRO under
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports under
Rule 17g-3. The Commission also seeks comment on the following:
1. Should applicants be required to submit Form NRSRO
electronically under paragraph (a), (b), (c), or (d) of Rule 17g-1?
2. What would be the impact of making the Form NRSROs required
under paragraphs (e), (f), and (g) of Rule
[[Page 33485]]
17g-1 and the annual reports required under Rule 17g-3 mandatory
electronic submissions? Are there additional burdens or costs that
would result from requiring these submissions to be made
electronically?
3. Are there any other difficulties and considerations unique to
these proposed requirements? If so, what aspect of the proposed
requirements would be burdensome? Are there other alternatives that
would be less burdensome? Provide specific details and alternative
approaches.
4. Should NRSROs be required to submit the financial information in
Form NRSRO and the information and documents contained in Exhibits 1
through 9 and the Rule 17g-3 annual reports using the XBRL format?
Should NRSROs be required to use eXtensible Markup Language (XML) for
EDGAR for non-financial information? Provide detailed information on
any difficulties and considerations as well as benefits concerning such
requirements.
5. Should the temporary hardship exemption be available for
submission of these filings?
M. Other Amendments
The Commission is proposing additional amendments to several of the
NRSRO rules in response to amendments the Dodd-Frank Act made to
sections of the Exchange Act that authorize or otherwise are relevant
to these rules.
1. Changing ``Furnish'' to ``File''
Section 932(a) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to replace the word ``furnish'' with the word ``file'' in
paragraphs (b), (d), (k), and (l).\723\ In addition, Section 932(a) of
the Dodd-Frank Act amended paragraph (j) of Section 15E of the Exchange
to, among other things, add a requirement that an NRSRO ``file'' a
report of the designated compliance officer.\724\ The Dodd-Frank Act,
however, did not replace the word ``furnish'' with the word ``file'' in
Section 15E(a) (which governs the submission of initial applications
for registration as an NRSRO), Section 15E(e) (which governs the
submission of voluntary withdrawals from registration), and Section
17(a)(1) (which provides the Commission with authority to, among other
things, require NRSROs to furnish reports).\725\ Consistent with the
amendments to Section 15E described above, the Commission is proposing
to amend Rule 17g-1 and Rule 17g-3 to treat certain of the submissions
required in those rules as ``filings'' rather than ``furnishings.''
\726\ The Commission also is proposing to make corresponding amendments
to Form NRSRO and the Instructions to Form NRSRO.
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\723\ See Public Law 111-203 Sec. 932(a) and 15 U.S.C. 78o-
7(b), (d), (k), and (l).
\724\ See Public Law 111-203 Sec. 932(a) and 15 U.S.C. 78o-
7(j)(5).
\725\ See 15 U.S.C. 78o-7(e) and 15 U.S.C. 78q(a)(1).
\726\ Among other things, an application, report, or document
``filed'' with the Commission pursuant to the Exchange Act or the
rules thereunder is subject to the provisions of Section 18 of the
Exchange Act. See 15 U.S.C. 78o-7r.
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The Commission proposes amending paragraphs (a), (b), (c), and (d)
of Rule 17g-1 to treat Form NRSROs submitted pursuant to those
provisions as ``filings'' rather than ``furnishings.'' \727\ These
paragraphs govern the submissions of initial applications for
registration as an NRSRO. The Commission notes that the Dodd-Frank Act
did not replace the word ``furnish'' with the word ``file'' in Section
15E(a) of the Exchange Act, which addresses the submission of initial
applications for registration. The Commission, however, preliminarily
believes that this was an inadvertent omission. For example, Section
15E(b)(1) refers to information ``required to be filed'' under Section
15E(a)(1)(B)(i) of the Exchange Act (emphasis added).\728\ Similarly,
Section 15E(d)(1)(B) of the Exchange Act refers to ``the date on which
an application for registration is filed with the Commission''
(emphasis added).\729\ In addition, the legislative history of Section
932(a) states that ``[Title IX, Subtitle C, of the Dodd-Frank Act]
requires all references to `furnish' be replaced with the word `file'
in existing law.'' \730\ For these reasons, the Commission proposes to
amend paragraphs (a), (b), (c), and (d) of Rule 17g-1 to treat the
submissions pursuant to those paragraphs as ``filings.''
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\727\ See proposed amendments to paragraphs (a), (b), (c), and
(d) of Rule 17g-1.
\728\ See 15 U.S.C. 78o-7(a)(1)(B)(i).
\729\ See 15 U.S.C. 78o-7(d)(1)(B).
\730\ See Conference Report, H.R. 4173 (June 29, 2010), p. 872.
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The Commission proposes amending paragraphs (e) and (f) of Rule
17g-1 to treat Form NRSROs submitted pursuant to those provisions as
``filings'' rather than ``furnishings.'' \731\ As noted above, Section
932(a) of the Dodd-Frank Act amended Section 15E(b) of the Exchange Act
to replace the word ``furnish'' with the word ``file.'' \732\ Section
15E(b) of the Exchange Act addresses updating Form NRSRO to keep it
current and the submission of the annual certification.\733\ Paragraphs
(e) and (f) of Rule 17g-1 govern the submission of updated Form NRSROs
and annual certifications, respectively.\734\ Consequently, the
Commission proposes amending these paragraphs to treat the submissions
of an updated Form NRSRO and an annual certification, respectively, as
``filings'' rather than ``furnishings.'' \735\
---------------------------------------------------------------------------
\731\ See proposed amendments to paragraphs (e) and (f) of Rule
17g-1.
\732\ See Public Law 111-203 Sec. 932(a)(1) and 15 U.S.C. 78o-
7(b).
\733\ See 15 U.S.C. 78o-7(b)(1) and (2).
\734\ See 17 CFR 240.17g-1(e) and (f).
\735\ See proposed amendments to paragraphs (e) and (f) of Rule
17g-1.
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The Commission is not proposing to amend paragraph (g) of Rule 17g-
1 to replace the word ``furnish'' with the word ``file.'' This
paragraph implemented Section 15E(e) of the Exchange Act, which
addresses the submission by an NRSRO of a written notice to voluntarily
withdraw a registration.\736\ The Commission preliminarily believes
that it is not necessary to subject a notice of withdrawal of
registration to the higher standards of a ``filing.''
---------------------------------------------------------------------------
\736\ See 15 U.S.C. 78o-7(e) and 17 CFR 240.17g-1(g).
---------------------------------------------------------------------------
Given the proposed amendments to paragraphs (a), (b), (c), (d),
(e), and (f) of Rule 17g-1, the Commission proposes amending paragraphs
(h) and (i) of Rule 17g-1 to reflect that a Form NRSRO would be
``filed'' with the Commission under the proposed amendments to
paragraphs (a), (b), (c), (d), (e), and (f) of Rule 17g-1 and
``furnished'' to the Commission under paragraph (g) of Rule 17g-1.
The Commission is proposing to amend paragraphs (a)(1) through
(a)(5) of Rule 17g-3 to treat the reports submitted pursuant to those
provisions as ``filings'' rather than ``furnishings.'' \737\ As noted
above, Section 932(a) of the Dodd-Frank Act amended Section 15E(k) of
the Exchange Act to replace the word ``furnish'' with the word
``file.'' \738\ Section 15E(k) of the Exchange Act provides the
Commission with authority to require NRSROs to submit annual financial
reports.\739\ The Commission adopted paragraphs (a)(1) through (a)(5)
of Rule 17g-3 under Section 15E(k).\740\ Consequently, the Commission
proposes amending Rule 17g-3 to treat the reports identified in
paragraphs (a)(1) through (a)(5) as ``filings'' rather than
``furnishings.'' \741\
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\737\ See proposed amendments to paragraphs (a)(1) through (5)
of Rule 17g-3.
\738\ See Public Law 111-203 Sec. 932(a)(6) and 15 U.S.C. 78o-
7(k).
\739\ See 15 U.S.C. 78o-7(k).
\740\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33590-33593 (June 18, 2007).
\741\ See 15 U.S.C. 78o-7(k) and proposed amendments to
paragraphs (a)(1)-(5) of Rule 17g-3.
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[[Page 33486]]
In addition, the Commission proposes that the new report on
internal controls discussed in Section II.A.3 of this release and the
new report of the designated compliance officer discussed in Section
II.K of this release be treated as ``filings'' rather than
``furnishings.'' \742\ Section 15E(c)(3)(B) of the Exchange Act
provides, among other things, that the Commission shall prescribe rules
requiring NRSROs to ``submit'' to the Commission an internal controls
report.\743\ In addition, Section 15E(j)(5)(B) of the Exchange Act,
``Submission of reports to the Commission,'' provides that an NRSRO
``shall file'' the report of the designated compliance officer together
with the financial report that is required to be ``submitted'' to the
Commission under Section 15E of the Exchange Act.\744\ As discussed in
Section II.K of this release, the financial reports are submitted
pursuant to Rule 17g-3, which was adopted under Section 15E(k).\745\
Moreover, as noted above, the Section 932(a)(6) of the Dodd-Frank Act
amended Section 15E(k) of the Exchange Act to replace the word
``furnish'' with the word ``file.'' \746\ Consequently, given the
interchangeable use of the word ``submit'' with the word ``file'' in
Section 15E(j)(5)(B) and the legislative history discussed above, the
Commission proposes to treat the new report on internal controls as a
``filing.'' \747\ As noted above, Section 15E(j)(5)(B) of the Exchange
Act explicitly provides that an NRSRO ``shall file'' the report of the
designated compliance officer.\748\ Therefore, the Commission proposes
to use the term ``file'' in proposed new paragraph (a)(8) of Rule 17g-
3.\749\
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\742\ See proposed new paragraphs (a)(7) and (a)(8) of Rule 17g-
3.
\743\ See 15 U.S.C. 78o-7(c)(3)(B).
\744\ See 15 U.S.C. 78o-7(j)(5)(B).
\745\ See 15 U.S.C. 78o-7(k) and 17 CFR 240.17g-3; see also
Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations, 72 FR at 33590-33593
(June 18, 2007).
\746\ See Public Law 111-203 Sec. 932(a)(6) and 15 U.S.C. 78o-
7(k).
\747\ See proposed new paragraph (a)(7) of Rule 17g-3.
\748\ See 15 U.S.C. 78o-7(j)(5)(B).
\749\ See proposed new paragraph (a)(8) of Rule 17g-3.
---------------------------------------------------------------------------
The Commission does not propose to amend paragraph (a)(6) of Rule
17g-3 to treat the report identified in that paragraph as a filing.
This paragraph was adopted under Section 17(a)(1) of the Exchange
Act.\750\ Section 17(a)(1) of the Exchange Act provides that any report
an NRSRO ``is required by Commission rules under this paragraph to make
and disseminate to the Commission shall be deemed furnished to the
Commission.'' \751\ As noted above, the Dodd-Frank Act did not change
this provision to make the report a ``filing.''
---------------------------------------------------------------------------
\750\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6464-65 (Feb. 9, 2009).
\751\ See 15 U.S.C. 78o-7q(a)(1).
---------------------------------------------------------------------------
The Commission is proposing to amend Form NRSRO and the
Instructions to Form NRSRO to conform the Form and its Instructions to
the proposed amendments discussed above.\752\ Under the proposed
amendments, the Commission would replace the word ``furnish'' with the
word ``file'' when referring to a Form NRSRO submitted under paragraphs
(a), (b), (c), (d), (e), and (f) of Rule 17g-1. In addition, in some
cases, the Commission proposes using the term ``submit'' when referring
to a Form NRSRO that may have been submitted prior to enactment of the
Dodd-Frank Act when the submission would have been ``furnished to'' as
opposed to ``filed with'' the Commission. The Commission intends the
word ``submit'' as used in this context to mean the submission was
either ``furnished'' or ``filed'' depending on the applicable
securities laws in effect at the time of the submission.
---------------------------------------------------------------------------
\752\ See proposed amendments to Form NRSRO and the Instructions
to Form NRSRO.
---------------------------------------------------------------------------
Request for Comment
The Commission generally requests comment on all aspects of these
proposals to replace the word ``furnish'' with the word ``file'' in the
Commission's NRSRO rules.
2. Amended Definition of NRSRO
As discussed above in Section II.I.1.c of this release, the first
prong of the definition of ``nationally recognized statistical rating
organization'' in Section 3(a)(62) of the Exchange Act, prior to being
amended by the Dodd-Frank Act, provided that the entity ``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
under Section 15E.'' \753\ Section 932(b) of the Dodd-Frank Act deleted
this prong of the definition.\754\ Instruction F.4 to Form NRSRO
contains a definition of ``NRSRO'' that incorporates the Section
3(a)(62) definition as originally enacted. The Commission proposes
amending this definition to conform it to the Section 3(a)(62)
definition as amended by the Dodd-Frank Act.\755\
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\753\ See Section 3(a)(62)(A) of the Exchange Act (15 U.S.C.
78c(a)(62)(A) added by the Rating Agency Act of 2006.
\754\ See Public Law 111-203 Sec. 932(b).
\755\ See proposed amendment to Instruction F.4 to Form NRSRO.
---------------------------------------------------------------------------
Request for Comment
The Commission generally requests comment on all aspects of this
proposal to amend the definition of NRSRO in Instruction F.4 to Form
NRSRO.
3. Definition of Asset-Backed Security
Several of the Commission's NRSRO rules impose requirements
specific to credit ratings for structured finance products by providing
that the rules apply to credit ratings with respect to ``a security or
money market instrument issued by an asset pool or as part of any
asset-backed or mortgage-backed-securities transaction.'' \756\ This
language mirrors the text of Section 15E(i) of the Exchange Act, which
provides the Commission with authority to prohibit an NRSRO from the
practice of ``lowering or threatening to lower a credit rating on, or
refusing to rate, securities or money market instruments issued by an
asset pool or as part of any asset-backed or mortgage-backed securities
transaction, unless a portion of the assets within such pool or part of
such transaction, as applicable, also is rated by the [NRSRO].'' \757\
As noted earlier, with respect to this language, the Commission has
provided the following interpretation,
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\756\ See paragraphs (a)(2)(iii), (a)(7), and (b)(9) of Rule
17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs (a)(3) and (b)(9)
of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.
\757\ See 15 U.S.C. 78o-7(i).
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'').\758\
---------------------------------------------------------------------------
\758\ Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 63832, footnote 3 (Dec. 4, 2009).
Section 941(a) of the Dodd-Frank Act amended Section 3 of the
Exchange Act to add paragraph (a)(77), which defines the term ``asset-
backed security.'' \759\ The Exchange Act definition of ``asset-backed
security,'' includes a ``collateralized mortgage obligation.'' \760\
Consequently, the Commission preliminarily believes that the current
identification of structured finance products in the Commission's rules
(i.e., ``a security or money market instrument
[[Page 33487]]
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction'') may have redundant terms insomuch as
given the new definition of ``asset-backed security'' in Section
3(a)(77) of the Exchange Act an ``asset-backed securities transaction''
would include a ``mortgage-backed securities transaction.'' \761\
Accordingly, the Commission is proposing to delete the term ``or
mortgage-backed'' from the identification of structured finance
products in these rules.\762\ The term ``asset-backed security[y]'' as
used in the proposed new NRSRO rule definition would mean an ``asset-
backed security'' as defined in Section 3(a)(77) of the Exchange Act.
The term ``security or money market instrument issued by an asset pool
or as part of any asset-backed securities transaction'' would include
an asset-backed security as defined in Section 3(a)(77) of the Exchange
Act and other structured finance products relating to asset-backed
securities such as synthetic CDOs.
---------------------------------------------------------------------------
\759\ See Public Law 111-203 Sec. 941(a) and 15 U.S.C.
78c(a)(77).
\760\ See 15 U.S.C. 78c(a)(77)(A)(i).
\761\ See 15 U.S.C. 78c(a)(77)(A).
\762\ See proposed amendments to paragraphs (a)(2)(iii), (a)(7),
and (b)(9) of Rule 17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs
(a)(3) and (b)(9) of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.
---------------------------------------------------------------------------
Request for Comment
The Commission generally requests comment on all aspects of these
proposals to delete the term ``or mortgage-backed'' from the
identification of structured finance products in the NRSRO rules. The
Commission also seeks comment on the following:
1. Would the proposal to delete the term ``or mortgage-backed''
from the identification of structured finance products in the NRSRO
rules change the requirements of these rules in any way? For example,
would it exclude certain types of structured finance products that
currently are within the scope of these rules by narrowing the
definition? Alternatively, would it add certain types of structured
finance products that currently are outside the scope of these rules by
broadening the definition?
4. Other Amendments to Form NRSRO
The Commission is proposing additional amendments to the
Instructions to Form NRSRO to clarify certain requirements because the
instructions, as written, have created some confusion among NRSROs.
a. Clarification With Respect to Items 6 and 7
The Commission is proposing amendments to Form NRSRO and the
Instructions for Form NRSRO to remove potential ambiguity as to how an
applicant and NRSRO must determine the approximate number of credit
ratings outstanding for the purposes of Items 6 and 7. In addition, the
Commission is seeking comment on how certain types of obligors,
securities, and money market instruments should be classified for the
purposes of Items 6 and 7.
Item 6 requires a credit rating agency applying to be registered as
an NRSRO or an NRSRO applying to be registered in a new class of credit
ratings to provide, among other things, the approximate number of
credit ratings it has outstanding as of the date of the application in
each class of credit ratings for which it is seeking registration.\763\
Item 7 requires an NRSRO submitting a Form NRSRO for the purpose of
updating information in the Form, making the annual certification, or
withdrawing a registration to provide, among other things, the
approximate number of credit ratings it had outstanding as of the end
of the most recently ended calendar year in each class of credit
ratings for which it is registered.\764\ As noted earlier, the classes
of credit ratings for which an NRSRO can be registered are: (1)
financial institutions, brokers, or dealers; \765\ (2) insurance
companies; \766\ (3) corporate issuers; \767\ (4) issuers of asset-
backed securities (as that term is defined in Section 1101(c) of part
229 of Title 17, Code of Federal Regulations, as in effect on the date
of enactment of this paragraph); \768\ and (5) issuers of government
securities, municipal securities, or securities issued by a foreign
government.\769\
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\763\ See Item 6 of Form NRSRO and Instructions B, C, D, and H
(as it relates to Item 6) to Form NRSRO.
\764\ See Item 7 of Form NRSRO and Instructions E, F, G, and H
(as it relates to Item 7) to Form NRSRO.
\765\ See 15 U.S.C. 78c(a)(62)(A)(i).
\766\ See 15 U.S.C. 78c(a)(62)(A)(ii).
\767\ See 15 U.S.C. 78c(a)(62)(A)(iii).
\768\ See 15 U.S.C. 78c(a)(62)(A)(iv).
\769\ See 15 U.S.C. 78c(a)(62)(A)(v).
---------------------------------------------------------------------------
NRSROs have raised questions about how they should count the number
of credit ratings outstanding in a given class of credit ratings for
the purposes of Form NRSRO.\770\ For example, in some classes, certain
NRSROs count the number of issuers rated but not the number of
securities or money market instruments rated.\771\ Other NRSROs count
the number of securities or money market instruments rated (but do
include the number of rated obligors in the total).\772\ Finally, some
NRSROs count the number of obligors, securities, and money market
instruments rated.\773\
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\770\ See, e.g., GAO Report 10-782, pp. 46-47.
\771\ Id.
\772\ Id.
\773\ Id.
---------------------------------------------------------------------------
The Commission's intent in Items 6 and 7 is to elicit the total
number of obligors, securities, and money market instruments in a given
class of credit ratings for which the applicant or NRSRO has assigned a
credit rating that was outstanding as of the applicable date (i.e., the
date of the application in the case of Item 6 and the date of the most
recent calendar year-end in the case of Item 7). Consequently, to make
the Commission's expectations more clear, the Commission is proposing
to amend the text in Items 6.A and 7.A of Form NRSRO to clarify that an
applicant or NRSRO must provide the approximate number of obligors,
securities, and money market instruments in each class of credit
ratings for which the applicant or NRSRO has an outstanding credit
rating.\774\ The text in Items 6.A and 7.A currently provides that the
applicant or NRSRO must provide the approximate number of credit
ratings outstanding. Consequently, the amendment would clarify that the
applicant or NRSRO must provide the number of ``obligors, securities,
and money market instruments'' in the given class for which the
applicant or NRSRO assigned a credit rating that was outstanding as of
the applicable date.
---------------------------------------------------------------------------
\774\ See proposed amendments to the text in Items 6.A and 7.A
respectively.
---------------------------------------------------------------------------
In addition, the Commission is proposing to amend Instruction H to
Form NRSRO (as it relates to Items 6.A and 7.A) in four ways. First, in
conformity with the proposed amendments to the text of Items 6.A and
7.A in the Form, the Instructions would be amended to provide that the
applicant or NRSRO must, for each class of credit ratings, provide in
the appropriate box the approximate number of obligors, securities, and
money market instruments in that class for which the applicant or NRSRO
presently has a credit rating outstanding as of the date of the
application (Item 6.A) or had a credit rating outstanding as of the
most recently ended calendar year (Item 7.A).
Second, Instruction H would be amended to provide that the
applicant or NRSRO must treat as a separately rated security or money
market instrument each individually rated security and money market
instrument that, for example, is assigned a distinct CUSIP or other
unique identifier, has distinct credit enhancement features as compared
with other securities or money market instruments of the same
[[Page 33488]]
issuer, or has a different maturity date as compared with other
securities or money market instruments of the same issuer. This
proposed instruction would be designed to clarify that each security or
money market instrument of an issuer must be included in the count if
it is assigned a credit rating by the applicant or NRSRO. For example,
if the issuer is in the structured finance class, each tranche of the
structured finance product that is assigned a credit rating must be
included in the count. In addition, if an issuer issues securities or
money market instruments that have different maturities, the applicant
or NRSRO must include each such security in the count if the NRSRO
assigns a credit rating to the security or money market instrument.
Third, Instruction H would be amended to provide that the applicant
or NRSRO must not include an obligor, security, or money market
instrument in more than one class of credit rating. In other words, the
applicant or NRSRO cannot double count an obligor, security, or money
market instrument by including it in the totals for two or more classes
of credit ratings. For example, some securities have characteristics
that could cause an applicant or NRSRO to classify them as municipal
securities or structured finance products.\775\ Nonetheless, the
applicant or NRSRO would need to select the most appropriate class for
the security or money market instrument and include it in the count for
that class. Because some obligors, securities, and money market
instruments have characteristics that could cause them to be assigned
more than one class, the Commission is seeking comment below on which
class would be the most appropriate for these types of obligors,
securities, and money market instruments. Based on the comments
received, the Commission may decide to prescribe by rule or identify
through guidance how certain types of obligors, securities, and money
market instruments should be classified.\776\
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\775\ For example, tax exempt housing bonds share
characteristics of both municipal securities and structured finance
products.
\776\ As noted above in Sections II.E.1 and II.E.2 of this
release, the comments also could inform Commission rulemaking or
guidance with respect to the performance statistics that would need
to be disclosed pursuant to the proposed enhancements to Exhibit 1
to Form NRSRO and the ratings history information that would need to
be disclosed pursuant to new paragraph (b) of Rule 17g-7. The goal
would be to have consistent disclosures in Items 6 and 7 of Form
NRSRO, Exhibit 1 to Form NRSRO, and in the information about credit
ratings histories that would be required under proposed new
paragraph (b) of Rule 17g-7. The Commission notes other requirements
in the securities laws may be triggered based on the type of
obligor, security, or money market instrument being rated. See,
e.g., 17 CFR 240.17g-5(a)(3) (which applies when an NRSRO issues or
maintains a credit rating for a security or money market instrument
issued by an asset pool or part of any asset-backed or mortgage-
backed securities transaction). The Commission, in eliciting
comment, is not suggesting that an obligor, security, or money
market instrument having shared characteristics of, for example, a
structured finance product and a municipal security, would not be
subject to these other requirements because the most appropriate
classification for purposes of Items 6 and 7 of Form NRSRO, Exhibit
1 to Form NRSRO, and proposed new paragraph (b) of Rule 17g-7 would
be to classify it as a type of obligor, security, or money market
instrument not subject to the other requirements.
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Fourth, Instruction H would be amended to provide that the
applicant or NRSRO must include in the class of credit ratings
described in Section 3(a)(62)(B)(iv) of the Exchange Act (issuers of
asset-backed securities) to the extent not described in Section
3(a)(62)(B)(iv), any rated security or money market instrument issued
by an asset pool or as part of any asset-backed securities transaction.
As discussed above in Section II.M.3 of this release, Section
3(a)(62)(B)(iv) contains a narrower definition of ``asset-backed
security'' than the Commission uses for the purposes of its NRSRO
rules.\777\ In fact, the definition is narrower than the new definition
of ``asset-backed security'' in Section 3(a)77 of the Exchange
Act.\778\ The Commission expects an applicant and NRSRO to use the
broader definition that captures all structured finance products when
providing the number of credit ratings outstanding in this class. The
proposed amendments to Instruction H to Form NRSRO would be designed to
make this expectation more clear.
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\777\ Compare 15 U.S.C. 78c(a)(62)(B)(iv), with: Instructions
for Exhibit 1 to Form NRSRO; paragraphs (a)(2)(iii), (a)(7), and
(b)(9) of Rule 17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs
(a)(3) and (b)(9) of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.
\778\ Compare 15 U.S.C. 78c(a)(62)(B)(iv), with 15 U.S.C.
78c(a)(77).
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Request for Comment
The Commission generally requests comment on all aspects of this
proposal to amend Form NRSRO Items 6.A and 7.A and Instruction H to
Form NRSRO as it relates to Items 6.A and 7.A. The Commission also
seeks comment on the following:
1. Would the proposed amendments to Items 6.A and 7.A and
Instruction H to Form NRSRO as it relates to Items 6.A and 7.A make the
Commission's expectations sufficiently clear in terms of providing the
approximate number of credit ratings outstanding in each class for
which an applicant is seeking registration and an NRSRO is registered?
If not, how could the proposed amendments be modified to provide
greater clarity?
2. How should tax-exempt housing bonds be classified for the
purposes of Items 6 and 7? For example, should they be classified as:
(1) Issuers of asset-backed securities identified in Section
3(a)(62)(A)(iv) of the Exchange Act as broadened to include any rated
security or money market instrument issued by an asset pool or as part
of any asset-backed securities transaction; or (2) issuers of
government securities, municipal securities, or securities issued by a
foreign government identified in Section 3(a)(62)(A)(v) of the Exchange
Act? Is there another more appropriate classification? Commenters
should provide explanations for their choices.
3. How should project finance issuances be classified for the
purposes of Items 6 and 7? For example, should they be classified as:
(1) Corporate issuers identified in Section 3(a)(62)(A)(iii) of the
Exchange Act; (2) issuers of asset-backed securities identified in
Section 3(a)(62)(A)(iv) of the Exchange Act as broadened to include any
rated security or money market instrument issued by an asset pool or as
part of any asset-backed securities transaction; or (3) issuers of
government securities, municipal securities, or securities issued by a
foreign government identified in Section 3(a)(62)(A)(v) of the Exchange
Act? Is there another more appropriate classification? Commenters
should provide explanations for their choices.
4. How should supra-national issuers (e.g., the World Bank) be
classified for the purposes of Items 6 and 7? For example, should they
be classified as: (1) Financial institutions, brokers, or dealers
identified in Section 3(a)(62)(A)(i) of the Exchange Act; or (2)
issuers of government securities, municipal securities, or securities
issued by a foreign government identified in Section 3(a)(62)(A)(v) of
the Exchange Act? Is there another more appropriate classification?
Commenters should provide explanations for their choices.
5. How should covered bonds be classified? For example, should they
be classified as: (1) Financial institutions, brokers, or dealers
identified in Section 3(a)(62)(A)(i) of the Exchange Act; or (2)
issuers of asset-backed securities identified in Section
3(a)(62)(A)(iv) of the Exchange Act as broadened to include any rated
security or money market instrument issued by an asset pool or as part
of any asset-backed securities transaction? Is there another more
appropriate classification?
[[Page 33489]]
Commenters should provide explanations for their choices.
6. How should municipal structured finance issuers be classified?
For example, should they be classified as: (1) Issuers of asset-backed
securities identified in Section 3(a)(62)(A)(iv) of the Exchange Act as
broadened to include any rated security or money market instrument
issued by an asset pool or as part of any asset-backed securities
transaction; or (2) issuers of government securities, municipal
securities, or securities issued by a foreign government identified in
Section 3(a)(62)(A)(v) of the Exchange Act? Is there another more
appropriate classification? Commenters should provide explanations for
their choices.
7. How should for-profit health care companies (e.g., hospitals,
assisted living facilities, nursing homes) be treated if a municipality
issues securities on behalf of the company? For example, should they be
classified as: (1) Corporate issuers identified in Section
3(a)(62)(A)(iii) of the Exchange Act; or (2) issuers of government
securities, municipal securities, or securities issued by a foreign
government identified in Section 3(a)(62)(A)(v) of the Exchange Act? Is
there another more appropriate classification? Commenters should
provide explanations for their choices.
8. How should securitizations of health care receivables be
classified? For example, should they be classified as: (1) Issuers of
asset-backed securities identified in Section 3(a)(62)(A)(iv) of the
Exchange Act as broadened to include any rated security or money market
instrument issued by an asset pool or as part of any asset-backed
securities transaction; or (2) issuers of government securities,
municipal securities, or securities issued by a foreign government
identified in Section 3(a)(62)(A)(v) of the Exchange Act? Is there
another more appropriate classification? Commenters should provide
explanations for their choices.
9. How should insurance-linked securities be classified? For
example, should they be classified as: (1) Insurance companies
identified in Section 3(a)(62)(A)(ii) of the Exchange Act; or (2)
issuers of asset-backed securities identified in Section
3(a)(62)(A)(iv) of the Exchange Act as broadened to include any rated
security or money market instrument issued by an asset pool or as part
of any asset-backed securities transaction? Is there another more
appropriate classification? Commenters should provide explanations for
their choices.
10. Are there other types of obligors, securities, or money market
instruments that share characteristics of one or more classes of credit
ratings identified in Section 3(a)(62)(A) of the Exchange Act? If so,
identify each such type of obligor, security, or money market
instrument, provide a proposed classification, and explain the reason
for the proposed classification.
b. Clarification With Respect to Exhibit 8
The Commission proposes to amend Instruction H to Form NRSRO as it
relates to Exhibit 8. Exhibit 8 requires an applicant and NRSRO to
provide the number of credit analysts it employs and the number of
credit analyst supervisors. The Commission is proposing two amendments
to the instructions for Exhibit 8. The first amendment would delete a
parenthesis in the instructions that provides that the applicant or
NRSRO should ``see definition below'' of the term ``credit analyst.''
There is no such definition. The second amendment would clarify that
the applicant or NRSRO, in providing the number of credit analysts,
should include the number of credit analyst supervisors. This would be
designed to ensure that the disclosures in Form NRSRO are comparable
across NRSROs by avoiding the situation in which some NRSROs include
credit analyst supervisors in the total number of credit analysts and
some NRSROs do not include credit analyst supervisors in that amount.
Request for Comment
The Commission generally requests comment on all aspects of this
proposal to amend Instruction H to Form NRSRO as it relates to Exhibit
8.
c. Clarification With Respect to Exhibits 10 through 13
As discussed above, paragraph (i) of Rule 17g-1 requires an NRSRO
to make its current Form NRSRO and information and documents submitted
in Exhibits 1 through 9 to Form NRSRO publicly available on its
Internet Web site, or through another comparable, readily accessible
means within 10 business days after the date of the Commission order
granting an initial application for registration.\779\ An NRSRO is not
required to make Exhibits 10 through 13 of Form NRSRO publicly
available or update them after registration. Instead, an NRSRO must
provide similar information in the annual reports required to be filed
with the Commission pursuant to Rule 17g-3.\780\ An NRSRO is not
required to make the annual reports public. In the past, some NRSRO
have submitted the annual reports required by Rule 17g-3 in the form of
Exhibits 10 through 13, on a confidential basis, as part of the annual
certification. Consequently, the Commission proposes to amend
Instruction H in several places to add a ``Note'' instructing that
after registration, Exhibits 10 through 13 are not required to be made
publicly available by the NRSRO pursuant to Rule 17g-1(i) and they
should not be updated with the filing of the annual certification. The
``Note'' would further instruct that similar information must be filed
with the Commission not more than 90 days after the end of each fiscal
year pursuant to Rule 17g-3.\781\
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\779\ See 17 CFR 240.17g-1.
\780\ See 17 CFR 240.17g-3; also compare Exhibits 10, 11, 12,
and 13 to Form NRSRO and Instruction H of Form NRSRO (as it relates
to those Exhibits), with paragraphs (a) through (5) of Rule 17g-3.
17 CFR 240.17g-3(a)(1)-(5).
\781\ See ``Notes'' proposed to be added to Instruction H to
Form NRSRO.
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Request for Comment
The Commission generally requests comment on all aspects of this
proposal to amend Instruction H to Form NRSRO.
III. General Request for Comment
In responding to the specific requests for comment above, the
Commission encourages interested persons to provide supporting data and
analysis and, when appropriate, suggest modifications to proposed rule
text. Responses that are supported by data and analysis provide great
assistance to the Commission in considering the practicality and
effectiveness of proposed new requirements as well as weighing the
benefits and costs of proposed requirements. In addition, commenters
are encouraged to identify in their responses a specific request for
comment by indicating the section number of the release and question
number within that section to which the response is directed (e.g.,
Section II.E.1.a, Question 15).
The Commission also seeks comment on the proposals as a whole. In
this regard, the Commission seeks comment on the following:
1. How would the proposals integrate with provisions in other
Titles and Subtitles of the Dodd-Frank Act and any regulations or
proposed regulations under those other Titles and Subtitles?
2. How would the proposals integrate with existing requirements
applicable to NRSROs in the Exchange Act and the regulations adopted
under authority in the Exchange Act?
[[Page 33490]]
3. What should the implementation timeframe be for the proposed
amendments and new rules? For example, should the compliance date be 60
days after publication in the Federal Register? Alternatively, should
the compliance date be 90, 120, 150, 180, or some other number of days
after publication? Should the proposed requirements have different time
frames before their compliance dates are triggered? For example, would
it take longer to come into compliance with certain of these proposals
than others? If so, rank the requirements in terms of the length of
time it would take to come into compliance with them and propose a
schedule of compliance dates.
IV. Paperwork Reduction Act
Certain provisions of the proposed rule amendments and proposed new
rules would contain new ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\782\ The Commission has submitted the proposed rule
amendments and proposed new rules 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 OMB
control number.
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\782\ 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
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The titles for the collections of information are:
(1) Rule 17g-1, Application for registration as a nationally
recognized statistical rating organization; Form NRSRO, and Form NRSRO
Instructions (OMB Control Number 3235-0625);
(2) Rule 17g-2, Records to be made and retained by nationally
recognized statistical rating organizations (OMB Control Number 3235-
0628);
(3) Rule 17g-3, Annual financial reports to be furnished by
nationally recognized statistical rating organizations \783\ (OMB
Control Number 3235-0626);
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\783\ The Commission is proposing to amend the title of Rule
17g-3 to read, ``Annual financial and other reports to be filed or
furnished by nationally recognized statistical rating
organizations.''
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(4) Rule 17g-7, Disclosure requirements (OMB Control Number 3235-
0656);
(5) Rule 17g-8, Policies and procedures (a proposed new collection
of information);
(6) Rule 17g-9, Standards of training, experience, and competence
for credit analysts (a proposed new collection of information);
(7) Rule 17g-10, Certification of providers of third-party due
diligence services in connection with asset-backed securities; Form ABS
Due Diligence-15E (a proposed new collection of information);
(8) Form ABS-15G (OMB Control Number 3235-0675);
(9) Rule 15Ga-2 (a proposed new collection of information);
(10) Regulation S-T, General Rules and Regulations for Electronic
Filing (OMB Control Number 3235-0424); and
(11) Form ID (OMB Control Number 3235-0328).
The proposed amendments to Rule 17g-5 (discussed in Section II.B of
this release) and Rule 17g-6 (discussed in Section II.M.3 of this
release) do not contain a collection of information requirement within
the meaning of the PRA.
A. Summary of Collections of Information Under the Proposed Rules and
Rule Amendments
In accordance with the Dodd-Frank Act and to enhance oversight, the
Commission is soliciting comment on proposed amendments to existing
rules and proposed new rules that would apply to NRSROs, providers of
third-party due diligence services for Exchange Act-ABS, and issuers
and underwriters of Exchange Act-ABS. The following proposals contain
new ``collection of information'' requirements within the meaning of
the PRA.
1. Proposed Amendments to Rule 17g-1
The Commission is proposing to amend Rule 17g-1.\784\ First, to
implement rulemaking mandated in Section 15E(q)(2)(D) of the Exchange
Act, the Commission is proposing to amend paragraph (i) of Rule 17g-1,
which requires an NRSRO to make its current Form NRSRO and formation
and documents submitted in Exhibits 1 through 9 publicly available on
its Internet Web site or through another comparable, readily accessible
means within 10 business days of being granted an initial registration
or a registration in an additional class of credit ratings, and within
10 business days of furnishing a Form NRSRO to update information on
the Form, to provide the annual certification, and to withdraw a
registration.\785\ The Commission's proposed amendment would require an
NRSRO to make Form NRSRO and Exhibits 1 through 9 freely available on
an easily accessible portion of its corporate Internet Web site.\786\
The proposed amendment to paragraph (i) also would remove the option
for an NRSRO to make its Form NRSRO publicly available ``through
another comparable, readily accessible means'' as an alternative to Web
site disclosure.\787\ In addition, the Commission is proposing amending
paragraph (i) to provide that Exhibit 1 of Form NRSRO (the performance
measurement statistics) be made freely available in writing when
requested.\788\
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\784\ 17 CFR 240.17g-1.
\785\ See 15 U.S.C. 78o-7(q)(2)(D) and proposed amendments to
paragraph (i) of Rule 17g-1; see also Section II.E.1.b of this
release for a more detailed discussion of this proposal.
\786\ See proposed amendments to paragraph (i) of Rule 17g-1.
\787\ Id.
\788\ Id.
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Second, the Commission is proposing to amend paragraphs (e), (f),
and (g) of Rule 17g-1 to require NRSROs to use the Commission's EDGAR
system to electronically submit Form NRSRO and Exhibits 1 through 9
with the Commission in the format required by the EDGAR Filer Manual,
as defined in Rule 11 of Regulation S-T.\789\
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\789\ See proposed amendments to paragraphs (e), (f), and (g) of
Rule 17g-1; see also Section II.L of this release for a more
detailed discussion of these proposals.
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2. Proposed Amendments to Instructions for Exhibit 1 to Form NRSRO
The Commission is proposing to amend the instructions for Exhibit 1
to Form NRSRO.\790\ The proposed amendments would be designed to
implement rulemaking mandated in Section 15E(q) of the Exchange
Act.\791\ In particular, the amendments would confine the disclosures
in the Exhibit to transition and default rates and certain limited
supplemental information.\792\ Moreover, the enhancements would
standardize the production and presentation of the transition and
default rates.\793\ Specifically, the amendments would require the
transition and default rates in Exhibit 1 to be produced using a
``single cohort approach.'' \794\ Under this approach, an applicant and
NRSRO, on an annual basis, would be required to compute how the credit
ratings assigned to obligors, securities, and money market instruments
in a particular class or subclass of credit rating outstanding on the
date 1, 3, and 10 years prior to the most recent calendar year-end
[[Page 33491]]
performed during respective 1, 3, and 10 year time periods.\795\
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\790\ See Instruction H to Form NRSRO (as it relates to Exhibit
1).
\791\ See 15 U.S.C. 78o-7(q) and proposed amendments to the
instructions for Exhibit 1; see also Section II.E.1.a of this
release for a more detailed discussion of this proposal.
\792\ See proposed amendments to the instructions for Exhibit 1.
\793\ Id.
\794\ Id.
\795\ Id.
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Under the amendments, the proposed new instructions would be
divided into paragraphs (1), (2), (3), and (4), some of which would
have subparagraphs.\796\ The proposed new paragraphs would contain
specific instructions with respect to, among other things, how required
information should be presented in the Exhibit (including the order of
presentation) and how transition and default rates should be produced
using a single cohort approach.\797\ As with all information that must
be submitted in Form NRSRO and its Exhibits, applicants and NRSROs
would be subject to these new requirements.\798\
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\796\ See proposed paragraphs (1)-(4) of the instructions for
Exhibit 1.
\797\ Id.
\798\ See, e.g., 17 CFR 240.17g-1; see also Instructions A.1, B,
C, D, E, and F to Form NRSRO.
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3. Proposed Amendments to Rule 17g-2
The Commission proposes a number of amendments to Rule 17g-2.\799\
First, the Commission proposes adding new paragraph (a)(9) to Rule 17g-
2 to identify the policies and procedures an NRSRO is required to
establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of
the Exchange Act and paragraph (c) of Rule 17g-8 as a record that must
be made and retained.\800\ Second, the Commission proposes adding new
paragraph (b)(12) to Rule 17g-2 to identify the internal control
structure an NRSRO must establish, maintain, enforce, and document
pursuant to Section 15E(c)(3)(A) of the Exchange Act as a record that
must be retained.\801\ Third, the Commission proposes adding new
paragraph (b)(13) to Rule 17g-2 to identify the policies and procedures
an NRSRO is required to establish, maintain, enforce, and document
pursuant to proposed paragraph (a) of new Rule 17g-8 as a record that
must be retained.\802\ Fourth, the Commission proposes adding new
paragraph (b)(14) to Rule 17g-2 to identify the policies and procedures
an NRSRO must establish, maintain, enforce, and document pursuant to
proposed paragraph (b) of new Rule 17g-8 as record that must be
retained.\803\ Fifth, the Commission proposes adding new paragraph
(b)(15) to Rule 17g-2 to identify the standards of training,
experience, and competence an NRSRO must establish, maintain, enforce,
and document pursuant to proposed new Rule 17g-9 as a record that must
be retained.\804\
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\799\ 17 CFR 240.17g-2.
\800\ See proposed new paragraph (a)(9) to Rule 17g-2(a)(9); see
also Section II.C.2 of this release for a more detailed discussion
of this proposal.
\801\ See proposed new paragraph (b)(12) of Rule 17g-2; see also
Section II.A.2 of this release for a more detailed discussion of
this proposal.
\802\ See proposed new paragraph (b)(13) to Rule 17g-2; see also
Section II.F.2 of this release for a more detailed discussion of
this proposal.
\803\ See proposed new paragraph (b)(14) to Rule 17g-2; see also
Section II.J.2 of this release for a more detailed discussion of
this proposal.
\804\ See proposed new paragraph (b)(15) to Rule 17g-2; see also
Section II.I.2 of this release for a more detailed discussion of
this proposal.
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4. Proposed Amendments to Rule 17g-3
The Commission proposes amending Rule 17g -3.\805\ First, the
Commission proposes amending paragraphs (a) and (b) of Rule 17g-3 to
implement the rulemaking mandated by Section 15E(c)(3)(B) of the
Exchange Act.\806\ The proposed amendment to paragraph (a) would add a
new paragraph (a)(7) to require an NRSRO to include an additional
report--the report on the NRSRO's internal control structure--with its
annual submission of reports pursuant to Rule 17g-3.\807\ Similar to
the reports currently identified in paragraphs (a)(2) through (a)(6) of
Rule 17g-3, the report identified in new paragraph (a)(7) would be
unaudited.\808\ The proposed amendment to paragraph (b) of Rule 17g-3
would implement Section 15E(c)(3)(B)(iii) of the Exchange Act, which
provides that the annual internal controls report must contain an
attestation of the NRSRO's CEO, or equivalent individual.\809\
Specifically, the Commission proposes amending paragraph (b) of Rule
17g-3 to require that the NRSRO's CEO or, if the firm does not have a
CEO, an individual performing similar functions, provide a signed
statement that would be attached to the report.\810\
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\805\ 17 CFR 240.17g-3.
\806\ See 15 U.S.C. 78o-7(c)(3)(B) and proposed new paragraphs
(a)(7) and (b)(2) of Rule 17g-3; see also Section II.A.3 of this
release for a for a more detailed discussion of this proposal.
\807\ See proposed new paragraph (a)(7) of Rule 17g-3.
\808\ See 17 CFR 240.17g-3(a)(2)-(6).
\809\ 15 U.S.C. 78o-7(c)(3)(B)(iii).
\810\ See proposed new paragraph (b)(2) of Rule 17g-3.
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Second, the Commission is proposing that all the annual reports
required to be submitted to the Commission pursuant to Rule 17g-3 be
submitted through the EDGAR system.\811\ To implement this requirement,
the Commission proposes, among other amendments, to add new paragraph
(d) to Rule 17g-3. Proposed new paragraph (d) would provide that the
reports required by the rule must be submitted electronically with the
Commission in the format required by the EDGAR Filer Manual, as defined
in Rule 11 of Regulation S-T.\812\
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\811\ See proposed new paragraph (d) of Rule 17g-3; see also
Section II.L of this release for a more detailed discussion of this
proposal.
\812\ See proposed new paragraph (d) of Rule 17g-3.
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Third, the Commission is proposing to add a new paragraph (a)(8) to
Rule 17g-3 to identify the report of the NRSRO's designated compliance
officer that an NRSRO is required to file with the Commission pursuant
to Section 15E(j)(5)(B) of the Exchange Act as a report that must be
filed with the other annual reports.\813\ Section 15E(j)(5)(B) further
provides that the NRSRO ``shall file'' this report with the financial
report required to be submitted to the Commission under Section 15E of
the Exchange Act (i.e., the Rule 17g-3 annual reports).\814\ The
Commission's proposal is intended to clarify how an NRSRO must adhere
to the self-executing provisions in Section 15E(j)(5)(B) of the
Exchange Act. Consequently, the Commission preliminary believes this
requirement would not result in a collection of information requirement
under the PRA because the requirement to file the report with the other
annual reports required under Rule 17g-3 derives exclusively from
Section 15E(j)(5)(B) of the Exchange Act (i.e., not from Commission
rulemaking).\815\ Moreover, the Commission is not proposing to add any
additional requirements with respect to the filing other than the
proposed requirement that this report and the other annual reports be
submitted through the EDGAR system, which is addressed separately in
this PRA.\816\
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\813\ See proposed new paragraph (a)(8) of Rule 17g-3; see also
Section II.K of this release for a more detailed discussion of this
proposal.
\814\ See 15 U.S.C. 78o-7(j)(5)(B). Section 15E(k) of the
Exchange Act provides that each NRSRO shall, on a confidential
basis, file with the Commission, at intervals determined by the
Commission, such financial statements, certified (if required by the
rules or regulations of the Commission) by an independent public
accountant, 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. See 15
U.S.C. 78o-7(k). The Commission implemented Section 15E(k) by
adopting Rule 17g-3. See 17 CFR 240.17g-3; see also Oversight of
Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33590-33593 (June 18,
2007).
\815\ See 15 U.S.C. 78o-7(j)(5)(B).
\816\ Compare 15 U.S.C. 78o-7(j)(5)(B), with proposed new
paragraph (a)(8) of Rule 17g-3.
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[[Page 33492]]
5. Proposed Amendments to Rule 17g-7
The Commission proposes to amend Rule 17g-7.\817\ First, the
Commission is proposing to add new paragraphs (a)(1) and (2) to Rule
17g-7 to implement rulemaking mandated in Sections 15E(s)(1), (2), (3),
and (4)(D) of the Exchange Act.\818\ Proposed new paragraphs (a)(1) and
(2) of Rule 17g-2 would require, respectively, an NRSRO when taking a
rating action to publish a form containing information about the credit
rating resulting from or subject to the rating action; and any
certification of a provider third-party due diligence services received
by the NRSRO that relates to the credit rating.\819\ Proposed paragraph
(a)(1) of Rule 17g-7 would contain three primary components: paragraph
(a)(1)(i) prescribing the format of the form; \820\ paragraph
(a)(1)(ii) prescribing the content of the form; \821\ and paragraph
(a)(1)(iii) prescribing an attestation requirement for the form.\822\
Proposed paragraph (a)(2) of Rule 17g-7 would identify a certification
from a provider of third-party due diligence services as an item that
must be published with a rating action.\823\
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\817\ 17 CFR 240.17g-7.
\818\ See 15 U.S.C. 78o-7(s)(1), (2), (3), and (4)(D) and
proposed new paragraph (a) of Rule 17g-7; see also Sections II.G.1
through G.5 of this release for a more detailed discussion of this
proposal.
\819\ See proposed new paragraphs (a)(1) and (2) of Rule 17g-7.
\820\ See Section II.G.2 of this release for a detailed
discussion of this proposal.
\821\ See Section II.G.3 of this release for a detailed
discussion of this proposal.
\822\ See Section II.G.4 of this release for a detailed
discussion of this proposal.
\823\ See Section II.G.5 of this release for a detailed
discussion of this proposal.
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Second, the Commission is proposing to add new paragraph (b) to
Rule 17g-7. This proposed amendment would implement rulemaking mandated
in Section 15E(q) of the Exchange Act by: (1) Re-codifying in paragraph
(b) of Rule 17g-7 requirements currently contained in paragraph (d)(3)
of Rule 17g-2; and (2) substantially enhancing those requirements.\824\
More specifically, paragraph (d)(3) of Rule 17g-2 requires an NRSRO to,
among other things, make publicly available on its corporate Internet
Web site in an XBRL format the information required to be documented
pursuant to paragraph (a)(8) of the rule with respect to any credit
rating initially determined by the NRSRO on or after June 26, 2007, the
effective date of the Rating Agency Act of 2006.\825\
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\824\ See 15 U.S.C. 78o-7(q) and proposed new paragraph (b) of
Rule 17g-7; see also Section II.E.2 of this release for a more
detailed discussion of this proposal.
\825\ 17 CFR 240.17-2(d)(3)(i)(A). Paragraph (a)(8) of Rule 17g-
2 requires an NRSRO to make and retain a record that, ``for each
outstanding credit rating, shows all rating actions and the date of
such actions from the initial credit rating to the current credit
rating identified by the name of the rated security or obligor and,
if applicable, the CUSIP of the rated security or the Central Index
Key (``CIK'') number of the rated obligor.'' 17 CFR 240.17-2(a)(8).
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These requirements would be enhanced in four ways. The first
enhancement would make the disclosure easier for investors and other
users of credit ratings to locate. Specifically, new proposed paragraph
(b)(1) of Rule 17g-7 would require the NRSRO, among other things, to
publicly disclose the ratings history information for free on an easily
accessible portion of its corporate Internet Web site.\826\
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\826\ See proposed new paragraph (b)(1) of Rule 17g-7.
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The second enhancement would broaden the scope of credit ratings
subject to the disclosure requirements. Specifically, proposed new
paragraph (b)(1)(i) of Rule 17g-7 would require an NRSRO to disclose
each credit rating assigned to an obligor, security, and money market
instrument in every class of credit ratings for which the NRSRO is
registered that was outstanding as of June 26, 2007 and any subsequent
upgrades or downgrades of a credit rating assigned to the obligor,
security, or money market instrument (including a downgrade to, or
assignment of, default), any placements of a credit rating assigned to
the obligor, security, or money market instrument on watch or review,
any affirmation of a credit rating assigned to the obligor, security,
or money market instrument, and a withdrawal of a credit rating
assigned to the obligor, security, or money market instrument.\827\
With respect to credit ratings initially determined on or after June
26, 2007, the amendments would clarify that the disclosure of the
rating history information would be triggered when an NRSRO publishes
any expected or preliminary credit rating assigned to an obligor,
security, or money market instrument before the publication of an
initial credit rating, and any subsequent upgrades or downgrades of a
credit rating assigned to the obligor, security, or money market
instrument (including a downgrade to, or assignment of, default), any
placements of a credit rating assigned to the obligor, security, or
money market instrument on watch or review, any affirmation of a credit
rating assigned to the obligor, security, or money market instrument,
and a withdrawal of a credit rating assigned to the obligor, security,
or money market instrument.\828\
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\827\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
\828\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
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The third enhancement would increase the scope of information that
must be disclosed about a rating action. Specifically, proposed
paragraph (b)(2) of Rule 17g-7 would identify 7 categories of data that
would need to be disclosed when a credit rating action is published
pursuant to proposed new paragraph (b)(1) of Rule 17g-7.\829\ The
fourth enhancement would be to require that a rating history not be
removed from the disclosure until 20 years after the NRSRO withdraws
the credit rating assigned to the obligor, security, or money market
instrument.\830\
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\829\ See proposed new paragraph (b)(2) of Rule 17g-7.
\830\ See proposed new paragraph (b)(5) of Rule 17g-7.
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6. Proposed New Rule 17g-8
The Commission is proposing new Rule 17g-8 that would have
paragraphs (a), (b), and (c) (each paragraph would have sub-
paragraphs). Proposed paragraph (a) of new Rule 17g-8 would implement
rulemaking mandated in Section 15E(r) of the Exchange Act by requiring
an NRSRO to have policies and procedures with respect to the procedures
and methodologies the NRSRO uses to determine credit ratings.\831\ In
particular, proposed paragraph (a)(1) would require the NRSRO to have
policies and procedures that are reasonably designed to ensure that the
procedures and methodologies, including qualitative and quantitative
data and models, the NRSRO uses to determine credit ratings are
approved by its board of directors or, if the NRSRO does not have a
board of directors, a body performing a function similar to that of a
board of directors.\832\ Proposed paragraph (a)(2) would require an
NRSRO to have policies and procedures that are reasonably designed to
ensure that the procedures and methodologies, including qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are developed and modified in accordance with the policies and
procedures of the NRSRO.\833\ Proposed paragraph (a)(3)(i) would
require an NRSRO to have policies and procedures that are reasonably
designed to ensure that material changes to the procedures and
[[Page 33493]]
methodologies, including changes to qualitative and quantitative data
and models, the NRSRO uses to determine credit ratings are applied
consistently to all credit ratings to which the changed procedures or
methodologies apply.\834\ Proposed paragraph (a)(3)(ii) would require
the NRSRO to have policies and procedures that are reasonably designed
to ensure that material changes to the procedures and methodologies,
including changes to qualitative and quantitative data and models, the
NRSRO uses to determine credit ratings are, to the extent that the
changes are to surveillance or monitoring procedures and methodologies,
applied to then-current credit ratings within a reasonable period of
time taking into consideration the number of ratings impacted, the
complexity of the procedures and methodologies used to determine the
credit ratings, and the type of obligor, security, or money market
instrument being rated.\835\ Proposed paragraph (a)(4)(i) would require
the NRSRO to have policies and procedures that are reasonably designed
to ensure that the NRSRO promptly publishes on an easily accessible
portion of its corporate Internet Web site material changes to the
procedures and methodologies, including to qualitative models or
quantitative inputs, the NRSRO uses to determine credit ratings, the
reason for the changes, and the likelihood the changes will result in
changes to any current ratings.\836\ Proposed paragraph (a)(4)(ii)
would require the NRSRO to have policies and procedures that are
reasonably designed to ensure the NRSRO promptly publishes on an easily
accessible portion of its corporate Internet Web site significant
errors identified in a procedure or methodology, including a
qualitative or quantitative model, the NRSRO uses to determine credit
ratings that may result in a change in current credit ratings.\837\
Finally, proposed paragraph (a)(5) would require the NRSRO to have
policies and procedures that are reasonably designed to ensure that it
discloses the version of a credit rating procedure or methodology,
including the qualitative methodology or quantitative inputs, used with
respect to a particular credit rating.\838\
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\831\ See 15 U.S.C. 78o-7(r) and proposed new paragraph (a) of
Rule 17g-8; see also Section II.F.1 of this release for a more
detailed discussion of this proposal.
\832\ See proposed paragraph (a)(1) of new Rule 17g-8.
\833\ See proposed paragraph (a)(2) of new Rule 17g-8.
\834\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
\835\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
\836\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
\837\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
\838\ See proposed paragraph (a)(5) of new Rule 17g-8.
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Proposed paragraph (b) of new Rule 17g-8 would implement rulemaking
mandated in Section 938(a) of the Dodd-Frank Act by requiring an NRSRO
to have policies and procedures with respect to the symbols, numbers,
or scores it uses to denote credit ratings.\839\ In particular,
proposed paragraph (b)(1) of new Rule 17g-8 would require the NRSRO to
have policies and procedures reasonably designed to assess the
probability that an issuer of a security or money market instrument
will default, fail to make timely payments, or otherwise not make
payments to investors in accordance with the terms of the security or
money market instrument.\840\ Proposed paragraph (b)(2) of new Rule
17g-8 would require the NRSRO to have policies and procedures
reasonably designed to clearly define the meaning of each symbol,
number, or score in the rating scale used by the NRSRO to denote a
credit rating category and notches within a category for each class and
subclass of credit ratings for which the NRSRO is registered and to
include such definitions in Exhibit 1 to Form NRSRO.\841\ Proposed
paragraph (b)(3) of new Rule 17g-8 would require the NRSRO to have
policies and procedures reasonably designed to apply any symbol,
number, or score defined pursuant to paragraph (b)(2) of new Rule 17g-8
in a manner that is consistent for all types of obligors, securities
and money market instruments for which the symbol, number, or score is
used.\842\
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\839\ See Public Law 111-203 Sec. 938(a) and proposed paragraph
(b) of new Rule 17g-8; see also Section II.J.1 of this release for a
more detailed discussion of this proposal.
\840\ See proposed paragraph (b)(1) of new Rule 17g-8.
\841\ See proposed paragraph (b)(2) of new Rule 17g-8.
\842\ See proposed paragraph (b)(1) of new Rule 17g-8.
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Proposed paragraph (c) of new Rule 17g-8 would implement rulemaking
mandated in Section 15E(h)(4)(A)(ii) of the Exchange Act by requiring
the NRSRO to include certain policies and procedures in the policies
and procedures the NRSRO is required to establish, maintain, and
enforce pursuant to Section 15E(h)(4)(A) of the Exchange Act.\843\
Specifically, proposed paragraph (c) would require the NRSRO to have
policies and procedures to address instances in which a look-back
review determines that a conflict of interest influenced a credit
rating assigned to an obligor, security, or money market instrument by
including, at a minimum, procedures that are reasonably designed to
ensure that the NRSRO will: (1) Immediately place the credit rating on
credit watch and disclose certain information about the reason for the
rating action; (2) promptly evaluate whether the credit rating must be
revised to conform it to the NRSRO's documented procedures and
methodologies for determining credit ratings (i.e., remove the
influence of the conflict); and (3) promptly publish a revised credit
rating, if appropriate, or affirm the credit rating, if appropriate,
and, in either case, disclose certain information about the reason for
the rating action.\844\
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\843\ See 15 U.S.C. 78o-7(h)(4)(A)(ii) and proposed new
paragraph (c) of Rule 17g-8; see also Section II.C.1 of this release
for a more detailed discussion of this proposal.
\844\ See proposed paragraphs (c)(1), (2) and (3) of new Rule
17g-8.
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7. Proposed New Rule 17g-9
The Commission is proposing new Rule 17g-9.\845\ This proposed rule
would implement rulemaking mandated in Section 936 of the Dodd-Frank
Act by requiring an NRSRO to establish, maintain, enforce, and document
standards of training, experience, and competence for the individuals
it employs to determine credit ratings.\846\ Proposed paragraph (a) of
new Rule 17g-9 would require an NRSRO to establish, maintain, enforce,
and document standards of training, experience, and competence for the
individuals it employs to determine credit ratings that are reasonably
designed to achieve the objective that such individuals produce
accurate credit ratings in the classes and subclasses of credit ratings
for which the NRSRO is registered.\847\ Proposed paragraph (b) would
identify four factors the NRSRO must consider when designing the
standards.\848\ Proposed paragraph (c) would prescribe two requirements
an NRSRO must incorporate into its standards of training, experience,
and competence.\849\
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\845\ Proposed new Rule 17g-9 would be codified at 17 CFR
240.17g-9, if adopted.
\846\ See Public Law 111-203 Sec. 936 and proposed new Rule
17g-9; see also Section II.I.1 of this release for a more detailed
discussion of this proposal.
\847\ See proposed paragraph (a) of new Rule 17g-9; see also
Section II.I.1.a of this release for a more detailed discussion of
this proposal.
\848\ See proposed paragraphs (b)(1)-(4) of new Rule 17g-9; see
also Section II.I.1.b of this release for a more detailed discussion
of this proposal.
\849\ See proposed paragraphs (c)(1) and (2) of new Rule 17g-9;
see also Section II.I.1.c of this release for a more detailed
discussion of this proposal.
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8. Proposed New Rule 17g-10 and Form ABS Due Diligence-15E
The Commission is proposing new Rule 17g-10 and new Form ABS Due
[[Page 33494]]
Diligence-15E.\850\ The new rule and form would implement rulemaking
mandated in Sections 15E(s)(4)(B) and (C) of the Exchange Act.\851\
Proposed new Rule 17g-10 would contain three paragraphs: (a), (b) and
(c).\852\ Proposed paragraph (a) would provide that the written
certifications of providers of third-party due diligence services
required pursuant to Section 15E(s)(4)(B) of the Exchange Act must be
made on Form ABS Due Diligence-15E.\853\ Proposed paragraph (b) of new
Rule 17g-10 would provide that the written certification must be signed
by an individual who is duly authorized by the person providing the
third-party due diligence services to make such a certification.\854\
Proposed paragraph (c) of new Rule 17g-10 would contain four
definitions to be used for the purposes of Section 15E(s)(4)(B) and
Rule 17g-10; namely, a definition of ``due diligence services,'' \855\
``issuer,'' \856\ ``originator,'' \857\ and ``securitizer.'' \858\
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\850\ Proposed new Rule 17g-10 would be codified at 17 CFR
240.17g-10 and proposed new Form ABS Due Diligence-15E would be
identified at 17 CFR 249b.400.
\851\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), proposed new Rule
17g-10, and proposed new Form ABS Due Diligence-15E; see also
Section II.H of this release for a more detailed discussion of this
proposal.
\852\ See proposed paragraphs (a), (b) and (c) of Rule 17g-10;
see also Section II.H.2 of this release for a more detailed
discussion of this proposal.
\853\ See proposed paragraph (a) of new Rule 17g-10.
\854\ See proposed paragraph (b) of Rule 17g-10.
\855\ See proposed paragraph (c)(1) of new Rule 17g-10.
\856\ See proposed paragraph (c)(2) of new Rule 17g-10.
\857\ See proposed paragraph (c)(3) of new Rule 17g-10.
\858\ See proposed paragraph (c)(4) of new Rule 17g-10.
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Proposed Form ABS Due Diligence-15E would contain five line items
identifying information the provider of third-party due diligence
services would need to provide in the form.\859\ It also would contain
a signature line with a corresponding representation.\860\ Item 1 would
elicit the identity and address of the provider of third-party due
diligence services.\861\ Item 2 would elicit the identity and address
of the issuer, underwriter, or NRSRO that employed the provider of
third-party due diligence services.\862\ Item 3 would instruct the
provider of third-party due diligence services to identify each NRSRO
whose published criteria for performing due diligence the provider of
third-party due diligence services satisfied in performing the due
diligence review.\863\ Item 4 would require the provider of third-party
due diligence services to describe the scope and manner of the due
diligence performed.\864\ Item 5 would require the provider of third-
party due diligence services to describe the findings and conclusions
resulting from the review.\865\
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\859\ See proposed new Form ABS Due Diligence-15E; see also
Section II.H.3 of this release for a more detailed discussion of
this proposal.
\860\ See proposed new Form ABS Due Diligence-15E.
\861\ See Item 1 to proposed Form ABS Due Diligence-15E.
\862\ See Item 2 to proposed Form ABS Due Diligence-15E.
\863\ See Item 3 to proposed Form ABS Due Diligence-15E.
\864\ See Item 4 to proposed Form ABS Due Diligence-15E.
\865\ See Item 5 to proposed Form ABS Due Diligence-15E.
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9. Rule 15Ga-2 and Form ABS-15G
The Commission is proposing new Rule 15Ga-2 and amendments to Form
ABS-15G.\866\ The new rule and amended form would implement Section
15E(s)(4)(A) of the Exchange Act.\867\ Proposed new Rule 15Ga-2 would
require an issuer or underwriter of any Exchange Act-ABS that is to be
rated by an NRSRO to furnish a Form ABS-15G on the EDGAR system
containing the findings and conclusions of any third-party ``due
diligence report'' obtained by the issuer or underwriter. The rule
would define ``due diligence report'' as any report containing findings
and conclusions relating to ``due diligence services'' as defined in
proposed new Rule 17g-10.\868\ Under the proposal, the disclosure would
be furnished using Form ABS-15G for both registered and unregistered
offerings of Exchange Act-ABS. In addition, under the Commission's
proposal, an issuer or underwriter would not need to furnish Form ABS-
15G if the issuer or underwriter obtains a representation from each
NRSRO engaged to produce a credit rating for the Exchange Act-ABS that
can be reasonably relied on that the NRSRO will publicly disclose the
findings and conclusions of any third-party due diligence report
obtained by the issuer or underwriter with the publication of the
credit rating five business days prior to the first sale in the
offering in an information disclosure form generated pursuant to
proposed new paragraph (a)(1) of Rule 17g-7.\869\
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\866\ See proposed new Rule 15Ga-2 and proposed amendments to
Form ABS-15G.
\867\ See 15 U.S.C. 78o-7(s)(4)(A), proposed new Rule 15Ga-2,
and proposed amendments to Form ABS-15G; see also Section II.H.1 of
this release for a more detailed discussion of this proposal.
\868\ See proposed paragraph (c)(1) of new Rule 17g-10.
\869\ See proposed new paragraph (a)(1) of Rule 17g-7.
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10. Proposed Amendments to Regulation S-T
The Commission is proposing that certain Form NRSRO submissions and
all Rule 17g-3 annual report submissions be submitted to the Commission
using the EDGAR system.\870\ In order to implement this requirement,
the Commission is proposing amendments to Rule 101 of Regulation S-T to
require Form NRSROs and Exhibits 1 through 9 submitted pursuant to
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports
submitted pursuant Rule 17g-3 be submitted through the EDGAR
system.\871\ The Commission also is proposing to amend Rule 201 of
Regulation S-T, which governs temporary hardship exemptions from
electronic filing, to make this exemption unavailable for NRSRO
filings.\872\
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\870\ See proposed amendment of Rule 101 of Regulation S-T (17
CFR 231.101); see also Section II.L of this release for a more
detailed discussion of this proposal.
\871\ See proposed new paragraph (a)(xiv) of Rule 101 of
Regulation S-T.
\872\ See proposed amendment to paragraph (a) of Rule 201 of
Regulation S-T (17 CFR 231.201); see also Section II.L of this
release for a more detailed discussion of this proposal.
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The Commission also is proposing amendments to Rule 314 of
Regulation S-T to permit municipal securitizers of Exchange Act-ABS, or
underwriters in the offering of municipal Exchange Act-ABS, to provide
the information required by Form ABS-15G on EMMA, the Municipal
Securities Rulemaking Board's centralized public database.\873\
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\873\ See proposed amendments to Rule 314 of Regulation S-T (17
CFR 231.314); see also Section II.H.1 of this release for a more
detailed discussion of this proposal.
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11. Form ID
NRSROs would need to file a Form ID with the Commission in order to
gain access to the Commission's EDGAR system to make electronic filings
with the Commission.\874\
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\874\ See Section II.L of this release for a more detailed
discussion of these proposals.
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The Commission preliminarily believes that the issuers and
underwriters of Exchange Act-ABS that would need to furnish Form ABS-
15G to the Commission through the EDGAR system pursuant to proposed new
Rule 15Ga-2 already have access to the EDGAR system because, for
example, they need such access for the purpose of Rule 15Ga-1.
B. Proposed Use of Information
1. Proposed Amendments to Rule 17g-1
The Commission proposes amending paragraph (i) of Rule 17g-1 to
require
[[Page 33495]]
that an NRSRO make Form NRSRO and Exhibits 1 through 9 freely available
on an easily accessible portion of its corporate Internet Web
site.\875\ The proposed amendment to paragraph (i) also would remove
the option for an NRSRO to make its Form NRSRO publicly available
``through another comparable, readily accessible means'' as an
alternative to Internet disclosure. In addition, the Commission is
proposing amending paragraph (i) to provide that Exhibit 1 of Form
NRSRO (the performance measurement statistics) be made freely available
in writing when requested. Second, the Commission is proposing to amend
paragraphs (e), (f), and (g) of Rule 17g-1 to require that NRSROs use
the Commission's EDGAR system to electronically file or submit Form
NRSRO with the Commission pursuant to these paragraphs in the format
required by the EDGAR Filer Manual, as defined in Rule 11 of Regulation
S-T.\876\
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\875\ See proposed amendments to paragraph (i) of Rule 17g-1;
see also Section II.E.1.b of this release for a more detailed
discussion of this proposal.
\876\ See proposed amendments to paragraphs (e), (f), and (g) of
Rule 17g-1; see also Section II.L of this release for a more
detailed discussion of these proposals.
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The proposed requirements that an NRSRO make Form NRSRO and
Exhibits 1 through 9 freely available on an easily accessible portion
of its corporate Internet Web site and file the Form through the EDGAR
system are designed to make this information more readily accessible to
investors and other users of credit ratings. As the Commission stated
when adopting Form NRSRO, the Form will provide users of credit ratings
with information that will assist them in comparing NRSROs and
understanding how a given NRSRO conducts its business activities.\877\
In addition, the filing of the Form NRSROs on the EDGAR system would
allow Commission examiners to more easily retrieve the submissions of a
specific NRSRO to prepare for an examination. Furthermore, having the
Forms filed and stored through the EDGAR system (i.e., in a centralized
location), would assist the Commission from a records management
perspective by establishing a more automated storage process and
creating efficiencies in terms of reducing the volume of paper filings
that must be manually processed and stored.
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\877\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR 33569-
335670 (June 18, 2007).
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2. Proposed Amendments to Instructions for Exhibit 1 to Form NRSRO
The Commission is proposing to amend the instructions for Exhibit 1
to Form NRSRO.\878\ The amendments would confine the disclosures in the
Exhibit to transition and default rates and certain limited
supplemental information.\879\ Moreover, the amendments would
standardize the production and presentation of the transition and
default rates. As the Commission stated when adopting Form NRSRO, the
information provided in Exhibit 1 is an important indicator of the
performance of an NRSRO in terms of its ability to assess the
creditworthiness of issuers and obligors and, consequently, will be
useful to users of credit ratings in evaluating an NRSRO.\880\ In
addition, Commission staff would use the enhanced performance
statistics provided in an applicant's initial application for
registration and in an NRSRO's Form NRSRO to, among other things,
assess whether the applicant or NRSRO has adequate financial and
managerial resources to consistently produce credit ratings with
integrity.\881\ For example, statistics indicating the applicant or
NRSRO is performing poorly in determining credit ratings could be an
indication the applicant or NRSRO fails to maintain adequate financial
and managerial resources to consistently produce credit ratings with
integrity in a particular class or subclass of credit ratings. Finally,
the disclosure of the enhanced performance statistics in an applicant's
initial application would allow the Commission staff to verify that the
applicant, if granted registration, would publicly disclose the
information in accordance with the proposed amendments to the
Instructions for Exhibit 1.\882\
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\878\ See Instruction H to Form NRSRO (as it relates to Exhibit
1).
\879\ See proposed amendments to the instructions for Exhibit 1
to Form NRSRO (17 CFR 249b.300); see also Section II. E.1.a of this
release for a more detailed discussion of this proposal.
\880\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33574 (June 18, 2007); see also Amendments to Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 6474 (Feb. 9,
2009) (``The amendments to the instructions to Exhibit 1 to Form
NRSRO will require NRSROs to provide more detailed performance
statistics and, thereby, make it easier for users of credit ratings
to compare the performance of the NRSROs.'').
\881\ See, e.g., 15 U.S.C. 78o-7(a)(2)(C) (setting forth grounds
to deny an initial application) and 15 U.S.C. 78o-7(d)(1)(E) and
(d)(2) (setting forth grounds to sanction an NRSRO, including
revoking the NRSRO's registration); see also Oversight of Credit
Rating Agencies Registered as Nationally Recognized Statistical
Rating Organizations, 72 FR at 33612 (June 18, 2007) (``Form NRSRO
requires that a credit rating agency provide information required
under Section 15E(a)(1)(B) of the Exchange Act and certain
additional information. The additional information will assist the
Commission in making the assessment regarding financial and
managerial resources required under Section 15E(a)(2)(C)(2)(ii)(I)
of the Exchange Act.'').
\882\ As indicated above, paragraph (i) requires an NRSRO to
make Form NRSRO and Exhibits 1 through 9 publicly available within
10 business days of being granted an initial registration. See 17
CFR 240.17g-1(i). In addition, the public disclosure of Form NRSRO
and Exhibits 1 through 9 could be accelerated if the Commission
adopts the proposal that this information be filed through the EDGAR
system upon registration.
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3. Proposed Amendments to Rule 17g-2
The Commission proposes adding paragraph (a)(9) to Rule 17g-2 to
identify the policies and procedures an NRSRO is required to establish,
maintain, and enforce pursuant to Section 15E(h)(4)(A) of the Exchange
Act and proposed paragraph (c) of new Rule 17g-8 as a record that must
be made and retained.\883\ In addition, the Commission is proposing to
add the following new paragraphs to Rule 17g-2 to identify additional
records that must be retained: (1) Paragraph (b)(12) would identify the
internal control structure an NRSRO must establish, maintain, enforce,
and document pursuant to Section 15E(c)(3)(A); \884\ (2) paragraph
(b)(13) would identify the policies and procedures an NRSRO is required
to establish, maintain, enforce, and document pursuant to proposed
paragraph (a) of new Rule 17g-8; \885\ (3) paragraph (b)(14) would
identify the policies and procedures an NRSRO must establish, maintain,
enforce, and document pursuant to proposed paragraph (b) of new Rule
17g-8; \886\ and (4) paragraph (b)(15) would identify the standards of
training, experience, and competence an NRSRO must establish, maintain,
enforce, and document pursuant to proposed new Rule 17g-9.\887\
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\883\ See proposed new paragraph (a)(9) to Rule 17g-2(a)(9); see
also Section II.C.2 of this release for a more detailed discussion
of this proposal.
\884\ See proposed new paragraph (b)(12) of Rule 17g-2; see also
Section II.A.2 of this release for a more detailed discussion of
this proposal.
\885\ See proposed new paragraph (b)(13) to Rule 17g-2; see also
Section II.F.2 of this release for a more detailed discussion of
this proposal.
\886\ See proposed new paragraph (b)(14) to Rule 17g-2; see also
Section II.J.2 of this release for a more detailed discussion of
this proposal.
\887\ See proposed new paragraph (b)(15) to Rule 17g-2; see also
Section II.I.2 of this release for a more detailed discussion of
this proposal.
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The proposed requirement that a record of the policies and
procedures identified in proposed new paragraph (a)(9) of Rule 17g-2 be
made (i.e., documented) would promote better
[[Page 33496]]
understanding of them among the individuals within the organization
and, therefore, promote compliance with such policies and procedures.
The requirement that the policies and procedures identified in proposed
new paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and (b)(15) be
retained would subject these records to the various retention and
production requirements of paragraphs (c), (d), (e), and (f) of Rule
17g-2.\888\ The Commission staff would use these records to review
whether an NRSRO was complying with the provisions of the securities
laws requiring the NRSRO to establish, maintain, enforce, and document
these policies, procedures, and standards.\889\
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\888\ See 17 CFR 240.17g-2(c), (d), (e) and (f). Paragraph (c)
of Rule 17g-2 requires an NRSRO to retain the records identified in
paragraphs (a) and (b) for three years after the date the record is
made or received. 17 CFR 240.17g-2(c). Paragraph (d) requires, among
other things, that an NRSRO maintain each record required to be
retained pursuant to paragraphs (a) and (b) in a manner that makes
the original record or copy easily accessible to the principal
office of the NRSRO. 17 CFR 240.17g-2(d). Paragraph (e) sets forth
the requirements that apply when an NRSRO uses a third-party
custodian to maintain its records. 17 CFR 240.17g-2(e). Paragraph
(f) requires an NRSRO to promptly furnish the Commission with
legible, complete, and current copies, and, if specifically
requested, English translations, of those records of the NRSRO
required to be retained pursuant to paragraphs (a) and (b), or any
other records of the NRSRO subject to examination under Section
17(b) of the Exchange Act. See 17 CFR 240.17g-2(f); see also 15
U.S.C. 78q(b).
\889\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33582 (June 18, 2007) (``The Commission designed [Rule 17g-2] based
on its experience with recordkeeping rules for other regulated
entities. These other books and records rules have proven integral
to the Commission's investor protection function because the
preserved records are the primary means of monitoring compliance
with applicable securities laws. Rule 17g-2 is designed to ensure
that an NRSRO makes and retains records that will assist the
Commission in monitoring, through its examination authority, whether
an NRSRO is complying with the provisions of Section 15E of the
Exchange Act and the rules thereunder.'') (footnotes omitted).
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4. Proposed Amendments to Rule 17g-3
The Commission proposes amending paragraphs (a) and (b) of Rule
17g-3 to implement the rulemaking mandated by Section 15E(c)(3)(B) of
the Exchange Act.\890\ The proposed amendment to paragraph (a) would
add a new paragraph (a)(7) to require an NRSRO to include an additional
report--a report on the NRSRO's internal control structure--with its
annual submission of reports pursuant to Rule 17g-3. The proposed
amendment to paragraph (b) of Rule 17g-3 would require that the NRSRO's
CEO or, if the firm does not have a CEO, an individual performing
similar functions, provide a signed statement that would be attached to
the report. The Commission staff would use this report along with the
other Rule 17g-3 annual reports to monitor the NRSRO's compliance with
applicable securities laws.\891\ For example, Section 15E(c)(3)(A) of
the Exchange Act requires an NRSRO to ``establish, maintain, enforce,
and document an effective internal control structure governing the
implementation of and adherence to policies, procedures, and
methodologies for determining credit ratings.'' \892\ Among other
things, the annual report that an NRSRO would file pursuant to proposed
new paragraph (a)(7) of Rule 17g-3 would require the NRSRO to provide
an assessment by management of the effectiveness of the internal
control structure. Consequently, Commission staff could use the report
as a starting point to assess whether the NRSRO is complying with
Section 15E(c)(3)(A) of the Exchange Act.\893\
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\890\ See proposed new paragraphs (a)(7) and (b)(2) of Rule 17g-
3; see also Section II.A.3 of this release for a for a more detailed
discussion of this proposal.
\891\ See, e.g., Oversight of Credit Rating Agencies Registered
as Nationally Recognized Statistical Rating Organizations, 72 FR at
33612-33613 (June 18, 2007) (``[Rule 17g-3] will aid the Commission
in monitoring whether the initiation of a proceeding under Section
15E(d) of the Exchange Act will be appropriate because the NRSRO
`fails to maintain adequate financial and managerial resources to
consistently produce credit ratings with integrity. In addition, the
financial reports also will assist the Commission in monitoring
potential conflicts of interest of a financial nature arising from
the operation of an NRSRO.'') (footnotes omitted); see also
Amendments to Rules for Nationally Recognized Statistical Rating
Organizations, 74 FR at 6465 (Feb. 9, 2009) (``[The amendment to
Rule 17g-3] will assist the Commission in its examination function
of NRSROs.'').
\892\ 15 U.S.C. 78o-7(c)(3)(A).
\893\ Id.
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The Commission also is proposing that all the annual reports
required to be submitted to the Commission pursuant to Rule 17g-3 be
submitted through the EDGAR system.\894\ The submission of the annual
reports through the EDGAR system would allow Commission examiners to
more easily retrieve the reports of a specific NRSRO to prepare for an
examination. Moreover, having these reports submitted and stored
through the EDGAR system (i.e., in a centralized location), would
assist the Commission from a records management perspective by
establishing a more automated storage process and creating efficiencies
in terms of reducing the volume of paper submissions that must be
manually processed and stored.
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\894\ See proposed new paragraph (d) of Rule 17g-3; see also
Section II.L of this release for a more detailed discussion of this
proposal.
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5. Proposed Amendments to Rule 17g-7
The Commission proposes to amend Rule 17g-7.\895\ First, the
Commission is proposing to add new paragraphs (a)(1) and (2) to Rule
17g-7 to implement rulemaking mandated in Sections 15E(s)(1), (2), (3),
and (4)(D) of the Exchange Act.\896\ Proposed new paragraphs (a)(1) and
(2) of Rule 17g-2 would require, respectively, an NRSRO when taking a
rating action to publish a form containing information about the credit
rating resulting from or subject to the rating action; and any
certification of a provider of third-party due diligence services
received by the NRSRO that relates to the credit rating.\897\ As stated
in Section 15E(s)(1)(B) of the Exchange Act, the purpose of the
disclosures required in the form would be to provide information that
can be used by investors and other users of credit ratings to better
understand credit ratings in each class of credit rating issued by the
NRSRO.\898\ Furthermore, as stated in Section 15E(s)(4)(D) of the
Exchange Act, the purpose of the disclosure of the certification would
be to allow the public to determine the adequacy and level of due
diligence services provided by a third-party.\899\
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\895\ 17 CFR 240.17g-7.
\896\ See 15 U.S.C. 78o-7(s)(1), (2), (3), and (4)(D) and
proposed new paragraph (a) of Rule 17g-7; see also Sections II.G.1
through G.5 of this release for a more detailed discussion of this
proposal.
\897\ See proposed new paragraphs (a)(1) and (2) of Rule 17g-7.
\898\ See 15 U.S.C. 78o-7(s)(1)(B).
\899\ See 15 U.S.C. 78o-7(s)(4)(D).
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Second, the Commission is proposing to add new paragraph (b) to
Rule 17g-7.\900\ The proposed amendments would: (1) Re-codify in
paragraph (b) of Rule 17g-7 requirements currently contained in
paragraph (d)(3) of Rule 17g-2; and (2) substantially enhance those
requirements. Under the current and proposed enhanced requirements, an
NRSRO is (and would be) required to disclose certain historical
information about its credit ratings. As the Commission stated when
adopting the current disclosure requirement, the ``intent of the rule
is to facilitate comparisons of credit rating accuracy across all
NRSROs--including direct comparisons of different NRSROs' treatment of
the same obligor or instrument--in order to enhance NRSRO
accountability, transparency, and competition.'' \901\ The proposals
also
[[Page 33497]]
are designed to provide persons with the ``raw data'' necessary to
generate statistical information about the performance of each NRSRO's
credit ratings.\902\ Finally, the proposals are designed to implement
provisions of Section 15E(q)(2) of the Exchange Act, which provides,
among other things, that the Commission's rules shall require NRSROs to
disclose information about the performance of credit ratings that is
comparable among NRSROs, to allow users of credit ratings to compare
the performance of credit ratings across NRSROs.\903\
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\900\ See proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
\901\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63838 (Dec. 4, 2009)
(``Ratings history information for outstanding credit ratings is the
most direct means of comparing the performance of two or more
NRSROs. It allows an investor or other user of credit ratings to
compare how all NRSROs that maintain a credit rating for a
particular obligor or instrument initially rated that obligor or
instrument and, thereafter, how and when they adjusted their credit
rating over time.''). The Commission notes that under the proposals
the disclosures would not contain complete histories for many credit
ratings because the NRSRO would not need to include information
about rating actions taken before June 26, 2007. However, the
Commission believes that the disclosures would still be used to
compare how different NRSROs rated a particular obligor, security,
or money market instrument beginning as of June 26, 2007 and from
that date forward.
\902\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4,
2009) (``The raw data to be provided by NRSROs pursuant to the new
ratings history disclosure requirements[hellip]will enable market
participants to develop performance measurement statistics that
would supplement those required to be published by NRSROs themselves
in Exhibit 1, tapping into the expertise of credit market observers
and participants in order to create better and more useful means to
compare the credit ratings performance of NRSROs.'').
\903\ See 15 U.S.C. 78o-7(q)(2).
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6. Proposed New Rule 17g-8
The Commission is proposing new Rule 17g-8 that would have
paragraphs (a), (b), and (c) (each paragraph would have sub-
paragraphs). Paragraph (a) of new Rule 17g-8 would implement Section
15E(r) of the Exchange Act by requiring an NRSRO to have policies and
procedures with respect to the procedures and methodologies the NRSRO
uses to determine credit ratings.\904\ These policies and procedures
would be used by the NRSRO to achieve the objectives identified in
Section 15E(r) of the Exchange Act,\905\ namely, that the NRSRO:
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\904\ See 15 U.S.C. 78o-7(r) and proposed new paragraph (a) of
Rule 17g-8; see also Section II.F.1 of this release for a more
detailed discussion of this proposal.
\905\ See 15 U.S.C. 78o-7(r)(1)-(3).
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determines credit ratings using procedures and
methodologies, including qualitative and quantitative data and models,
that are approved by the board of the NRSRO, or a body performing a
function similar to that of a board;\906\
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\906\ See 15 U.S.C. 78o-7(r)(1)(A).
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determines credit ratings using procedures and
methodologies, including qualitative and quantitative data and models,
that are in accordance with the policies and procedures of the NRSRO
for the development and modification of credit rating procedures and
methodologies; \907\
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\907\ See 15 U.S.C. 78o-7(r)(1)(B).
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when material changes are made to credit rating procedures
and methodologies (including changes to qualitative and quantitative
data and models), applies the changes consistently to all credit
ratings to which the changed procedures and methodologies apply; \908\
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\908\ See 15 U.S.C. 78o-7(r)(2)(A).
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when material changes are made to credit rating procedures
and methodologies (including changes to qualitative and quantitative
data and models), to the extent that changes are made to credit rating
surveillance procedures and methodologies, applies the changes to then-
current credit ratings within a reasonable time period determined by
the Commission, by rule; \909\
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\909\ 15 U.S.C. 78o-7(r)(2)(B).
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when material changes are made to credit rating procedures
and methodologies (including changes to qualitative and quantitative
data and models), the NRSRO publicly discloses the reason for the
change; \910\
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\910\ See 15 U.S.C. 78o-7(r)(2)(C).
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notifies users of credit ratings of the version of a
procedure or methodology, including the qualitative methodology or
quantitative inputs, used with respect to a particular credit
rating.\911\
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\911\ 15 U.S.C. 78o-7(r)(3)(A).
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notifies users of credit ratings when a material change is
made to a procedure or methodology, including to a qualitative model or
quantitative input;) \912\
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\912\ See 15 U.S.C. 78o-7(r)(3)(B).
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notifies users of credit ratings when a significant error
is identified in a procedure or methodology, including a qualitative or
quantitative model, that may result in credit rating actions; \913\ and
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\913\ See 15 U.S.C. 78o-7(r)(3)(C).
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notifies users of credit ratings when a material change is
made to a procedure or methodology, including to a qualitative model or
quantitative input, of the likelihood the change will result in a
change in current credit ratings.\914\
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\914\ See 15 U.S.C. 78o-7(r)(3)(D).
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Proposed paragraph (b) of new Rule 17g-8 would implement Section
938(a) of the Dodd-Frank Act by requiring an NRSRO to have policies and
procedures with respect to the symbols, numbers, or scores it uses to
denote credit ratings.\915\ These policies and procedures would be used
by the NRSRO to achieve the objectives mandated in Sections 938(a)(1)
through (3) of the Dodd-Frank Act.\916\ Namely, that the NRSRO
establishes, maintains, and enforces written policies and procedures
to: (1) Assess the probability that an issuer of a security or money
market instrument will default, fail to make timely payments, or
otherwise not make payments to investors in accordance with the terms
of the security or money market instrument; \917\ (2) clearly define
and disclose the meaning of any symbol used by the NRSRO to denote a
credit rating; \918\ and (3) apply any symbol described in item (2) in
a manner that is consistent for all types of securities and money
market instruments for which the symbol is used.\919\
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\915\ See Public Law 111-203 Sec. 938(a) and proposed paragraph
(b) of new Rule 17g-8; see also Section II.J.1 of this release for a
more detailed discussion of this proposal.
\916\ See Public Law 111-203 Sec. Sec. 938(a)(1)-(3).
\917\ See Public Law 111-203 Sec. 938(a)(1).
\918\ See Public Law 111-203 Sec. 938(a)(2).
\919\ See Public Law 111-203 Sec. 938(a)(3).
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Proposed paragraph (c) of new Rule 17g-8 would implement Section
15E(h)(4)(A)(ii) of the Exchange Act by requiring the NRSRO to include
certain policies and procedures in the policies and procedures the
NRSRO is required to establish, maintain, and enforce under Section
15E(h)(4)(A) of the Exchange Act.\920\ These policies and procedures
would be used by the NRSRO: (1) To achieve the objective specified in
Section 15E(h)(4)(A)(ii) of the Exchange Act to revise a credit rating,
if appropriate, when a look-back review determines the credit rating
was influenced by the conflict of interest of the credit analyst
seeking employment with the person subject to the credit rating or the
issuer, underwriter, or sponsor of a security or money market
instrument subject to the credit rating; \921\ and (2) to make the
disclosures that would be required in proposed new paragraph
(a)(1)(ii)(J)(3) of Rule 17g-7.\922\
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\920\ See 15 U.S.C. 78o-7(h)(4)(A)(ii) and proposed new
paragraph (c) of Rule 17g-8; see also Section II.C.1 of this release
for a more detailed discussion of this proposal.
\921\ See 15 U.S.C. 78o-7(h)(4)(A)(ii).
\922\ See proposed paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.
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[[Page 33498]]
7. Proposed New Rule 17g-9
The Commission is proposing new Rule 17g-9.\923\ This rule would
implement Section 936 of the Dodd-Frank Act by requiring an NRSRO to
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings.\924\ These standards would be used by the NRSRO to
achieve the objectives specified in Sections 936(1) and (2) of the
Dodd-Frank Act that any person employed by the NRSRO to perform credit
ratings produces accurate ratings for the categories of issuers whose
securities the person rates and is tested for knowledge of the credit
rating process.\925\
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\923\ Proposed new Rule 17g-9 would be codified at 17 CFR
240.17g-9, if adopted.
\924\ See Public Law 111-203 Sec. 936 and proposed new Rule
17g-9; see also Section II.I.1 of this release for a more detailed
discussion of this proposal.
\925\ Public Law 111-203 Sec. Sec. 936(1) and (2).
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8. Proposed New Rule 17g-10 and Form ABS Due Diligence-15E
The Commission is proposing new Rule 17g-10 and new Form ABS Due
Diligence-15E.\926\ Proposed new Rule 17g-10 would implement rulemaking
mandated in Sections 15E(s)(4)(B) and (C) of the Exchange Act by
requiring that the written certification a provider of third-party due
diligence services must provide to an NRSRO be made on Form ABS Due
Diligence-15E.\927\ Proposed new Rule 17g-10 and proposed new Form ABS
Due Diligence-15E would be designed to achieve the objective stated in
Section 15E(s)(4)(B) of the Exchange Act; namely, that the provider of
third-party due diligence services conducts a thorough review of data,
documentation, and other relevant information necessary for an NRSRO to
provide an accurate credit rating.\928\ They also would be designed--in
combination with the disclosure requirement in proposed new paragraph
(a)(2) of Rule 17g-7--to achieve the objective stated in Section
15E(s)(4)(D) of the Exchange Act; namely, to allow the public to
determine the adequacy and level of due diligence services provided by
a third party.\929\
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\926\ Proposed new Rule 17g-10 would be codified at 17 CFR
240.17g-10 and proposed new Form ABS Due Diligence-15E would be
identified at 17 CFR 249b.400.
\927\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), proposed new Rule
17g-10, and proposed new Form ABS Due Diligence-15E; see also
Sections II.H of this release for a more detailed discussion of this
proposal.
\928\ See 15 U.S.C. 78o-7(s)(4)(B).
\929\ See 15 U.S.C. 78o-7(s)(4)(D); see also Sections II.G.5 of
this release for a more detailed discussion of proposed new
paragraph (a)(2) of Rule 17g-7.
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9. Rule 15Ga-2 and Form ABS-15G
The Commission is proposing new Rule 15Ga-2 and amendments to Form
ABS-15G.\930\ The new rule and amended form would implement Section
15E(s)(4)(A) of the Exchange Act.\931\ Proposed new Rule 15Ga-2 would
require an issuer or underwriter of any Exchange Act-ABS that is to be
rated by an NRSRO to furnish a Form ABS-15G on the EDGAR system
containing the findings and conclusions of any third-party ``due
diligence report'' obtained by the issuer or underwriter. Under the
proposal, the disclosure would be furnished using Form ABS-15G for both
registered and unregistered offerings of Exchange Act-ABS. In addition,
under the Commission's proposal, an issuer or underwriter would not
need to furnish Form ABS-15G if the issuer or underwriter obtains a
representation from each NRSRO engaged to produce a credit rating for
the Exchange Act-ABS that can be reasonably relied on that the NRSRO
will publicly disclose the findings and conclusions of any third-party
due diligence report obtained by the issuer or underwriter with the
publication of the credit rating five business days prior to the first
sale in the offering in an information disclosure form generated
pursuant to proposed new paragraph (a)(1) of Rule 17g-7.
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\930\ See proposed new Rule 15Ga-2 and proposed amendments to
Form ABS-15G.
\931\ See 15 U.S.C. 78o-7(s)(4)(A); see also Section II.H.1 of
this release for a more detailed discussion of this proposal.
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The information proposed to be disclosed under these requirements
would be used by investors and other users of credit ratings to
determine the adequacy and level of due diligence services provided by
a third party. In addition, if no disclosure is made, investors and
other users of credit ratings would be put on notice that the issuer or
underwriter did not employ a provider of third-party due diligence
services in connection with the offering of an Exchange Act-ABS.
10. Proposed Amendments to Regulation S-T
As noted above, the Commission is proposing that certain Form NRSRO
submissions and all Rule 17g-3 annual report submissions be made
through the EDGAR system. In order to implement this requirement, the
Commission is proposing amendments to Rule 101 of Regulation S-T to
require that the EDGAR system be used to submit Form NRSRO pursuant to
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports
pursuant Rule 17g-3.\932\ The Commission also is proposing to amend
Rule 201 of Regulation S-T, which governs temporary hardship exemptions
from electronic filings, to make this exemption unavailable for NRSRO
submissions.\933\
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\932\ See proposed amendment of Rule 101 of Regulation S-T (17
CFR 231.101); see also Section II.L of this release for a more
detailed discussion of this proposal.
\933\ See proposed amendment of Rule 201 of Regulation S-T (17
CFR 231.201); see also Section II.L of this release for a more
detailed discussion of this proposal.
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These proposed requirements would implement the proposals that
NRSROs use the EDGAR system to submit Form NRSROs pursuant to
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports
pursuant to Rule 17g-3. With respect to the Form NRSROs, the proposal
is designed to make the information contained in the Form more readily
accessible to investors and other users of credit ratings. As the
Commission stated when adopting Form NRSRO, the Form will provide users
of credit ratings with information that will assist them in comparing
NRSROs and understanding how a given NRSRO conducts its business
activities.\934\ In addition, the filing of the Form NRSROs and annual
reports on the EDGAR system would allow Commission examiners to more
easily retrieve the Forms of a specific NRSRO to prepare for an
examination. Moreover, having the Forms and annual reports filed and
stored through the EDGAR system (i.e., in a centralized location),
would assist the Commission from a records management perspective by
establishing a more automated storage process and creating efficiencies
in terms of reducing the volume of paper filings that must be manually
processed and stored.
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\934\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR 33569-
335670 (June 18, 2007).
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The Commission also is proposing amendments to Rule 314 of
Regulation S-T that would permit municipal securitizers of Exchange
Act-ABS, or underwriters in the offering of municipal Exchange Act-ABS,
to provide the information required by Form ABS-15G on EMMA, the
Municipal Securities Rulemaking Board's centralized public
database.\935\ This would allow investors and other market participants
to access the information required in Form ABS-15G
[[Page 33499]]
along with other information on EMMA about the municipal Exchange Act-
ABS.
---------------------------------------------------------------------------
\935\ See proposed amendments to Rule 314 of Regulation S-T (17
CFR 231.314); see also Section II.H.1 of this release for a more
detailed discussion of this proposal.
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11. Form ID
NRSROs would need to file a Form ID with the Commission in order to
gain access to the Commission's EDGAR system to electronically submit
Form NRSROs submitted pursuant to paragraphs (e), (f), and (g) of Rule
17g-1 and the annual reports submitted pursuant to Rule 17g-3 through
the EDGAR system with the Commission.\936\ The use of this information
is addressed in Sections IV.D.1, IV.D.4 and IV.A.10 of this release.
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\936\ See Section II.L of this release for a more detailed
discussion of these proposals.
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C. Respondents
In adopting the first rules under the Rating Agency Act of 2006,
the Commission estimated that approximately 30 credit rating agencies
ultimately would be registered as NRSROs.\937\ Since that time, 10
credit rating agencies have registered with the Commission as
NRSROs.\938\ This number has remained constant for several years.
Consequently, while the Commission expects several more credit rating
agencies may become registered as NRSROs over the next few years, the
Commission preliminarily believes that the actual number of NRSROs
should be used for purposes of the PRA.
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\937\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33607 (June 18, 2007).
\938\ A.M. Best Company, Inc., DBRS Ltd., Egan-Jones Rating
Company, Fitch, Inc., Japan Credit Rating Agency, Ltd., Kroll Bond
Rating Agency, Inc. (formerly LACE Financial Corp.), Moody's
Investors Service, Inc., Rating and Investment Information, Inc.,
Realpoint LLC, and Standard & Poor's Ratings Services.
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The Commission notes the current industry-wide annual burden
estimates for the NRSRO Rules are based on 30 respondents.
Consequently, these estimates would need to be adjusted to reflect the
Commission's use of the actual number of NRSROs (i.e., 10 respondents).
In this regard, the current OMB approved industry-wide annual hour
burdens are: 6,400 hours for Rule 17g-1 and Form NRSRO; 12,000 hours
for Rule 17g-2; 7,900 hours for Rule 17g-3; and 96,948 hours for Rule
17g-7. Adjusting for 10 respondents, these industry-wide annual hour
burdens would be: 2,133 hours for Rule 17g-1 and Form NRSRO; \939\
4,000 hours for Rule 17g-2;\940\ 2,633 hours for Rule 17g-3; \941\ and
92,948 hours for Rule 17g-7.\942\ For the purposes of the PRA
discussion below and the economic analysis in Section V of this
release, the Commission uses the adjusted current industry-wide annual
hour burdens above (the ``adjusted industry-wide annual hour
burdens''). For example, when discussing how a proposed amendment would
increase an industry-wide annual hour burden, the Commission adds the
increased hour burden to the applicable rule's adjusted current
industry-wide annual hour burden.
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\939\ The current OMB approved total industry-wide annual hour
burden for Rule 17g-1 and Form NRSRO of 6,400 hours is based on 30
respondents preparing and filing Form NRSROs. See Oversight of
Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33607-33609 (June 18,
2007); Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 6470 (Feb. 9, 2009), and Proposed
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR at 63889-63890 (Dec. 4, 2009). Consequently, the adjusted current
industry-wide annual hour burden for Rule 17g-1 and Form NRSRO would
be 2,133 hours (6,400 hours/30 NRSROs = 213 hours; 10 NRSROs x 213
hours = 2,133 hours).
\940\ The current OMB approved total industry-wide annual hour
burden for Rule 17g-2 of 12,000 hours is based on 30 respondents
making and retaining the required records identified in paragraphs
(a) and (b) of Rule 17g-2 and making the required disclosures in
paragraphs (d)(2) and (d)(3) (except the hour burden resulting from
paragraph (d)(2) of Rule 17g-2 was allocated across 7 NRSROs;
however, the impact on the per firm total of allocating to 7 as
opposed to 10 firms is minimal). See Oversight of Credit Rating
Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33609-33610 (June 18, 2007); Amendments to
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR at 6473 (Feb. 9, 2009), and Proposed Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 63888-63889
(Dec. 4, 2009). Consequently, the adjusted current industry-wide
annual hour burden for Rule 17g-2 would be 4,000 hours (12,000
hours/30 NRSROs = 400 hours; 10 NRSROs x 400 hours = 4,000 hours).
\941\ The current OMB approved total industry-wide annual hour
burden for Rule 17g-3 of 7,900 hours is based on 30 respondents
preparing and filing the annual reports. See Oversight of Credit
Rating Agencies Registered as Nationally Recognized Statistical
Rating Organizations, 72 FR at 33610 (June 18, 2007); Amendments to
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR at 6473 (Feb. 9, 2009), and Proposed Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 63888-63889
(Dec. 4, 2009). Consequently, the adjusted current industry-wide
annual hour burden for Rule 17g-3 would be 2,633 hours (7,900 hours/
30 NRSROs = 263 hours; 10 NRSROs x 263 hours = 2,633 hours).
\942\ Of the 96,948 hours in the current OMB approved total
industry-wide annual hour burden for Rule 17g-7, 90,948 hours are
based on the number of Exchange Act-ABS transactions per year for
which the disclosure requirement in the rule would apply (i.e., not
based on the number of respondents). See Disclosure for Asset-Backed
Securities Required by Section 943 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, 76 FR at 4507-4508 (Jan. 26,
2011). However, 6,000 hours in that total are based on the number of
respondents. Id. Consequently, the adjusted current industry-wide
annual hour burden for Rule 17g-7 would be 92,948 hours (6,000
hours/30 NRSROs = 200 hours; 10 NRSROs x 200 hours = 2,000 hours;
90,948 hours + 2,000 hours = 92,948 hours).
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The Commission preliminarily believes there are approximately 10
firms that provide, or would begin providing, third-party ``due
diligence services'' to issuers and underwriters of Exchange Act-ABS as
the term ``due diligence services'' would be defined in paragraph (a)
of proposed new Rule 17g-10.\943\ As discussed in Section II.H.2 of
this release, the Commission preliminarily believes that the firms
providing third-party ``due diligence services'' as that term would be
defined in proposed new Rule 17g-10 concentrate mostly on providing
such services for RMBS. Consequently, given the low issuance rate for
RMBS, the number of active firms may be small but it could grow if
issuance volume increases.
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\943\ See, e.g., Testimony of Vicki Beal, Senior Vice President,
Clayton Holdings, before the Financial Crisis Inquiry Commission
(Sept. 23, 2010).
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The Commission preliminarily believes there are 270 unique
securitizers that would be subject to the proposed requirements in new
Rule 15Ga-2 and the amendments to Form ABS-15G.\944\ This estimate is
based on the Commission's estimate of the number of securitizers that
would be subject to requirements in Rule 15Ga-1 and Form ABS-15G.\945\
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\944\ See proposed new Rule 15Ga-2 and the amendments to Form
ABS-15G; see also Section II.H.1 of this release for a more detailed
discussion of this proposal.
\945\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4506-4507 (Jan. 26, 2011)
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Request for Comment
The Commission generally requests comment on all aspects of these
estimates of the number of respondents. In addition, the Commission
requests specific comments on the following:
1. Is it reasonable for the Commission to use the actual number of
NRSROs for purposes of the PRA? Alternatively, should the Commission
either use, for purposes of the PRA, the estimate of 30 NRSROs it has
used in the past or develop and use a new estimate of the expected
eventual number of NRSROs? Explain any choices made with respect to the
number of NRSROs that should be used for the purposes of the PRA,
including any data and analysis supporting the choice.
2. Identify any sources of industry information that could be used
to estimate the number of NRSROs that may become registered with the
Commission over the next few years for purposes of the PRA.
[[Page 33500]]
3. Is the estimate that 10 firms will be operate as third-party
``due diligence service'' providers over the next few years reasonable?
Alternatively, should the Commission use some other number? Explain any
choices made with respect to the number of third-party ``due diligence
service'' providers that should be used for the purposes of the PRA,
including any data and analysis supporting the choice.
4. Identify any sources of industry information that could be used
to estimate the number of third-party ``due diligence service''
providers for purposes of the PRA.
D. Total Initial and Annual Recordkeeping and Reporting Burdens
Unless otherwise noted, the one-time and annual hour burden
estimates per NRSRO described below are averages across all types of
NRSROs that would be subject to the proposed amendments and new rules.
The NRSROs vary, in terms of size and complexity, from small entities
that employ less than 20 credit analysts to complex global
organizations that employ over a thousand credit analysts.\946\ Given
the 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 dominate in terms of size
and the volume of credit rating issuance.\947\
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\946\ See, e.g., Annual Report on Nationally Recognized
Statistical Rating Organizations. Commission (Jan. 2011), pp. 4-9.
\947\ Based on data collected from the NRSROs in their Form
NRSROs and Rule 17g-3 annual reports, the Commission has used the
Herfindahl-Hirschmann Index (HHI) to analyze market concentration
among the 10 NRSROs. Id. HHI is calculated by squaring the market
share of each firm competing in the market and then summing the
resulting number. Id. The HHI is measured on a scale of 0 to 10,000
and approaches zero when a market consists of a large number of
firms of relatively equal size. The HHI increases both as the number
of firms in the market decreases and as the disparity in size
between those firms increases. Id. According to the U.S. Department
of Justice, markets in which the HHI is between 1,000 and 1,800
points are considered to be moderately concentrated, and those in
which the HHI is in excess of 1,800 points are considered to be
concentrated. Id. The Commission has calculated an HHI number using
the number credit ratings outstanding per NRSRO and that number is
3,495, which is equivalent to there being approximately 2.86 equally
sized firms. Id. The HHI using earnings reported by NRSROs in the
Rule 17g-3 annual reports is 3,926, which the equivalent of 2.55
equally sized firms. Id. The inverse of the HHI (``HHI Inverse'') is
a measure of the number of equally sized firms which would
constitute a comparable level of concentration for a given HHI and
is calculated by dividing 10,000 by the HHI. Id.
---------------------------------------------------------------------------
As discussed below, with respect to some burden estimates, the
Commission preliminarily believes it would be reasonable to use the
approximate number of credit ratings outstanding or the number of
credit analysts employed based on the most recently submitted annual
certifications of the NRSROs.\948\ These data are presented in Figure 2
and Figure 3 below, respectively.
---------------------------------------------------------------------------
\948\ See, Annual Report on Nationally Recognized Statistical
Rating Organizations. Commission (Jan. 2011), pp. 4-9.
Figure 2--Outstanding Credit Ratings Reported by NRSROs on Form NRSRO by Ratings Class
--------------------------------------------------------------------------------------------------------------------------------------------------------
Government,
NRSRO Financial Insurance Corporate Asset-backed municipal & Total ratings
institutions companies issuers securities sovereign
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.M. Best............................................... 3 5,364 2,246 54 0 7,667
DBRS.................................................... 16,630 120 5,350 8,430 12,400 42,930
EJR..................................................... 82 45 853 14 13 1,007
Fitch................................................... 72,311 4,599 12,613 69,515 352,697 511,735
JCR..................................................... 156 31 518 64 53 822
Kroll................................................... 17,263 60 1,000 0 61 18,384
Moody's................................................. 76,801 5,455 31,008 106,337 862,240 1,081,841
R&I..................................................... 100 30 543 186 123 982
Realpoint............................................... 0 0 0 8,856 0 8,856
S&P..................................................... 52,500 8,600 41,400 124,600 1,004,500 1,231,600
-----------------------------------------------------------------------------------------------
Total............................................... 235,846 24,304 95,531 318,056 2,232,087 2,905,824
================-------------------------------------------------------------------------------
HHI..................................................... 2,599 2,601 3,145 3,145 3,767 3,495
HHI Inverse............................................. 3.85 3.84 3.18 3.18 2.65 2.86
--------------------------------------------------------------------------------------------------------------------------------------------------------
Figure 3--Credit Analysts Employed Reported by NRSROs on Form NRSRO
------------------------------------------------------------------------
Credit
NRSRO Credit analyst
analysts supervisors
------------------------------------------------------------------------
A.M. Best.................................... 134 42
DBRS......................................... 67 20
EJR.......................................... 5 3
Fitch........................................ 1,035 345
JCR.......................................... 61 27
Kroll........................................ 7 4
Moody's...................................... 1,096 143
R&I.......................................... 81 6
Realpoint.................................... 15 7
S&P.......................................... 1,019 223
--------------------------
Total.................................... 3,520 820
------------------------------------------------------------------------
1. Proposed Amendments to Rule 17g-1
The Commission is proposing several amendments to Rule 17g-1. As
discussed below, the Commission preliminarily estimates that these
proposals would result in additional one-time and annual hour burdens
for NRSROs.
The Commission proposes amending paragraph (i) of Rule 17g-1 to
require that an NRSRO make Form NRSRO and Exhibits 1 through 9 freely
available on an easily accessible portion of its corporate Internet Web
site.\949\ The proposed amendment would remove the option for an NRSRO
to make the Form publicly available ``through another comparable,
readily accessible means'' as an alternative to Internet Web site
disclosure. The Commission preliminarily estimates that there would be
a minimal one-time hour burden attributable to requiring that an NRSRO
make Form NRSRO and Exhibits 1 through 9 freely available on an easily
[[Page 33501]]
accessible portion of its corporate Internet Web site and removing the
option for an NRSRO to make its Form NRSRO and Exhibits 1 through 9
available through another comparable, readily accessible means.
Currently, all NRSROs make Form NRSRO and Exhibits 1 through 9
available on their corporate Internet Web sites.\950\ However, as noted
earlier, the Commission preliminarily believes that a Form NRSRO and
Exhibits 1 through 9 would be ``easily accessible'' if they could be
accessed through a clearly and prominently labeled hyperlink on the
home page of the NRSRO's corporate Internet Web site. All NRSROs would
need to make changes to their corporate Internet Web sites to place
clearly and prominently labeled hyperlinks on the Web sites to Form
NRSRO and Exhibits 1 through 9. Based on staff experience, the
Commission preliminarily estimates that re-configuring a corporate
Internet Web site for this purpose would take an average of
approximately 5 hours. For these reasons, the Commission preliminarily
estimates that the proposed requirement would result in an average one-
time hour burden to each NRSRO of approximately 5 hours, resulting in
an average one-time industry-wide hour burden of approximately 50
hours.\951\ The Commission preliminarily estimates that NRSROs would
prepare these responses internally using their own corporate Internet
Web site administrators. The Commission preliminarily does not believe
the proposed requirement would result in an increase in the industry-
wide annual hour burden attributable to Rule 17g-1 and Form NRSRO.
---------------------------------------------------------------------------
\949\ See proposed amendments to paragraph (i) of Rule 17g-1;
see also Section II.E.1.b of this release for a more detailed
discussion of this proposal.
\950\ See, e.g., Annual Report on Nationally Recognized
Statistical Rating Organizations. Commission (Jan. 2011), pp. 18-19.
\951\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------
The Commission also is proposing to amend paragraph (i) of Rule
17g-1 to require that Exhibit 1 be made freely available in writing
when requested. This would implement rulemaking mandated in Section
15E(q)(2)(D) of the Exchange Act.\952\ With respect to making Exhibit 1
freely available in writing, the Commission notes that, under the
proposed amendments to paragraph (i) of Rule 17g-1, Form NRSRO and
Exhibits 1 through 9 would need to be made freely available on an
easily accessible portion of the NRSRO's corporate Internet Web site.
Moreover, as noted above, NRSROs currently comply with paragraph (i) of
Rule 17g-1 by making their Form NRSROs and Exhibits 1 through 9
available on their corporate Internet Web sites. Consequently, an
individual with access to the Internet and a printer can (and would be
able to) obtain Exhibit 1 immediately through the Internet and could
print the Exhibit if the individual wanted to have it in paper form.
Therefore, the Commission preliminarily estimates that the instances in
which an individual would request an NRSRO to provide a written copy of
Exhibit 1 would be rare, given that the individual would need to wait
for the request to be processed by the NRSRO and the Exhibit to arrive
by mail as opposed to accessing it immediately via the Internet.
Nonetheless, the Commission preliminarily estimates that some number of
individuals may request an NRSRO to provide Exhibit 1 in writing.
---------------------------------------------------------------------------
\952\ See 15 U.S.C. 78o-7(q)(2)(D).
---------------------------------------------------------------------------
The Commission preliminarily estimates that the proposed
requirement would result in a one-time hour burden to each NRSRO as
they would need to establish procedures and protocols for receiving and
processing these requests. Based on staff experience, the Commission
preliminarily estimates that each NRSRO would spend an average of
approximately 48 hours establishing such procedures and protocols,
resulting in an average industry-wide one-time hour burden of
approximately 480 hours.\953\
---------------------------------------------------------------------------
\953\ 10 NRSROs x 48 hours = 480 hours.
---------------------------------------------------------------------------
In terms of annual hour burden, the Commission notes it is
difficult to quantify the number of requests an NRSRO would receive
each year. However, the Commission preliminarily estimates each NRSRO
would on average receive approximately 200 requests per year and would
spend an average of 20 minutes processing each request. The estimate of
200 requests is intended to serve as a ``placeholder'' for PRA purposes
and the Commission will revise this estimate based on information
provided by NRSROs and other commenters. For these reasons, the
Commission estimates that the average annual hour burden to each NRSRO
would be approximately 67 hours,\954\ resulting in a total industry-
wide annual hour burden of approximately 670 hours.\955\ The Commission
preliminarily estimates that NRSROs would prepare these responses
internally.
---------------------------------------------------------------------------
\954\ 200 requests x 20 minutes per request = 67 hours per year.
\955\ 10 NRSROs x 67 hours per year = 670 hours per year.
---------------------------------------------------------------------------
The Commission also is proposing to amend paragraphs (e), (f), and
(g) of Rule 17g-1 to require that an NRSRO use the Commission's EDGAR
system to electronically submit Form NRSRO and Exhibits 1 through 9
with the Commission pursuant to these paragraphs in the format required
by the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-
T.\956\ NRSROs currently submit these documents to the Commission in
paper form.
---------------------------------------------------------------------------
\956\ See proposed amendments to paragraphs (e), (f), and (g) of
Rule 17g-1; see also Section II.L of this release for a more
detailed discussion of these proposals.
---------------------------------------------------------------------------
The Commission preliminarily estimates that each NRSRO would spend
an average of approximately 5 hours becoming familiar with the EDGAR
filing system and completing and submitting Form ID, which is necessary
to access the system. As discussed below, the Commission preliminarily
estimates that the one-time hour burden for each NRSRO to complete Form
ID would be 15 minutes.\957\ In addition, as discussed above and below,
the Commission is proposing that the Rule 17g-3 annual report also be
submitted using the EDGAR system.\958\ The Commission's preliminary
estimate of 5 hours to become familiar with the EDGAR system would
include developing an understanding of how to use the system for both
submitting Form NRSROs and submitting the Rule 17g-3 annual reports.
Consequently, for purposes of the PRA and the Economic Analysis in
Section V of this release, the Commission is allocating this one-time
hour burden and corresponding cost solely to Rule 17g-1. In addition,
because the hour burden of 15 minutes for Form ID is addressed below,
the Commission estimates that each NRSRO would spend an average of 4.75
hours becoming familiar with how to use the EDGAR system, resulting in
an industry-wide one-time hour burden of approximately 47.5 hours.\959\
---------------------------------------------------------------------------
\957\ See Section IV.D.11 of this release.
\958\ See proposed amendments to Regulation S-T and Rule 17g-3;
see also Section II.L of this release for a more detailed discussion
of this proposal.
\959\ 10 NRSROs x 4.75 hours = 47.5 hours.
---------------------------------------------------------------------------
The Commission does not believe changing the method of submitting
Form NRSRO and Exhibits 1 through 9 from a paper submission to an
electronic submission would increase the current annual hour burden for
Rule 17g-1. In particular, the Commission believes that both the amount
of time it currently takes an NRSRO to send these materials, once
compiled, to the Commission's headquarters by mail, messenger, or hand-
delivery by a representative of the NRSRO and the time it would take to
submit them electronically through the EDGAR system are de minimus.
[[Page 33502]]
For the foregoing reasons, the Commission estimates that the total
industry-wide one-time hour burden resulting from the proposed
amendments to Rule 17g-1 would be approximately 577.5 hours \960\ and
the total industry-wide annual burden would be approximately 670
hours.\961\
---------------------------------------------------------------------------
\960\ 480 hours + 50 + 47.5 hours = 577.5 hours.
\961\ This estimate would increase the adjusted industry-wide
annual hour burden for Rule 17g-1 and Form NRSRO from 2,133 hours to
2,803 hours (2,133 hours + 670 hours = 2,803 hours).
---------------------------------------------------------------------------
2. Proposed Amendments to Form NRSRO Instructions
The Commission is proposing to amend the instructions for Exhibit 1
to Form NRSRO.\962\ The amendments would confine the disclosures in the
Exhibit to transition and default rates and certain limited
supplemental information.\963\ Moreover, the amendments would
standardize the production and presentation of the transition and
default statistics. As discussed below, the Commission preliminarily
estimates that these proposals would result in additional one-time and
annual hour burdens for NRSROs.
---------------------------------------------------------------------------
\962\ See Instruction H to Form NRSRO (as it relates to Exhibit
1).
\963\ See proposed amendments to the instructions for Exhibit 1
to Form NRSRO (17 CFR 249b.300); see also Section II.E.1.a of this
release for a more detailed discussion of this proposal.
---------------------------------------------------------------------------
The Commission notes that an NRSRO currently is required to provide
transition and default rates in Exhibit 1 for each class of credit
rating for which it is registered and for 1, 3, and 10-year periods.
The Commission preliminarily estimates that an NRSRO would use the
internal information technology systems and expertise and other
resources it currently devotes to processing the information necessary
to monitor credit ratings and calculate transition and default
statistics in order to program a system to comply with the proposed
amendments to the Instructions for Exhibit 1. At the same time, the
Commission notes that, under the proposed amendments, NRSROs would be
required to adhere to specific requirements that may not be the same as
their current methods for calculating and presenting transition and
default rates. Consequently, the Commission preliminarily estimates
that the proposed amendments requiring standardized Transition/Default
Matrices would result in a one-time hour burden to program existing
systems to create the Transition/Default Matrices that would be
required under the proposed amendments and an increase in the annual
hour burden to comply with the proposed instructions to Exhibit 1.
As noted above, the size and complexity of the NRSROs varies
greatly. The magnitude of this variance is reflected in the number of
credit ratings each NRSRO has outstanding.\964\ For example, two NRSROs
have over 1,000,000 credit ratings outstanding in the classes of credit
ratings for which they are registered; others have fewer than 1,000
such ratings.\965\ The hour burden associated with calculating and
presenting these performance statistics would depend in large part on
the number of obligors, securities, and money market instruments
assigned credit ratings by the NRSRO.\966\ Consequently, the one-time
and annual burdens per NRSRO would vary widely.
---------------------------------------------------------------------------
\964\ See Figure 2 in Section IV.D of this release.
\965\ Id.
\966\ For example, as discussed in more detail in Section
II.E.1.a of this release, the applicant or NRSRO, in producing a
Transition/Default Matrix, would need to determine a start-date
cohort consisting of the obligors, securities, and money market
instruments in the applicable class or subclass of credit ratings
that were assigned a credit rating that was outstanding as of the
start date for the applicable period (i.e., the date 1, 3, or 10
years prior to the most recently ended calendar year). The applicant
or NRSRO also would need to group the obligors, securities, and
money market instruments in the start-date cohort based on the
credit rating assigned to them as of the start date and determine
the outcome for each such obligor, security, and money market
instrument in the group during, or as of the end of, the relevant
period. This exercise would be more time-consuming for an NRSRO that
has over 1,000,000 credit ratings outstanding than for an NRSRO that
has fewer than 10,000 credit ratings outstanding (2 NRSROs have over
1,000,000 credit ratings outstanding and 5 NRSROs have fewer than
10,000 credit ratings outstanding). See Figure 2 in Section IV.D of
this Release.
---------------------------------------------------------------------------
In order to account for this variance, the Commission preliminarily
believes that the one-time and annual hour burden estimates should be
based on the number of credit ratings outstanding. Based on the annual
certifications submitted by the NRSROs for the 2009 calendar year-end,
there were approximately 2,905,824 credit ratings outstanding across
all 10 NRSROs.\967\ The Commission preliminarily estimates that the
one-time industry-wide hour burden to establish systems to process the
relevant information necessary to calculate the Transition/Default
Matrices and make the necessary calculations would be approximately 3
seconds per outstanding credit rating, which would result in a one-time
industry-wide hour burden of approximately 2,420 hours.\968\ Moreover,
because of the wide variance in the number of credit ratings
outstanding among the NRSROs, the Commission preliminarily estimates
that this one-time hour burden of 2,420 hours would be allocated to the
10 NRSROs based on the number of credit ratings each has outstanding
(although larger NRSROs may realize economies of scale). For example,
the two largest NRSROs had just over 1,000,000 credit ratings
outstanding, the next largest had approximately 500,000 credit ratings
outstanding, and the remaining 7 NRSROs had amounts ranging from 42,930
credit ratings outstanding to 982 credit ratings outstanding.\969\
---------------------------------------------------------------------------
\967\ Id.
\968\ 2,905,824 credit ratings x 3 seconds = 2,421.52 hours
(rounded to 2,420 hours).
\969\ See Figure 2 in Section IV.D of this release.
---------------------------------------------------------------------------
The Commission preliminarily believes that the annual hour burden
to comply with the proposed amendments to the Instructions for Exhibit
1 would be less than the one-time hour burden since the NRSROs would
have established systems to process the necessary information to
produce the required Transition/Default Matrices. Consequently, the
Commission preliminarily estimates that the annual hour burden to each
NRSRO to calculate the Transition/Default Matrices would be
approximately 1.5 seconds per outstanding credit rating, resulting in
an industry-wide annual hour burden of approximately 1,210 hours.\970\
Moreover, although larger NRSROs may realize economies of scale, the
Commission preliminarily estimates that the industry-wide annual hour
burden of 1,210 hours would be allocated to each NRSRO based on the
number of credit ratings the firm had outstanding.\971\
---------------------------------------------------------------------------
\970\ 2,905,824 credit ratings x 1.5 seconds = 1,210.76 hours
(rounded to 1,210 hours).
\971\ See Figure 2 in Section IV.D of this release.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission estimates that the total
industry-wide one-time hour burden resulting from the proposed
amendments to the instructions for Exhibit 1 to Form NRSRO would be
approximately 2,420 hours and the total industry-wide annual burden
would be approximately 1,210 hours.\972\
---------------------------------------------------------------------------
\972\ These estimates would increase the adjusted industry-wide
annual hour burden for Rule 17g-1 and Form NRSRO from 2,133 hours to
3,343 hours (2,133 hours + 1,210 hours = 3,343 hours). Combined with
the industry-wide annual burden hour increase of 670 hours resulting
from the proposed amendments to Rule 17g-1 discussed above in
Section IV.D.2 of this release, the total increase to the adjusted
industry-wide annual hour burden for Rule 17g-1 and Form NRSRO would
be from 2,133 hours to 4,013 hours (2,133+670 hours + 1,210 hours =
4,013 hours). The Commission notes that the adjusted industry-wide
annual hour burden for all of Rule 17g-1 and Form NRSRO (which
includes providing the transition and default rates required in
Exhibit 1 under the existing instructions) is 2,133 hours.
Consequently, the Commission preliminarily believes these estimates
of the incremental burden that would result from the proposed
amendments to the Instructions for Exhibit 1 are conservatively
large.
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[[Page 33503]]
3. Proposed Amendments to Rule 17g-2
The Commission proposes adding paragraph (a)(9) to Rule 17g-2 to
identify the policies and procedures an NRSRO is required to establish,
maintain, and enforce pursuant to Section 15E(h)(4)(A) of the Exchange
Act and proposed paragraph (c) of Rule 17g-8 as a record that must be
made and retained.\973\ In addition, the Commission is proposing to add
the following new paragraphs to Rule 17g-2 to identify records that
must be retained: (1) paragraph (b)(12) would identify the internal
control structure an NRSRO must establish, maintain, enforce, and
document pursuant to Section 15E(c)(3)(A); \974\ (2) paragraph (b)(13)
would identify the policies and procedures an NRSRO is required to
establish, maintain, enforce, and document pursuant to proposed
paragraph (a) of new Rule 17g-8; \975\ (3) paragraph (b)(14) would
identify the policies and procedures an NRSRO must establish, maintain,
enforce, and document pursuant to proposed paragraph (b) of new Rule
17g-8; \976\ and (4) paragraph (b)(15) would identify the standards of
training, experience, and competence for credit analysts an NRSRO must
establish, maintain, enforce, and document pursuant to proposed new
Rule 17g-9.\977\ As discussed below, the Commission preliminarily
estimates that these proposals would result in additional one-time and
annual hour burdens for NRSROs.
---------------------------------------------------------------------------
\973\ See proposed new paragraph (a)(9) to Rule 17g-2(a)(9); see
also Section II.C.2 of this release for a more detailed discussion
of this proposal.
\974\ See proposed new paragraph (b)(12) of Rule 17g-2; see also
Section II.A.2 of this release for a more detailed discussion of
this proposal.
\975\ See proposed new paragraph (b)(13) to Rule 17g-2; see also
Section II.F.2 of this release for a more detailed discussion of
this proposal.
\976\ See proposed new paragraph (b)(14) to Rule 17g-2; see also
Section II.J.2 of this release for a more detailed discussion of
this proposal.
\977\ See proposed new paragraph (b)(15) to Rule 17g-2; see also
Section II.I.2 of this release for a more detailed discussion of
this proposal.
---------------------------------------------------------------------------
The Commission is providing preliminary estimates below in Section
IV.D.5 of this release of the one-time and annual hour burdens that
would result from establishing, maintaining, enforcing, and documenting
the policies and procedures required by Section 15E(h)(4)(A) of the
Exchange Act and proposed paragraph (c) of Rule 17g-8. Because the
requirement to document these procedures would be the same as the
requirement in proposed paragraph (a)(9) of Rule 17g-2 to make this
record, the PRA burdens associated with that aspect of the making of
the record are addressed below in Section IV.D.5 of this release.
Consequently, for the purposes of Rule 17g-2, the Commission is
providing preliminary estimates of the one-time and annual hour burdens
resulting from the requirement to retain the records that would be
identified in new paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and
(b)(15) of Rule 17g-2. The Commission preliminarily estimates that the
one-time hour burden would result from the NRSRO needing to update its
record retention policies and procedures to incorporate these new
records that would need to be retained. Based on staff experience, the
Commission preliminarily estimates that each NRSRO would spend an
average of approximately 20 hours updating its record retention
policies and procedures, resulting in an industry-wide one-time hour
burden of approximately 200 hours.\978\
---------------------------------------------------------------------------
\978\ 10 NRSROs x 20 hours = 200 hours.
---------------------------------------------------------------------------
In terms of annual hour burden, the Commission notes that the
adjusted industry-wide annual hour burden attributable to Rule 17g-2 is
4,000 hours, resulting in an average annual burden of 400 hours per
NRSRO.\979\ This burden amount is attributable to 8 different types of
records that must be made and retained by the NRSRO, 11 types of
records that must be retained if made or received, and to the
disclosure requirements in paragraphs (d)(2) and (d)(3) of Rule 17g-
2.\980\ The Commission preliminarily believes that most of the hour
burden is attributable to making the records identified in paragraph
(a) of the Rule 17g-2 and making the disclosures required in paragraph
(d) of Rule 17g-2 as this work is substantially more labor intensive
than retaining a record. Consequently, the Commission preliminarily
estimates that the burden associated with retaining the 5 new records
that would be identified in new paragraphs (a)(9), (b)(12), (b)(13),
(b)(14), and (b)(15) of Rule 17g-2 would be minimal because NRSROs
already should have well-established procedures with respect to the
records they must make and retain pursuant to Rule 17g-2. In addition,
the Commission does not expect the new records would change frequently
given that they would be the NRSRO's internal control structure
required pursuant to Section 15E(c)(3)(A) of the Exchange Act,\981\
various types of policies and procedures, and the standards of
training, experience, and competence for credit analysts an NRSRO must
establish, maintain, enforce, and document pursuant to proposed new
Rule 17g-9. Accordingly, once the original record is retained, the need
to expend resources to retain updated versions of the original record
would be infrequent. Therefore, the Commission preliminarily estimates
that it would take approximately one hour per record each year to
retain updated versions of these records. For these reasons, the
Commission preliminarily estimates that the annual hour burden for each
NRSRO attributable to these proposals would be approximately 5
hours,\982\ resulting in an industry-wide annual hour burden of
approximately 50 hours.\983\
---------------------------------------------------------------------------
\979\ 4,000 hours/10 NRSROs = 400 hours.
\980\ See 17 CFR 240.17g-2(a), (b), (d)(2), and (d)(3).
\981\ See 15 U.S.C. 78o-7(c)(3)(A).
\982\ 5 records x 1 hour = 5 hours.
\983\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------
The Commission is proposing to repeal paragraph (d)(2) of Rule 17g-
2 and re-codify and enhance the requirements in paragraph (d)(3) of
Rule 17g-2 in proposed new paragraph (b) of Rule 17g-7.\984\ The
Commission preliminarily estimates that the repeal and re-codification
would result in de minimis one-time hour burdens to each NRSRO.\985\
The one-time and annual hour burden resulting from the proposed
enhancements to the requirements currently codified in paragraph (d)(3)
are discussed below in Section V.D.4 of this release, which addresses
the one-time and annual hour burdens resulting from the proposed
amendments to Rule 17g-7.
---------------------------------------------------------------------------
\984\ See proposed amendments to paragraphs (d)(2) and (3) of
Rule 17g-2 and proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
\985\ For example, each NRSRO likely would remove the
disclosures required pursuant to paragraph (d)(2) Rule 17g-2 from
its corporate Internet Web sites (though such a removal would not be
mandatory).
---------------------------------------------------------------------------
For the foregoing reasons, the Commission estimates that the total
industry-wide one-time hour burden resulting from the proposed
amendments to Rule 17g-2 would be approximately 200 hours and the total
industry-wide annual hour burden would be approximately 50 hours.\986\
---------------------------------------------------------------------------
\986\ The adjusted industry-wide annual hour burden for Rule
17g-2 is 4,000 hours. The elimination of the requirements in
paragraph (d)(2) of Rule 17g-7 would subtract 70 hours from that
amount. See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6472 (Feb. 9, 2009). In
addition, the re-codification of paragraph (d)(3) of Rule 17g-2 in
proposed new paragraph (b) of Rule 17g-7 would subtract an
additional 450 hours from the adjusted industry-wide annual hour
burden for Rule 17g-2. See Amendments to Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 63853 (Dec. 4,
2009). Consequently, after these subtractions, the adjusted
industry-wide annual hour burden for Rule 17g-2 would be 3,480 hours
(4,000 hours-70 hours-450 hours = 3,480 hours). The proposed
amendments to add paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and
(b)(15) to Rule 17g-2 would, as discussed above, add approximately
50 hours to the adjusted industry-wide annual hour burden resulting
in a total adjusted industry-wide annual hour burden of 3,530 hours
(3,480 hours + 50 hours = 3,530 hours).
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[[Page 33504]]
4. Proposed Amendments to Rule 17g-3
The Commission proposes amending paragraphs (a) and (b) of Rule
17g-3 to implement the rulemaking mandated by Section 15E(c)(3)(B) of
the Exchange Act.\987\ As discussed below, the Commission preliminarily
estimates that these proposals would result in additional one-time and
annual hour burdens for NRSROs.
---------------------------------------------------------------------------
\987\ See proposed new paragraphs (a)(7) and (b)(2) of Rule 17g-
3; see also Section II.A.3 of this release for a for a more detailed
discussion of this proposal.
---------------------------------------------------------------------------
The proposed amendment to paragraph (a) would add a new paragraph
(a)(7) to require an NRSRO to include an additional report--a report on
the NRSRO's internal control structure--with its annual submission of
reports pursuant to Rule 17g-3. The proposed amendment to paragraph (b)
of Rule 17g-3 would require the NRSRO's CEO or, if the firm does not
have a CEO, an individual performing similar functions, to provide a
signed statement that would be attached to the report. The Commission
preliminarily estimates that the proposed amendments would result in
one-time and annual hour burdens.
The Commission notes that NRSROs already should have developed
processes and protocols to prepare the annual reports required by Rule
17g-3. Consequently, the Commission preliminarily estimates that the
internal hour burden associated with the first submission of the report
would not be materially different than the hour burden associated with
submitting subsequent reports, although the time required to prepare
subsequent reports could decrease incrementally over time as the NRSRO
gains experience with the requirement. The Commission, however,
preliminarily estimates that an NRSRO likely would engage outside
counsel to analyze the requirements for the report and assist in
drafting and reviewing the first report, given that it must be signed
by the NRSRO's CEO or an individual performing a similar function. The
time an outside attorney would spend on this work would depend on the
size and complexity of the NRSRO. The Commission preliminarily
estimates that an attorney would spend an average of approximately 100
hours assisting an NRSRO and its CEO or other qualified individual in
drafting and reviewing the first report, resulting in an industry-wide
external one-time hour burden of approximately 1,000 hours.\988\ Based
on industry sources, the Commission estimates that the cost of an
outside counsel would be approximately $400 per hour.\989\ For these
reasons, the Commission estimates that the average one-time cost to an
NRSRO would be approximately $40,000,\990\ resulting in an industry-
wide one-time cost of approximately $400,000.\991\
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\988\ 10 NRSROs x 20 hours = 200 hours.
\989\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an
estimate of $400 an hour to engage outside professionals) and
Proposed Rules for Nationally Recognized Statistical Rating
Organizations, 74 FR 63889 (Dec. 4, 2009) (providing an estimate of
$400 per hour to engage an outside attorney).
\990\ 100 hours x $400 = $40,000. See also, Proposed Rules for
Nationally Recognized Statistical Rating Organizations, 74 FR 63889
(Dec. 4, 2009) (providing an estimate of $400 per hour to engage an
attorney).
\991\ 10 NRSROs x $40,000 = $400,000.
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The Commission preliminarily estimates, based on staff experience,
that each NRSRO would spend on average approximately 150 hours
preparing the internal control report to be included with the other
annual reports filed with the Commission, resulting in an industry-wide
annual burden of approximately 1,500 hours.\992\
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\992\ 10 NRSROs x 150 hours = 1,500 hours.
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In addition, the Commission preliminarily estimates that an NRSRO
likely would continue to engage outside counsel to assist in preparing
the report. As noted above, the time an outside attorney would spend on
this work would depend on the size and complexity of the NRSRO. In
addition, the Commission preliminarily estimates that the time an
outside attorney would spend assisting in the preparation of subsequent
reports would be less than the time spent on preparing the first report
since the counsel's work would not need to include an initial analysis
of the new requirements. Consequently, the Commission estimates that an
attorney would spend an average of approximately 50 hours assisting an
NRSRO and its CEO or other qualified individual in drafting and
reviewing the report, resulting in an industry-wide annual hour burden
of approximately 500 hours.\993\ As stated above, 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 annual cost to an NRSRO to comply with this requirement would
be approximately $20,000,\994\ resulting in an industry-wide annual
cost of approximately $200,000.\995\
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\993\ 10 NRSROs x 20 hours = 200 hours.
\994\ 50 hours x $400 = $20,000. See also, Proposed Rules for
Nationally Recognized Statistical Rating Organizations, 74 FR 63889
(Dec. 4, 2009) (providing an estimate of $400 per hour to engage an
attorney).
\995\ 10 NRSROs x $20,000 = $200,000.
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The amendments also would require that the Rule 17g-3 annual
reports be submitted electronically on the Commission's EDGAR
system.\996\ As discussed in Section IV.D.1 of this release, the
Commission preliminarily estimates each NRSRO would spend 5 hours
becoming familiar with how to use the EDGAR system and to complete Form
ID for the purposes of submitting Form NRSRO (and Exhibits 1 through 9)
and the Rule 17g-3 annual reports. For the purposes of this PRA and the
Economic Analysis section below, the Commission is allocating that time
to Rule 17g-1 and Form ID.
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\996\ See proposed new paragraph (d) of Rule 17g-3; see also
Section II.L of this release for a more detailed discussion of this
proposal.
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In addition, the Commission does not believe that changing the
method of submitting the annual reports from a paper submission to an
electronic submission would increase the current hour burden for Rule
17g-3. For example, the Commission does not believe the amount of time
it currently takes an NRSRO to gather these materials and send them to
the Commission's headquarters by mail, messenger, or hand-delivery
would be less than the time it would take to submit them electronically
through the EDGAR system.
For the foregoing reasons, the Commission preliminarily estimates
that the proposed amendments to Rule 17g-3 would result in a total
industry-wide one-time cost of approximately $400,000, a total
industry-wide annual hour burden of approximately 1,500 hours, and a
total industry-wide annual cost of approximately $200,000.\997\
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\997\ This estimate would increase the adjusted industry-wide
annual hour burden for Rule 17g-3 from 2,633 hours to 4,133 hours.
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5. Proposed New Rule 17g-7
The Commission is proposing to add new paragraphs (a) and (b) to
Rule 17g-7, which would contain substantial new requirements.\998\ As
discussed below, the Commission preliminarily estimates that these
proposals would result in additional one-time and annual hour burdens
for NRSROs.
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\998\ 17 CFR 240.17g-7.
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The Commission is proposing to add new paragraphs (a)(1) and (2) to
Rule 17g-7 to implement rulemaking
[[Page 33505]]
mandated in Sections 15E(s)(1), (2), (3), and (4)(D) of the Exchange
Act.\999\ Proposed new paragraphs (a)(1) and (2) of Rule 17g-2 would
require, respectively, an NRSRO, when taking a rating action, to
publish a form containing information about the credit rating resulting
from, or subject to, the rating action and any certification of a
provider of third-party due diligence services received by the NRSRO
relating to the credit rating.\1000\
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\999\ See 15 U.S.C. 78o-7(s)(1), (2), (3), and (4)(D) and
proposed new paragraph (a) of Rule 17g-7; see also Sections II.G.1
through G.5 of this release for a more detailed discussion of this
proposal.
\1000\ See proposed new paragraphs (a)(1) and (2) of Rule 17g-7.
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The Commission preliminarily believes that much of the information
required to be disclosed in the form could be standardized based on the
class and subclass of credit rating. For example, an NRSRO could
develop a set of standardized disclosures for structured finance
products based on whether the credit rating was issued for an RMBS,
CMBS, CDO, CLO, ABCP, or other type of structured finance product.
Similarly, for corporate issuers, the NRSRO could develop a set of
standardized disclosures depending on factors such as the industry
sector and geographic location of the rated issuer. In addition, the
Commission believes that much of the information, particularly as it
relates to the specific obligor, security, or money market instrument
that is subject to the rating action, already would be generated or
collected through the credit rating process. Finally, the Commission
notes that globally active NRSROs are subject to similar
requirements.\1001\
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\1001\ See, e.g., Regulation no. 1060/2009 of the European
Parliament and of the Council of 16 September 2009 on credit rating
agencies, Article 8.2 and Annex 1, Section D.
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Consequently, the Commission estimates that the proposal would
result in a one-time hour burden to develop the standardized
disclosures and to create systems, protocols, and procedures for
populating the form with information generated and collected during the
rating process. In addition, the NRSRO would need to develop procedures
designed to ensure that all the information required to be included in
the form is input into the form prior to the publication of the credit
rating, that any certifications received from a provider of third-party
due diligence services are attached to the form, and that the form and
certifications are published with the credit rating.
The Commission preliminarily estimates that the one-time hour
burden to develop these standardized disclosures would vary
considerably among NRSROs based on the number of credit ratings they
issue and monitor and the number of classes and subclasses of credit
ratings for which they issue and monitor credit ratings. Specifically,
the larger NRSROs that issue and monitor a high volume of credit
ratings across multiple classes and subclasses of credit ratings would
bear a significantly greater burden than smaller NRSROs that may need
to develop standardized disclosures for far fewer classes and
subclasses of credit ratings. The Commission estimates that an NRSRO
would spend an average of approximately 5,000 hours to develop the
standardized disclosures and create the systems, protocols, and
procedures for populating the form with information generated and
collected during the rating process.\1002\ However, the Commission
preliminarily estimates that this amount is heavily skewed upward by
the number of credit ratings issued, as well as the breadth of the
classes and subclasses rated, by the three largest NRSROs as compared
to the seven smaller NRSROs. Given the 5,000 hours per NRSRO
preliminary estimate, the Commission preliminarily estimates that the
proposal would result in a one-time industry wide hour burden of
approximately 50,000 hours.\1003\ In addition, the Commission
preliminarily allocates 75% of these burden hours (37,500 hours) to
internal burden and the remaining 25% (12,500 hours) to external burden
to hire outside professionals to assist in setting up the process to
generate the forms and publish them with applicable credit
ratings.\1004\ The Commission preliminarily estimates $400 per hour for
retaining outside professionals such as attorneys and information
technology consultants, resulting in an industry-wide one-time cost of
approximately $5,000,000.\1005\
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\1002\ This estimate is based on the Commission's estimate for
the amount of time it would take a securitizer to set-up a system to
make the disclosures required by Form ABS-15G. See Disclosure for
Asset-Backed Securities Required by Section 943 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506
(Jan. 26, 2011). The Commission significantly increases the estimate
for Form ABS-15G because the form required pursuant to Rule 17g-7
would contain substantially more qualitative information for which
the NRSRO would need to develop standardized disclosures.
\1003\ 10 NRSROs x 5,000 hours = 50,000 hours.
\1004\ 50,000 hours x 0.75 = 37,500 hours; 50,000 hours x 0.25 =
12,500 hours. This allocation is based on the Commission's
allocation of the industry-wide hour burden for the amount of time
it would take a securitizer to set-up a system to make the
disclosures required by Form ABS-15G. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan.
26, 2011).
\1005\ 12,500 hours x $400 = $5,000,000. See Disclosure for
Asset-Backed Securities Required by Section 943 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506
(Jan. 26, 2011) (providing an estimate of $400 an hour engage
outside professionals) and Proposed Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009)
(providing an estimate of $400 per hour to engage an outside
attorney).
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With respect to the annual hour burden, the Commission
preliminarily estimates that the estimate should be divided into two
components. The first component would constitute the amount of time an
NRSRO would spend to update its standardized disclosures. The
Commission preliminarily estimates an NRSRO would spend substantially
less time updating the disclosures than the one-time estimate of
approximately 5,000 hours per NRSRO to initially establish the
standardized disclosures and the systems, protocols, and processes to
generate the forms. Consequently, the Commission preliminarily
estimates that each NRSRO would spend an average of approximately 500
hours per year updating the standardized disclosures, resulting in an
annual industry-wide hour burden of approximately 5,000 hours. The
Commission preliminarily estimates that the update process would be
handled by the NRSROs internally.
The second component would constitute the amount of time an NRSRO
would spend generating and publishing each form and attaching
applicable certifications to the form. The Commission preliminarily
believes that this estimate should be based on the number of rating
actions taken per year by the NRSROs because the requirement to
generate and publish the form and attach the certifications would be
triggered upon the taking of a rating action. Based on information
submitted to the Commission by NRSROs pursuant to paragraph (a)(6) of
Rule 17g-3, the Commission preliminarily estimates that NRSROs took
approximately 2,000,000 credit rating actions in 2009, consisting of
upgrades, downgrades, placements on credit watch, and withdrawals of
credit ratings.\1006\
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\1006\ See 17 CFR 240.17g-7(a)(6).
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The Commission notes this figure does not include the following
rating actions: Expected or preliminary credit ratings, initial credit
ratings, and affirmations of existing credit ratings.\1007\ Based on
staff experience,
[[Page 33506]]
the Commission preliminarily believes expected or preliminary credit
ratings are published primarily (but not exclusively) with respect to
new issuances of structured finance products. In the PRA for the
adoption of Rule 17g-7, the Commission estimated that there would be an
average of approximately 2,067 Exchange Act-ABS offerings per
year.\1008\ The Commission, based on staff experience, believes
expected or preliminary credit ratings are used in other types of
offerings as well and, therefore, is increasing that estimate by 100%
or to 4,134 preliminary or expected credit ratings per year.\1009\
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\1007\ As discussed in more detail in Section II.G.1 of this
release, the Commission is proposing that the requirement to publish
the form and any certifications would be triggered when an NRSRO
takes the following rating actions: Publication of an expected or
preliminary credit rating assigned to an obligor, security, or money
market instrument before the publication of an initial credit
rating; an initial credit rating; an upgrade or downgrade of an
existing credit rating (including a downgrade to, or assignment of,
default); a placement of an existing credit rating on credit watch
or review; an affirmation of an existing credit rating; and a
withdrawal of an existing credit rating.
\1008\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011).
\1009\ 2,067 offerings x 2 = 4,134 offerings.
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In terms of estimating the number initial credit ratings, the
Commission notes that there were approximately 2,905,824 credit ratings
outstanding across all 10 NRSROs as of the 2009 calendar year-
end.\1010\ Based on staff experience, the Commission estimates that the
average maturity of rated securities and money market instruments is
approximately 7 years. Consequently, assuming 2,905,824 is the
approximate average number of credit ratings outstanding at any given
time, the Commission preliminarily estimates that approximately 415,117
initial credit rating are issued per year.\1011\
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\1010\ See Figure 2 in Section IV.D of this Release.
\1011\ 2,905,824 credit ratings/7 = 415,117 credit ratings. In
other words, the Commission estimates that issuers pay off in full
all outstanding principal and interest outstanding with respect to
approximately 415,117 rated securities or money market instruments
and, consequently, the credit ratings for these securities and money
market instruments are withdrawn. Those withdrawn credit ratings, in
turn, are replaced by 415,117 initial (or new) credit ratings. The
Commission notes that outstanding credit ratings assigned to
securities and money market instruments are withdrawn for other
reasons, including the security or money market instrument went into
default. In addition, the Commission notes that a percent of the
outstanding credit ratings are assigned to obligors as entities and,
therefore, these credit ratings would not be withdrawn because an
obligation was extinguished. However, they might be withdrawn for
other reasons, including the obligor went into default. Nonetheless,
the Commission preliminarily believes these estimates are reasonable
approximations of the number of initial credit ratings determined
per year.
---------------------------------------------------------------------------
Finally, with respect to affirmations of existing credit ratings,
the Commission preliminarily believes that NRSROs generally affirm
existing credit ratings at least once a year. Consequently, the
Commission preliminarily estimates that the number of affirmations
would be the total number of credit ratings outstanding (2,905,824),
less the number of credit ratings subject to other types of rating
actions, excluding expected or preliminary ratings (2,000,000), and
less the number of credit ratings assigned to securities or money
market instruments that are paid off in full during the year (415,117).
Consequently, the Commission preliminarily estimates that the number of
affirmations per year is approximately 490,707.\1012\
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\1012\ [2,905,824 outstanding credit ratings] - [2,000,000
credit ratings that are upgraded, downgraded, placed on watch, or
withdrawn] - [415,117 rated securities and money market instruments
that pay off in full] = 490,707 affirmations.
---------------------------------------------------------------------------
Based on these estimates, the Commission preliminarily estimates
that the 10 NRSROs take approximately 2,909,958 credit rating actions
per year.\1013\ The Commission preliminarily estimates that the time it
would take to generate a form by populating it with the required
disclosures and to publish the form with the credit rating would be
approximately 15 minutes on average, resulting in an industry-wide
annual hour burden of approximately 727,490 hours.\1014\ Moreover,
although larger NRSROs may realize economies of scale, the Commission
preliminarily estimates that the annual burden would be allocated to
the 10 NRSROs based on the number of credit ratings they have
outstanding.\1015\
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\1013\ [2,000,000 credit rating actions constituting upgrades,
downgrades, placements on credit watch, and withdrawals] + [4,134
preliminary or expected credit ratings] + [415,117 initial credit
ratings] + [490,707 affirmations of existing credit ratings] =
2,909,958 rating actions per year.
\1014\ 2,909,958 rating actions x .25 hours = 727,489.5 hours
(rounded to 727,490 hours).
\1015\ See Figure 2 in Section IV.D of this release.
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The Commission also is proposing to add new paragraph (b) to Rule
17g-7. The proposed amendments would: (1) Re-codify in paragraph (b) of
Rule 17g-7 requirements currently contained in paragraph (d)(3) of Rule
17g-2; and (2) substantially enhance those requirements.\1016\ The
Commission notes that NRSROs currently are required to provide ratings
history information for each credit rating initially determined on or
after June 26, 2007. The Commission preliminarily estimates that NRSROs
could use the internal information technology systems and expertise and
other resources they currently devote to complying with this
requirement to implement the proposed enhancements. At the same time,
the Commission notes that, under the proposed amendments, NRSROs would
be required to add substantially more ratings histories to the
disclosures and provide more information about each rating action in
the ratings history for a given obligor, security, or money market
instrument. Consequently, the Commission preliminarily estimates that
the proposed amendments would result in a one-time hour burden to
program existing systems and initially add the ratings histories for
all outstanding credit ratings as of June 26, 2007, and an incremental
increase in the annual hour burden to comply with the enhanced
requirements.
---------------------------------------------------------------------------
\1016\ See proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
---------------------------------------------------------------------------
When adopting paragraph (d)(3) of Rule 17g-2, the Commission
estimated that the average one-time hour burden per NRSRO would be
approximately 45 hours.\1017\ Based on that estimate, the Commission
estimates that the proposed amendments to this disclosure requirement
would result in an average one-time hour burden for each NRSRO of
approximately 135 hours, resulting in an industry-wide one-time hour
burden of approximately 1,350 hours.\1018\ In addition, when adopting
paragraph (d)(3) of Rule 17g-2, the Commission estimated the average
annual burden per NRSRO would be approximately 15 hours.\1019\ Based on
that estimate, the Commission preliminarily estimates that the proposed
enhancements would require each NRSRO to spend an average of 45 hours
per year making the disclosures, resulting in an industry-wide annual
hour burden of approximately 450 hours.\1020\
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\1017\ Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 63853 (Dec. 4, 2009).
\1018\ 10 NRSRO x 135 hours = 1,350 hours.
\1019\ Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 63853 (Dec. 4, 2009).
\1020\ 10 NRSRO x 45 hours = 450 hours.
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For the foregoing reasons, the Commission estimates that the
proposed amendments to Rule 17g-7 would result in a total industry-wide
one-time hour burden of approximately 51,350 hours,\1021\ a total
industry-wide one-time cost of approximately $5,000,000,\1022\ and a
total industry-wide annual hour burden of approximately 732,940
hours.\1023\
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\1021\ 50,000 hours + 1,350 hours = 51,350 hours.
\1022\ 12,500 hours x $400 = $5,000,000.
\1023\ 727,490 hours + 5,000 hours + 450 hours = 732,940 hours.
This estimate would increase the adjusted industry-wide annual hour
burden for Rule 17g-7 from 92,948 hours to 820,888 hours (732,940
hours + 92,948 = 825,888 hours). In addition, the annual hour burden
per NRSRO resulting from the existing requirements in paragraph
(d)(3) of Rule 17g-2 is 15 hours, which would result in an adjusted
industry-wide annual hour burden of 150 hours (10 NRSROs x 15 hours
= 150 hours). This amount would need to be transferred to the
industry-wide annual hour burden for Rule 17g-7 resulting in a total
industry-wide annual hour burden of 826,038 hours (825,888 hours +
150 hours = 826,038 hours).
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[[Page 33507]]
6. Proposed New Rule 17g-8
The Commission is proposing new Rule 17g-8, which would have three
paragraphs (a), (b), and (c).\1024\ As discussed below, the Commission
preliminarily estimates that these proposals would result in additional
one-time and annual hour burdens for NRSROs.
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\1024\ New Rule 17g-8, if adopted, would be codified at 17 CFR
240.17g-8.
---------------------------------------------------------------------------
Proposed paragraph (a) of new Rule 17g-8 would implement Section
15E(r) of the Exchange Act by requiring an NRSRO to have policies and
procedures with respect to the procedures and methodologies the NRSRO
uses to determine credit ratings.\1025\ The Commission preliminarily
estimates that the proposed requirement in paragraph (a) of new Rule
17g-8 would result in one-time and annual hour burdens for NRSROs. In
this regard, the Commission notes that Section 15E(g)(1) of the
Exchange Act requires 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 by the NRSRO or any person
associated with the NRSRO.\1026\ The Commission supplemented this
statutory requirement by adopting Rule 17g-4, which provides that the
policies and procedures under Section 15E(g) of the Exchange Act must
include policies and procedures reasonably designed to prevent: (1) The
inappropriate dissemination within and outside the NRSRO of material
nonpublic information obtained in connection with the performance of
credit rating services; (2) a person within the NRSRO from purchasing,
selling, or otherwise benefiting from any transaction in securities or
money market instruments when the person is aware of material nonpublic
information obtained in connection with the performance of credit
rating services that affects the securities or money market
instruments; and (3) the inappropriate dissemination within and outside
the NRSRO of a pending credit rating action before issuing the credit
rating on the Internet or through another readily accessible
means.\1027\
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\1025\ See 15 U.S.C. 78o-7(r) and proposed new paragraph (a) of
Rule 17g-8; see also Section II.F.1 of this release for a more
detailed discussion of this proposal.
\1026\ See 15 U.S.C. 78o-7(g).
\1027\ See 17 CFR 240.17g-4; see also Oversight of Credit Rating
Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33593-33595 (June 18, 2007).
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When adopting Rule 17g-4, the Commission assumed NRSROs already had
procedures in place to address the specific misuses of material
nonpublic information identified in Rule 17g-4.\1028\ Nonetheless, the
Commission expected that some NRSROs might need to modify their
procedures to comply with the rule.\1029\ Based on staff experience,
the Commission estimated that it would take approximately 50 hours for
an NRSRO to establish procedures in conformance with the rule.\1030\
Given the specificity of paragraph (a) proposed Rule 17g-8 as well as
the fact that unlike the policies and procedures required under Rule
17g-4, the policies and procedures that would be required under
paragraph (a) of proposed Rule 17g-8 would not be supplementing
policies and procedures that are required under a separate self-
executing statutory provision (i.e., the requirement would be based
solely on the Commission's rule), the Commission preliminarily believes
that paragraph (a) of proposed Rule 17g-8 would result in a greater
hour burden for an NRSRO. For these reasons, the Commission
preliminarily estimates that an NRSRO would spend an average of
approximately 200 hours establishing the policies and procedures,
resulting in an industry-wide one-time hour burden of approximately
2,000 hours.\1031\ In addition, the Commission preliminarily estimates
an NRSRO would spend an average of approximately 50 hours per year
reviewing the policies and procedures and updating them (if necessary),
resulting in an industry-wide annual hour burden of approximately 500
hours.\1032\
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\1028\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33610-33611 (June 18, 2007).
\1029\ Id.
\1030\ Id.
\1031\ 10 NRSROs x 200 hours = 2,000 hours.
\1032\ 10 NRSROs x 50 hours = 500 hours.
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Proposed paragraph (b) of new Rule 17g-8 would implement Section
938(a) of the Dodd-Frank Act by requiring an NRSRO to have policies and
procedures with respect to the symbols, numbers, or scores it uses to
denote credit ratings.\1033\ These policies and procedures would be
used by the NRSRO to achieve the objectives specified in Sections
938(a)(1) through (3) of the Dodd-Frank Act.\1034\ For the reasons
stated above with respect to proposed paragraph (a) of new Rule 17g-8,
the Commission estimates that an NRSRO would spend an average of
approximately 200 hours establishing the policies and procedures,
resulting in an industry-wide one-time hour burden of approximately
2,000 hours.\1035\ In addition, the Commission preliminarily estimates
an NRSRO would spend an average of approximately 50 hours per year
reviewing the policies and procedures and updating them (if necessary),
resulting in an industry-wide annual hour burden of approximately 500
hours.\1036\
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\1033\ See Public Law 111-203 Sec. 938(a) and proposed
paragraph (b) of new Rule 17g-8; see also Section II.J.1 of this
release for a more detailed discussion of this proposal.
\1034\ See Public Law 111-203 Sec. Sec. 938(a)(1)-(3).
\1035\ 10 NRSROs x 200 hours = 2,000 hours.
\1036\ 10 NRSROs x 50 hours = 500 hours.
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Proposed paragraph (c) of new Rule 17g-8 would implement Section
15E(h)(4)(A)(ii) of the Exchange Act by requiring the NRSRO to
establish, maintain, and enforce certain policies and procedures
pursuant to Section 15E(h)(4)(A) of the Exchange Act.\1037\ The
Commission preliminarily believes that the hour burdens resulting from
this proposal would be closer to the one-time hour burden estimate for
Rule 17g-4 because these policies and procedures would supplement
policies and procedures that are required under a separate self-
executing statutory provision. However, the Commission also believes
there would be new policies and procedures and, therefore, as with the
proposed requirements in paragraphs (a) and (b) of new Rule 17g-8, the
NRSRO would need to establish new policies and procedures. For these
reasons, the Commission preliminarily estimates an NRSRO would spend an
average of approximately 100 hours establishing the policies and
procedures, resulting in an industry-wide one-time hour burden of
approximately 1,000 hours.\1038\ In addition, the Commission
preliminarily estimates an NRSRO would spend an average of
approximately 25 hours per year reviewing the policies and procedures
and updating them (if necessary), resulting in an average industry-wide
annual hour burden of approximately 250 hours.\1039\
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\1037\ See 15 U.S.C. 78o-7(h)(4)(A)(ii) and proposed new
paragraph (c) of Rule 17g-8; see also Section II.C.1 of this release
for a more detailed discussion of this proposal.
\1038\ 10 NRSROs x 100 hours = 1,000 hours.
\1039\ 10 NRSROs x 25 hours = 250 hours.
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For the foregoing reasons, the Commission estimates that the total
industry-wide one-time hour burden to the NRSROs resulting from the
proposed amendments to Rule 17g-8
[[Page 33508]]
would be approximately 5,000 hours\1040\ and the total industry-wide
annual hour burden would be approximately 1,250 hours.\1041\
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\1040\ 2,000 hours + 2,000 + 1,000 hours = 5,000 hours.
\1041\ 500 hours + 500 hours + 250 hours = 1,250 hours.
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7. Proposed New Rule 17g-9
The Commission is proposing new Rule 17g-9.\1042\ This rule would
implement Section 936 of the Dodd-Frank Act by requiring an NRSRO to
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings.\1043\ As discussed below, the Commission preliminarily
estimates that these proposals would result in additional one-time and
annual hour burdens for NRSROs.
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\1042\ Proposed new Rule 17g-9 would be codified at 17 CFR
240.17g-9, if adopted.
\1043\ See Public Law 111-203 Sec. 936 and proposed new Rule
17g-9; see also Section II.I.1 of this release for a more detailed
discussion of this proposal.
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In this regard, the Commission preliminarily believes that several
of the NRSROs already have implemented standards of training,
experience, and competence for the individuals they employ to determine
credit ratings. For example, Section 1.4 of the Code of Conduct
Fundamentals for Credit Rating Agencies of the International
Organization of Securities Commissions (``IOSCO Code'') provides that
credit rating agencies ``should use people who, individually or
collectively (particularly where rating committees are used) have
appropriate knowledge and experience in developing a rating opinion for
the type of credit being applied.''\1044\ A number of NRSROs disclose
that they have implemented the IOSCO Code.\1045\ In addition, some
NRSROs disclose in the Exhibits to their Form NRSROs that they have
standards of training, experience, competence, continuing education,
and testing programs for their credit analysts.\1046\
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\1044\ Code of Conduct Fundamentals for Credit Rating Agencies,
Technical Committee of IOSCO (May 2008).
\1045\ The following NRSROs, for example, reported in Exhibit 5
to Form NRSRO that they comply with the IOSCO Code: A.M. Best
Company, Inc., DBRS Ltd., Kroll Bond Rating Agency, Inc., Moody's
Investors Service, Inc., Rating and Investment Information, Inc.,
Realpoint LLC, and Standard & Poor's Ratings Services.
\1046\ For example, Fitch, Inc., Moody's Investors Service,
Inc., and Standard & Poor's Ratings Services reported in Exhibit 8
to Form NRSRO that they had standards of experience and competence
for their credit analysts, and Moody's Investors Service, Inc.
reported in Exhibit 5 to Form NRSRO that its analysts were required
to complete 20 hours of coursework annually.
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As noted above, the size and complexity of the NRSROs varies
greatly. The magnitude of this variance is reflected in the number of
credit analysts and credit analyst supervisors each NRSRO employs
(hereinafter collectively referred to as ``credit analysts'') as shown
in Figure 3 above.\1047\ For example, three NRSROs employed over 1,000
credit analysts as of calendar year-end 2009 and three NRSROs employed
fewer than 30 credit analysts.
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\1047\ These figures are based on the annual certifications on
Form NRSRO submitted to the Commission and publicly disclosed by the
NRSROs for the calendar year-end 2009. See Annual Report on
Nationally Recognized Statistical Rating Organizations, Commission
(Jan. 2011), p. 5.
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The Commission preliminarily estimates that the degree of the one-
time and annual hour burdens resulting from proposed new Rule 17g-9
would depend on the number of credit analysts an NRSRO employs as well
as the range and complexity of the obligors, securities, and money
market instruments it rates. Consequently, the one-time and annual hour
burdens per NRSRO would vary widely.
In order to account for this variance, the Commission preliminarily
believes that the one-time and annual hour burden estimates should be
based on the number of credit rating analysts employed by the NRSROs.
Based on the 2009 annual certifications, the Commission estimates that
the NRSROs currently employ approximately 3,520 credit analysts.\1048\
In addition, as noted above, the Commission preliminarily believes some
of the NRSROs have established standards of training, experience, and
competence for their credit analysts. Consequently, for purposes of
this estimate, the Commission preliminarily believes these firms would
be required to augment or modify existing standards to comply with the
proposed rule as opposed to developing a set of completely new
standards. For these reasons, the Commission preliminarily estimates
that the one-time burden to establish the standards required pursuant
to proposed new Rule 17g-9 would be approximately 5 hours per credit
analyst, resulting in an industry-wide one-time hour burden of
approximately 17,600 hours.\1049\ In addition, the Commission
preliminarily allocates 75% of these burden hours (13,200 hours) to
internal burden and the remaining 25% (4,400 hours) to external burden
to hire outside professionals to assist in setting up training
programs.\1050\ The Commission preliminarily estimates $400 per hour
for external costs for retaining outside consultants, resulting in an
industry-wide cost of approximately $1,760,000.\1051\ Although larger
NRSROs may realize economies of scale, the Commission preliminarily
estimates that the industry-wide annual hour burden of 17,600 hours,
including the external burden costs, would be allocated to each NRSRO
based on the number of credit analysts the firm employs.\1052\
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\1048\ NRSROs reported that they have a total of 3,520 credit
analysts and 820 credit analyst supervisors. See Figure 3. As
discussed above in Section II.M.4.b of this release, some NRSROs
included credit analyst supervisors in the number of credit analysts
they reported; whereas others may not have included the supervisors.
Based on staff experience, the Commission preliminarily believes
that the majority of NRSROs included credit analyst supervisors in
the number of reported credit analysts. Consequently, for the
purposes of the PRA, the Commission is using a total of 3,520 credit
analysts across the 10 NRSROs.
\1049\ 3,520 credit analysts x 5 hours = 17,600 hours.
\1050\ 17,600 hours x 0.75 = 13,200 hours; 17,600 hours x 0.25 =
4,400 hours.
\1051\ 4,400 hours x $400 = $1,760,000. See Disclosure for
Asset-Backed Securities Required by Section 943 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506
(Jan. 26, 2011) (providing an estimate of $400 an hour to engage
outside professionals) and Proposed Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009)
(providing an estimate of $400 per hour to engage an outside
attorney).
\1052\ See Figure 3.
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The Commission believes that the annual hour burden to comply with
proposed new Rule 17g-9 would be less than the one-time hour burden
since NRSROs would have established the standards of training,
experience, and competence for the individuals they employ to determine
credit ratings. The annual hour burden would arise from reviewing and
updating the standards. Consequently, the Commission preliminarily
estimates that the annual industry-wide hour burden to update the
standards would be approximately 1 hour per credit analyst employed,
resulting in an industry-wide annual hour burden of approximately 3,520
hours across all NRSROs.\1053\ In addition, the Commission
preliminarily allocates 75% of these burden hours (2,640 hours) to
internal burden and the remaining 25% (880 hours) to external burden to
hire outside professionals to assist in reviewing and updating training
programs.\1054\ The Commission preliminarily estimates $400 per hour
for external costs for retaining outside consultants, resulting in an
industry-wide cost of $352,000.\1055\ Finally,
[[Page 33509]]
although larger NRSROs may realize economies of scale, the Commission
estimates that the industry-wide annual hour burden of 3,520 hours,
including the external costs, would be allocated to each NRSRO based on
the number of credit analysts the firm employs.\1056\
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\1053\ 3,520 credit analysts x 1 hour = 3,520 hours.
\1054\ 3,520 hours x 0.75 = 2,640 hours; 3,520 hours x 0.25 =
880 hours.
\1055\ 880 hours x $400 = $352,000. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan.
26, 2011) (providing an estimate of $400 an hour to engage outside
professionals) and Proposed Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009)
(providing an estimate of $400 per hour to engage an outside
attorney).
\1056\ See Figure 3.
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For the foregoing reasons, the Commission estimates that proposed
new Rule 17g-9 would result in a total industry-wide one-time hour
burden of approximately 17,600 hours,\1057\ a total industry-wide one-
time cost of approximately $1,760,000, a total industry-wide annual
hour burden of approximately 3,520 hours, and a total industry-wide
annual external cost of approximately $352,000.
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\1057\ 2,000 hours + 2,000 + 1,000 hours = 5,000 hours.
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8. Proposed New Rule 17g-10 and Form ABS Due Diligence-15E
The Commission is proposing new Rule 17g-10 and new Form ABS Due
Diligence-15E.\1058\ Proposed new Rule 17g-10 would implement
rulemaking mandated in Sections 15E(s)(4)(B) and (C) of the Exchange
Act by requiring that the written certification a provider of third-
party due diligence services must provide to an NRSRO be made on Form
ABS Due Diligence-15E.\1059\ As discussed below, the Commission
preliminarily estimates that these proposals would result in additional
one-time and annual hour burdens for providers of third-party due
diligence services.
---------------------------------------------------------------------------
\1058\ Proposed new Rule 17g-10 would be codified at 17 CFR
240.17g-10 and proposed new Form ABS Due Diligence-15E would be
identified at 17 CFR 249b.400.
\1059\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), proposed new Rule
17g-10, and proposed new Form ABS Due Diligence-15E; see also
Sections II.H of this release for a more detailed discussion of this
proposal.
---------------------------------------------------------------------------
In terms of one-time hour burdens, the Commission preliminarily
estimates that providers of third-party due diligence services would
need to develop processes and protocols to provide the required
information in new Form ABS Due Diligence-15E and submit the
certifications to NRSROs. The Commission preliminarily estimates that
providers of third-party due diligence services would spend an average
of approximately 300 hours per firm developing these processes and
protocols, resulting in a one-time industry-wide hour burden of 3,000
hours.\1060\ In addition, the Commission preliminarily allocates 75% of
these burden hours (2,250 hours) to internal burden and the remaining
25% (750 hours) to external burden to hire outside attorneys to provide
legal advice on the requirements of new Rule 17g-10 and Form ABS Due
Diligence-15E.\1061\ The Commission preliminarily estimates $400 per
hour for external costs for retaining outside consultants, resulting in
an industry-wide one-time cost of $300,000.\1062\
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\1060\ 10 Providers of third-party due diligence services x 300
hours = 3,000 hours. This estimate is based on the Commission's
estimate for the amount of time it would take a securitizer to set
up a system to make the disclosures required by Form ABS-15G. See
Disclosure for Asset-Backed Securities Required by Section 943 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR
at 4507-4506 (Jan. 26, 2011). The Commission, however, has reduced
the hour estimate of 850 hours used for Form ABS-15G by
approximately two-thirds because information required to be provided
in proposed new Form ABS Due Diligence-15E is substantially less
detailed and complex than the information required in Form ABS-15G.
\1061\ 3,000 hours x 0.75 = 2,250 hours; 3,000 hours x 0.25 =
750 hours.
\1062\ 750 hours x $400 = $300,000. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan.
26, 2011) (providing an estimate of $400 an hour to engage outside
professionals) and Proposed Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009)
(providing an estimate of $400 per hour to engage an outside
attorney).
---------------------------------------------------------------------------
With respect to the annual burden, the Commission preliminarily
believes that the estimate should be based on the number of issuances
per year of Exchange Act-ABS because the requirement to produce the
certification and provide it to NRSROs would be triggered when an
issuer, underwriter, or NRSRO hires a provider of third-party due
diligence services for transactions.\1063\ In the PRA for the adoption
of Rule 17g-7, the Commission estimated, on average, there would be
approximately 2,067 Exchange Act-ABS offerings per year.\1064\ In
addition, the Commission preliminarily estimates that a provider of
third-party due diligence services would spend approximately 30 minutes
completing and submitting Form ABS Due Diligence-15E. The Commission
bases this preliminary estimate on the fact that the first three Items
in the form require basic information and the fourth Item (the due
diligence performed) and the fifth Item (the findings and conclusions
of the review) could be drawn directly from the due diligence reports
the Commission expects that providers of third-party due diligence
services generate with respect to their performance of due diligence
services. Therefore, the Commission preliminarily estimates that the
industry-wide annual hour burden resulting from proposed new Rule 17g-
10 and Form ABS Due Diligence-15E would be approximately 1,034
hours.\1065\
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\1063\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), and proposed new
Rule 17g-10.
\1064\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). The Commission
notes that issuers, underwriters, and NRSROs may not use providers
of third-party due diligence services with respect to every issuance
of Exchange Act-ABS. For example, as discussed in Section II.H of
this release, the Commission preliminarily believes that providers
of third-party due diligence services are used primarily for RMBS
transactions. However, the Commission's estimate uses the total
number of estimated Exchange Act-ABS offerings (as opposed to a
lesser amount based on an estimate of RMBS offerings) because the
use of providers of third-party due diligence services may migrate
to other types of Exchange Act-ABS. This also makes the Commission's
estimates more conservative.
\1065\ 2,067 Exchange Act-ABS offerings x 30 minutes = 1,034
hours.
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For the foregoing reasons, the Commission estimates proposed new
Rule 17g-8 would result in a total industry-wide one-time burden of
approximately 3,000 hours, a total industry-wide one-time cost of
approximately $300,000, and a total industry-wide annual hour burden of
approximately 1,034 hours.
9. Rule 15Ga-2 and Form ABS-15G
The Commission is proposing new Rule 15Ga-2 and amendments to Form
ABS-15G.\1066\ The new rule and amended form would implement Section
15E(s)(4)(A) of the Exchange Act.\1067\ As discussed below, the
Commission preliminarily estimates that these proposals would result in
additional one-time and annual hour burdens for issuers and
underwriters of the Exchange Act-ABS.
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\1066\ See proposed new Rule 15Ga-2 and proposed amendments to
Form ABS-15G.
\1067\ See 15 U.S.C. 78o-7(s)(4)(A); see also Section II.H.1 of
this release for a more detailed discussion of this proposal.
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Proposed new Rule 15Ga-2 would require an issuer or underwriter of
any Exchange Act-ABS that is to be rated by an NRSRO to furnish a Form
ABS-15G on the EDGAR system containing the findings and conclusions of
any third-party ``due diligence report'' obtained by the issuer or
underwriter. Under the proposal, the disclosure would be furnished
using Form ABS-15G for both registered and unregistered offerings of
Exchange Act-ABS. In addition, under the Commission's proposal, an
issuer or underwriter would not need to furnish Form ABS-15G if the
issuer or underwriter obtains a representation
[[Page 33510]]
from each NRSRO engaged to produce a credit rating for the Exchange
Act-ABS that can be reasonably relied on that the NRSRO will publicly
disclose the findings and conclusions of any third-party due diligence
report obtained by the issuer or underwriter with the publication of
the credit rating five business days prior to the first sale in the
offering in an information disclosure form generated pursuant to
proposed new paragraph (a)(1) of Rule 17g-7.
The Commission preliminarily believes that this proposal would
result in a one-time hour burden to issuers and underwriters in
offerings of registered and unregistered Exchange Act-ABS in connection
with developing processes and protocols to provide the required
information to comply with new Rule 15Ga-2, including modifying their
existing Form ABS-15G processes and protocols to accommodate the
requirements of Rule 15Ga-2. In the adopting release for Form ABS-15G,
the Commission estimated that 270 unique securitizers would be required
to file the form.\1068\ The Commission preliminarily estimates that
each securitizer would require approximately 100 hours to develop
processes and protocols to comply with new Rule 15Ga-2 and to modify
their existing Form ABS-15G processes and protocols to provide for the
disclosure of the information required pursuant to Rule 15Ga-2,
resulting in an industry-wide total of 27,000 hours.\1069\ The
Commission believes that this work would be done internally by issuers
and underwriters.
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\1068\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4506 (Jan. 26, 2011).
\1069\ 270 unique securitizers x 100 hours = 27,000 hours. This
estimate is based on the Commission's estimate for the amount of
time it would take a securitizer to set up a system to make the
disclosures required by Form ABS-15G as originally adopted by the
Commission. See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011). The Commission,
however, believes that the hour burden for amending existing Form
ABS-15G processes and protocols will be significantly lower than the
estimate of 850 hours used to initially develop those processes and
protocols.
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The PRA burden assigned to Form ABS-15G reflects the cost of
preparing and furnishing the form on EDGAR. As noted above, the
proposed amendment to Form ABS-15G would require that it be furnished
by issuers and underwriters in offerings of registered and unregistered
Exchange Act-ABS. Consequently, the Commission preliminarily believes
that the estimate of the annual hour burden for furnishing Form ABS-15G
should be based on an estimate of the number of Exchange Act-ABS
offerings per year. As noted above, in the PRA for the adoption of Rule
17g-7, the Commission estimated, on average, there would be
approximately 2,067 Exchange Act-ABS offerings per year.\1070\ In
addition, the Commission preliminarily estimates that an issuer or
underwriter would spend approximately one hour completing and
submitting Form ABS-15G for purposes of meeting the requirement in Rule
15Ga-2. The Commission bases this preliminary estimate on the fact that
Form ABS-15G would elicit much less information when used solely for
the purpose of complying with proposed new Rule 15Ga-2. In addition,
the information required in the form could be drawn directly from the
due diligence reports the Commission expects providers of third-party
due diligence services generate with respect to their performance of
due diligence services. Therefore, the Commission preliminarily
estimates that the industry-wide annual hour burden resulting from
proposed new Rule 15Ga-2 and the amendments to Form ABS-15G would be
approximately 2,067 hours.\1071\ In addition, the Commission
preliminarily believes that this work would be done internally by
issuers and underwriters of Exchange Act-ABS.
---------------------------------------------------------------------------
\1070\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). As noted above,
issuers, underwriters, and NRSROs may not use providers of third-
party due diligence services with respect to every issuance of
Exchange Act-ABS. For example, as discussed in Section II.H of this
release, the Commission preliminarily believes that providers of
third-party due diligence services are used primarily for RMBS
transactions. However, the Commission's estimate uses the total
number of estimated Exchange Act-ABS offerings (as opposed to a
lesser amount based on an estimate of RMBS offerings) because the
use of providers of third-party due diligence services may migrate
to other types of Exchange Act-ABS. This also makes the Commission's
estimates more conservative.
\1071\ 2,067 Exchange Act-ABS transactions x 1 hour = 2,067
hours.
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To avoid duplicative disclosure, however, the Commission notes that
an issuer or underwriter would not need to furnish Form ABS-15G if the
issuer or underwriter obtains a representation from each NRSRO engaged
to produce a credit rating for the Exchange Act-ABS that can be
reasonably relied on that the NRSRO will publicly disclose the findings
and conclusions of any third-party due diligence report obtained by the
issuer or underwriter with the publication of the credit rating five
business days prior to the first sale in the offering in an information
disclosure form generated pursuant to proposed new paragraph (a)(1) of
Rule 17g-7. The Commission anticipates that issuers and underwriters
subject to this proposed requirement likely will seek to obtain such
representations from the NRSROs engaged to produce credit ratings for
Exchange Act-ABS. Consequently, the PRA burden for issuers and
underwriters may be reduced substantially. However, to be conservative,
the Commission preliminarily allocates the PRA burden for complying
with proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-
15G to the issuers and underwriters.
In addition, the Commission also is proposing to permit issuers of
municipal Exchange Act-ABS, or underwriters in such offerings, to
provide the information required by Form ABS-15G on EMMA. The
Commission believes this would limit the PRA burden on issuers and
underwriters of municipal Exchange Act-ABS subject to the proposed
rule, as well as provide the disclosure for investors in the same
location as other disclosures regarding municipal Exchange Act-ABS.
For the foregoing reasons, the Commission preliminarily estimates
that proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-
15G would result in a total industry-wide one-time hour burden of
approximately 27,000 hours and a total industry-wide annual hour burden
of approximately 2,067 hours.
10. Proposed Amendments to Regulation S-T
The Commission is proposing that certain Form NRSRO submissions and
all Rule 17g-3 annual report submissions be submitted to the Commission
using the EDGAR system. In order to implement this requirement, the
Commission is proposing amendments to Rule 101 of Regulation S-T to
require the electronic submission using the EDGAR system of Form NRSRO
pursuant to paragraphs (e), (f), and (g) of Rule 17g-1 and the annual
reports pursuant to Rule 17g-3.\1072\ The Commission also is proposing
to amend Rule 201 of Regulation S-T, which governs temporary hardship
exemptions from electronic filing, to make this exemption unavailable
for NRSRO submissions.\1073\
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\1072\ See proposed amendment of Rule 101 of Regulation S-T (17
CFR 231.101); see also Section II.L of this release for a more
detailed discussion of this proposal.
\1073\ See proposed amendment of Rule 201 of Regulation S-T (17
CFR 231.201); see also Section II.L of this release for a more
detailed discussion of this proposal.
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[[Page 33511]]
The Commission is proposing new Rule 15Ga-2, which would require an
issuer or underwriter of any Exchange Act-ABS that is to be rated by an
NRSRO to furnish a Form ABS-15G on the EDGAR system containing the
findings and conclusions of any third-party ``due diligence report''
obtained by the issuer or underwriter.\1074\
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\1074\ See proposed new Rule 15Ga-2 and proposed amendments to
Form ABS-15G; see also Section II.H.1 of this release for a more
detailed discussion of this proposal.
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OMB requires the Commission to assign a burden of one hour to
Regulation S-T and to indicate that the Regulation has one respondent
so that the automated OMB system will be able to handle approval of the
Regulation. OMB has already approved a burden of one hour for one
respondent to the Regulation.
11. Form ID
The Commission expects that NRSROs would need to file a Form ID
with the Commission in order to gain access to the EDGAR system. Form
ID is used to request the assignment of access codes to make
submissions on EDGAR. The current OMB approved hour burden for Form ID
is 15 minutes per respondent.\1075\ Thus, the Commission estimates that
the total one-time hour burden resulting from filing Form ID would be
approximately 2.5 hours.\1076\
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\1075\ See Form ID (OMB Number 3235-0328).
\1076\ 10 NRSROs x 15 minutes = 150 minutes; 150 minutes/60
minutes = 2.5 hours.
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The Commission preliminarily believes that the issuers and
underwriters of Exchange Act-ABS that would need to furnish Form ABS-
15G to the Commission through the EDGAR system pursuant to proposed new
Rule 15Ga-2 already have access to the EDGAR system because, for
example, they need such access for the purpose of Rule 15Ga-1.
12. Total Paperwork Burdens
Based on the foregoing, the Commission estimates that the total
recordkeeping burden for NRSRO respondents resulting from the proposed
rule amendments and proposed new rules would be approximately 77,150
industry-wide one-time hours, $7,160,000 industry-wide external one-
time costs, 741,140 industry-wide annual hours, and $552,000 industry-
wide external annual costs.
Based on the foregoing, the Commission estimates that the total
recordkeeping burden for respondents that are providers of third-party
due diligence services resulting from the rule amendments and proposed
new rules would be approximately 3,000 industry-wide one-time hours,
$300,000 industry-wide external one-time costs, and 1,034 industry-wide
annual hours.
Based on the foregoing, the Commission estimates that the total
recordkeeping burden for issuer and underwriter respondents resulting
from the rule amendments and proposed new rules would be approximately
27,000 industry-wide one-time hours and 2,067 industry-wide annual
hours.
E. Collection of Information Is Mandatory
The collections of information pursuant to the proposed amendments
and new rules are mandatory, as applicable, for NRSROs, providers of
third-party due diligence services, and issuers and underwriters.
F. Confidentiality
Other than information for which an NRSRO, provider of third-party
due diligence services, or issuer or underwriter requests confidential
treatment, or as may otherwise be kept confidential by the Commission,
and which may be withheld from the public in accordance with the
provisions of FOIA, the collection of information requirements
resulting from the proposed amendments and new rules would not be
confidential and would be publicly available.\1077\
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\1077\ See 15 U.S.C. 552 et seq.
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G. Retention Period of Recordkeeping Requirements
All records an NRSRO is required to retain under Rule 17g-3
(including records that would need to be made or received by an NRSRO
under the proposed amendments and new rules) must be retained for three
years after the record is made or retained.\1078\
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\1078\ See 17 CFR 240.17g-2(a), (b), and (c).
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The Dodd-Frank Act did not establish record retention requirements
for providers of third-party due diligence services.
The records issuers and underwriters are required to make and
furnish to the Commission pursuant to the requirements in proposed new
Rule 15Ga-2 and the proposed amendments to Form ABS-15G would be
mandatory. Responses to the information collections will not be kept
confidential and there is no mandatory retention period for the
collections of information.
H. Request for Comment
Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits
comment to:
1. Evaluate whether the proposed collection of information
requirements are necessary for the performance of the functions of the
Commission, including whether the information shall have practical
utility;
2. Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collection of information requirements;
3. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information
requirements on those who are to respond, including through the use of
automated collection techniques or other forms of information
technology.
Persons wishing to submit comments on the collection of information
requirements should direct them to the following persons: (1) Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, OMB, Room 3208, New Executive
Office Building, Washington, DC 20503; and (2) Secretary, Securities
and Exchange Commission, Station Place, 100 F Street, NE., Washington,
DC 20549-1090 with reference to File No. S7-18-11. OMB is required to
make a decision concerning the collection of information between 30 and
60 days after publication, so a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. The Commission has submitted the proposed collection of
information to OMB for approval. Requests for the materials submitted
to OMB by the Commission with regard to this collection of information
should be in writing, refer to File No. S7-18-11, and be submitted to
the Securities and Exchange Commission, Office of Investor Education
and Advocacy, Station Place, 100 F Street, NE., Washington, DC 20549-
0213.
V. Economic Analysis
The Commission is sensitive to the costs imposed by its rules. To
the extent possible, the discussion below focuses on the benefits and
costs of the decisions made by the Commission to fulfill the mandates
of the Dodd-Frank Act within its permitted discretion, rather than the
benefits and costs of the mandates of the Dodd-Frank Act itself.
However, as discussed below, to the extent that the Commission
exercises discretion in implementing the provisions of the Dodd-Frank
Act, the benefits and costs arising from the Commission's exercise of
its discretion and the benefits and costs arising directly from the
requirements of the Dodd-Frank Act are not entirely separable.
Accordingly, where the
[[Page 33512]]
Commission believes that it has exercised some discretion in
implementing the Dodd-Frank Act, hour burden estimates and dollar cost
estimates in the above PRA analysis are included in full below, even
where a portion--in most cases, the significantly greater portion--of
the anticipated costs are attributable to the rulemaking mandates of
the Dodd-Frank Act and not the exercise of the Commission's discretion
in how to implement those requirements.\1079\ Where the Commission
believes, however, that it has not exercised discretion in implementing
the rulemaking mandates of the Dodd-Frank Act and that any anticipated
benefits and costs are entirely attributable to those mandates, those
anticipated benefits and costs are not addressed in the discussion
below. Finally, as used below, the term ``incremental costs'' refers to
costs attributable to the exercise of the Commission's rulemaking
discretion that are in addition to costs attributable to the rulemaking
mandates of the Dodd-Frank Act.
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\1079\ For purposes of this economic analysis, the Commission's
salary figures are from SIFMA's Management & Professional Earnings
in the Securities Industry 2010, modified by Commission staff to
account for an 1800-hour work year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits, and overhead.
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In addition, the Commission notes that Section 3(f) of the Exchange
Act requires the Commission, whenever it engages in rulemaking and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action would promote efficiency,
competition, and capital formation.\1080\ Furthermore, Section 23(a)(2)
of the Exchange Act requires the Commission, when issuing rules under
the Exchange Act, to consider the impact such rules would have on
competition.\1081\ 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.\1082\ The Commission's analysis under these requirements as
applied to the proposed amendments to existing rules and proposed new
rules is included below in the discussions of the benefits and the
costs of the proposals where appropriate. In this regard, the
Commission's analysis focuses on the discretionary component of the
Commission's proposals and the incremental costs resulting from that
discretion.
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\1080\ See 15 U.S.C. 78c(f).
\1081\ See 15 U.S.C. 78w(a)(2).
\1082\ See id.
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Unless otherwise noted, the total one-time and annual cost
estimates per NRSRO for PRA purposes as used in this section are
averages across all types of NRSROs that would be subject to the
proposed amendments and new rules. The NRSROs vary, in terms of size
and complexity, from small entities that employ less than 20 credit
analysts to complex global organizations that employ over a thousand
credit analysts.\1083\ Given the variance in size between the largest
NRSROs and the smallest NRSROs, the cost estimates, as averages across
all NRSROs, are skewed higher because the largest firms currently
dominate in terms of size and the volume of credit rating
activities.\1084\
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\1083\ See, e.g., Annual Report on Nationally Recognized
Statistical Rating Organizations. Commission (January 2011), pp. 4-
9.
\1084\ As discussed above in Section IV.D of this release, based
on data collected from the NRSROs in their Form NRSROs and Rule 17g-
3 annual reports, the Commission has calculated an HHI number using
the number credit ratings outstanding per NRSRO and that number is
3,495, which is equivalent to there being approximately 2.86 equally
sized firms. The HHI using earnings reported by NRSROs in the Rule
17g-3 annual reports is 3,926, which the equivalent of 2.55 equally
sized firms.
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The Commission's estimates of the benefits and costs of the
proposals, as well as the anticipated effects on efficiency,
competition and capital formation, are described below. The Commission
recognizes that there may be benefits and costs resulting from the
proposals that are not required to be described or otherwise identified
below. The Commission generally requests that commenters identify and
describe any such benefits and costs.
A. Internal Control Structure
Section 932(a)(2)(B) of the Dodd-Frank Act added paragraph (3) to
Section 15E(c) of the Exchange Act.\1085\ Section 15E(c)(3)(A) requires
an NRSRO to ``establish, maintain, enforce, and document an effective
internal control structure governing the implementation of and
adherence to policies, procedures, and methodologies for determining
credit ratings, taking into consideration such factors as the
Commission may prescribe by rule.'' \1086\ Section 15E(c)(3)(B) of the
Exchange Act provides that the Commission shall prescribe rules
requiring an NRSRO to submit an annual internal controls report to the
Commission, which shall contain: (1) A description of the
responsibility of management in establishing and maintaining an
effective internal control structure; (2) an assessment of the
effectiveness of the internal control structure; and (3) the
attestation of the CEO or equivalent individual.\1087\ The Commission
proposes to implement this rulemaking by: (1) Adding a new paragraph
(b)(12) to Rule 17g-2; \1088\ and (2) amending paragraphs (a) and (b)
of Rule 17g-3.\1089\
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\1085\ See Public Law 111-203 Sec. 932(a)(2)(B) and 15 U.S.C.
78o-7(c)(3)(A); see also Section II.A.1 of this release for a more
detailed discussion of this provision.
\1086\ Id.
\1087\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii).
\1088\ See proposed new paragraph (b)(12) to Rule 17g-2; see
also Section II.A.2 of this release for a more detailed discussion
of this proposal.
\1089\ See proposed new paragraphs (a)(7) and of Rule 17g-3; see
also Section II.A.3 of this release for a for a more detailed
discussion of these proposals.
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Proposed new paragraph (b)(12) of Rule 17g-2 would identify the
internal control structure an NRSRO, among other things, must document
pursuant to Section 15E(c)(3)(A) of the Exchange Act as a record that
must be retained.\1090\ As a result, the various retention and
production requirements of paragraphs (c), (d), (e), and (f) of Rule
17g-2 in its current form would apply to the documented internal
control structure.\1091\
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\1090\ See proposed new paragraph (b)(12) of Rule 17g-2.
\1091\ See 17 CFR 240.17g-2(c), (d), (e) and (f).
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Proposed new paragraph (a)(7) of Rule 17g-3 would require an NRSRO
to include with the other reports required under that rule a report
regarding the NRSRO's internal control structure established pursuant
to Section 15E(c)(3)(A) of the Exchange Act.\1092\ The proposed
amendment would mirror the text of Section 15E(c)(3)(B) of the Exchange
Act by requiring that the report contain: (1) A description of the
responsibility of management in establishing and maintaining an
effective internal control structure; and (2) an assessment by
management of the effectiveness of the internal control
structure.\1093\ The Commission's proposed amendment to paragraph (b)
of Rule 17g-3 would require that the NRSRO's CEO, or, if the firm does
not have a CEO, an individual performing similar functions, provide a
signed statement that would need to be attached to the report.\1094\
The CEO or other individual would need to state, among other things,
that the report fairly presents, in all material respects, a
description of the responsibility of management in establishing and
[[Page 33513]]
maintaining an effective internal control structure and an assessment
of the effectiveness of the internal control structure.
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\1092\ See proposed new paragraph (a)(7) of Rule 17g-3.
\1093\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) and proposed
new paragraphs (a)(7)(i) and (ii) of Rule 17g-3.
\1094\ See proposed amendments to paragraph (b) of Rule 17g-3.
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1. Benefits
Section 15E(c)(3)(A) of the Exchange Act requires an NRSRO to
establish, maintain, enforce, and document an effective internal
control structure governing the implementation of and adherence to
policies, procedures, and methodologies for determining credit
ratings.\1095\ The Commission proposes to further implement this
provision by applying the record retention and production requirements
of Rule 17g-2 to the documented internal control structure by adding
new paragraph (b)(12).\1096\ Recordkeeping rules such as Rule 17g-2
have proven integral to the Commission's investor protection function
because the preserved records are the primary means of monitoring
compliance with applicable securities laws.\1097\ Rule 17g-2 is
designed to ensure that an NRSRO makes and retains records that will
assist the Commission in monitoring, through its examination authority,
whether an NRSRO is complying with applicable securities laws,
including the provisions of Section 15E of the Exchange Act and the
rules thereunder.\1098\ The proposed amendment to Rule 17g-2 is
designed to assist the Commission in monitoring an NRSRO's compliance
with the requirement in Section 15E(c)(3)(A) of the Exchange Act to
establish, maintain, enforce, and document an effective internal
control structure governing the implementation of and adherence to
policies, procedures, and methodologies for determining credit ratings.
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\1095\ See 15 U.S.C. 78o-7(c)(3)(A).
\1096\ See 17 CFR 240.17g-2(c), (d), (e) and (f).
\1097\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33582 (June 18, 2007).
\1098\ Id.
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The Commission preliminarily believes that implementing the
internal control structure reporting requirement through an amendment
to Rule 17g-3 would facilitate the Commission's oversight of NRSROs.
First, it would assist the Commission in monitoring an NRSRO's
compliance with the requirement in Section 15E(c)(3)(A) of the Exchange
Act to establish, maintain, enforce, and document an effective internal
control structure governing the implementation of and adherence to
policies, procedures, and methodologies for determining credit ratings.
Second, it would specify the format, manner, and timeframe in which the
report must be submitted to the Commission, thereby facilitating the
Commission's processing of the report. Furthermore, the Commission
preliminarily believes that proposed amendments to Rules 17g-2 and 17g-
3 would provide an efficient process for NRSROs by allowing them to
file the internal control report with the other annual reports required
under Rule 17g-3.
2. Costs
The Commission preliminarily estimates that, although the costs
resulting from the proposed amendment to Rule 17g-2, discussed below,
would largely be attributable to the Commission's discretionary
rulemaking, those incremental costs would be minimal. An NRSRO already
should have recordkeeping and control systems in place to comply with
the existing requirements in Rule 17g-2 to make and retain or to retain
documents listed in the rule.
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to the amendments to
Rule 17g-3 would also impose minimal incremental costs. The Commission
preliminarily estimates that the costs resulting from the proposed
amendments to Rule 17g-3 would largely be attributable to the
rulemaking mandated by the Dodd-Frank Act.\1099\
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\1099\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) with
proposed new paragraphs (a)(7)(i), (a)(7)(ii), and (b)(2) of Rule
17g-3.
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An NRSRO already should have control systems in place to comply
with the existing requirements of Rule 17g-3. Consequently, the
Commission preliminarily estimates that the internal hour burden
associated with the first filing of the internal control report would
not be materially different than the hour burden associated with filing
subsequent reports (though the time spent on subsequent reports may
decrease incrementally over time as the NRSRO gains experience with the
requirement). The Commission, however, preliminarily believes that an
NRSRO likely would engage outside counsel to analyze the requirements
for the report and assist in drafting and reviewing the first report,
given that it must be signed by the NRSRO's CEO or an individual
performing a similar function. The time an outside attorney would spend
on this work would depend on the size and complexity of the NRSRO.
In addition, as discussed above in Section IV.D.4 of this release
with respect to the PRA, the Commission preliminarily believes an NRSRO
likely would continue to engage outside counsel to assist in the
process of preparing the report on an annual basis and that the time an
outside attorney would spend on this work would depend on the size and
complexity of the NRSRO but in all cases be less than time spent on the
first report.
In sum, limiting the analysis to the elements of the proposals over
which the Commission exercised discretion, the Commission acknowledges
that the proposals would entail some compliance burdens for NRSROs.
Some of the compliance effects are estimated for the industry in
Sections Section IV.D.3 and Section IV.D.4 as $600,000 for the use of
outside counsel and 1,550 internal burden hours for creating and
retaining documents and complying with management's assessment of the
internal control structure. However, the Commission preliminarily
believes these compliance effects would result largely from the
rulemaking mandated by the Dodd-Frank Act rather than the Commission's
exercise of discretion.
The Commission preliminarily believes that the incremental cost
resulting from the proposed amendments would not impact competition or
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new paragraph (b)(12) of Rule 17g-2
and proposed new paragraphs (a)(7) and (b)(2) of Rule 17g-3.
B. Conflicts of Interest Relating to Sales and Marketing
Section 932(a)(4) of the Dodd-Frank Act added new paragraph (3) to
Section 15E(h) of the Exchange Act.\1100\ Section 15E(h)(3)(A) of the
Exchange Act provides that the Commission shall issue rules to prevent
the sales and marketing considerations of an NRSRO from influencing the
production of credit ratings by the NRSRO.\1101\ The Commission is
proposing to implement this provision by identifying a new conflict of
interest in paragraph (c) of Rule 17g-5.\1102\ The existing
requirements in paragraph (c) prohibit a person within an NRSRO (which
[[Page 33514]]
includes the NRSRO) \1103\ from having any of the conflicts of interest
identified in the paragraph under all circumstances.\1104\ Proposed new
paragraph (c)(8) of Rule 17g-5 would identify a new absolute
prohibition: an NRSRO issuing or maintaining a credit rating where a
person within the NRSRO who participates in the sales or marketing of a
product or service of the NRSRO or a product or service of a person
associated with the NRSRO also participates in determining or
monitoring the credit rating or developing or approving procedures or
methodologies used for determining the credit rating, including
qualitative or quantitative models.\1105\
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\1100\ Public Law 111-203 Sec. 932(a)(4) and 15 U.S.C. 78o-
7(h)(3).
\1101\ 15 U.S.C. 78o-7(h)(3)(A).
\1102\ See proposed new paragraph (c)(8) of Rule 17g-5; see also
Section II.B.1 of this release for a more detailed discussion of
this proposal.
\1103\ See paragraph (d) of Rule 17g-5 defining ``person within
an NRSRO'' for purposes of the rule. 17 CFR 240.17g-5(d).
\1104\ See 17 CFR 240.17g-5(c)(1)-(7).
\1105\ See proposed new paragraph (c)(8) of Rule 17g-5.
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Section 15E(h)(3)(B) of the Exchange Act provides that the
Commission's rules must contain two additional provisions.\1106\ First,
Section 15E(h)(3)(B)(i) requires that the Commission's rules shall
provide for exceptions for small NRSROs with respect to which the
Commission determines that the separation of the production of ratings
and sales and marketing activities is not appropriate.\1107\ To
implement this provision, the Commission is proposing to amend Rule
17g-5 by adding a new paragraph (f).\1108\ Proposed paragraph (f) would
provide a mechanism for a small NRSRO to apply in writing for an
exemption from the absolute prohibition proposed in new paragraph
(c)(8). In particular, proposed new paragraph (f) of Rule 17g-5 would
provide that upon written application by an NRSRO, the Commission may
exempt, either conditionally or unconditionally or on specified terms
and conditions, such NRSRO from the provisions of paragraph (c)(8) of
Rule 17g-5 if the Commission finds that due to the small size of the
NRSRO it is not appropriate to require the separation within the NRSRO
of the production of credit ratings from sales and marketing activities
and such exemption is in the public interest.\1109\
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\1106\ 15 U.S.C. 78o-7(h)(3)(B)(i) and (ii).
\1107\ 15 U.S.C. 78o-7(h)(3)(B)(i).
\1108\ See proposed new paragraph (f) of Rule 17g-5; see also
Section II.B.2 of this release for a more detailed discussion of
this proposal.
\1109\ See proposed new paragraph (f) of Rule 17g-5.
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Second, Section 15E(h)(3)(B)(ii) requires that the Commission's
rules shall provide for the suspension or revocation of the
registration of an NRSRO if the Commission finds, on the record, after
notice and opportunity for a hearing, that the NRSRO has committed a
violation of a rule issued under Section 15E(h) of the Exchange Act;
and (2) the violation affected a rating.\1110\ The Commission proposes
to implement this provision by adding new paragraph (g) of Rule 17g-
5.\1111\ This paragraph would provide that in a proceeding pursuant to
Section 15E(d) or Section 21C of the Exchange Act, the Commission shall
suspend or revoke the registration of an NRSRO if the Commission finds
in such proceeding that the NRSRO has violated a rule issued under
Section 15E(h) of the Exchange Act, the violation affected a rating,
and that suspension or revocation is necessary for the protection of
investors and in the public interest.
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\1110\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
\1111\ See proposed new paragraph (g) of Rule 17g-5; see also
Section II.B.3 of this release for a more detailed discussion of
this proposal.
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1. Benefits
The Commission preliminarily believes that the proposed new
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5 would
provide benefits to investors by mitigating the potential that undue
influences based on sales and marketing considerations could impact the
objectivity of the NRSRO's credit rating process.\1112\ As discussed
above in Section II.B.1 of this release, Commission staff found as part
of its 2007-2008 examination of the activities of the three largest
NRSROs in rating asset-backed securities linked to subprime mortgages
that it appeared that marketing personnel discussed with other
employees, including those responsible for credit rating criteria
development, business concerns they had related to those
criteria.\1113\ The rule proposal would be designed to insulate
individuals within the NRSRO responsible for determining credit ratings
from such pressures. In addition, the bright line on prohibited
behavior is likely to allow the company to effectively comply with the
proposed rules. The Commission believes that this could benefit
investors by increasing the integrity of credit ratings and the
procedures and methodologies used to determine credit ratings.
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\1112\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33598-33599, 33613 (June 18, 2007) (discussing objectives and
benefits of paragraph (c) of Rule 17g-5 when it was adopted); see
also Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 6465-6469, 6474-6475 (February 9,
2009) (discussing objectives and benefits of paragraph (c) of Rule
17g-5 when it was amended).
\1113\ See Summary Report of Issues Identified in the Commission
Staff's Examination of Select Credit Rating Agencies, Commission
(July 2008), pp. 25-26.
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With respect to the proposal for the suspension or revocation of
the registration of an NRSRO after a violation of a rule, the
Commission preliminarily believes that it would provide the Commission
with more flexibility in determining appropriate sanctions for
violations of the securities laws. This could act as a deterrent
against violations by NRSROs and could motivate them to strengthen
their internal controls to manage conflicts of interest.
The Commission preliminarily believes that codifying these
requirements mandated by the Dodd-Frank Act in Rule 17g-5 may promote
efficiency. NRSROs should already have developed a system of controls
to comply with the existing requirements relating to conflicts of
interest that are codified in Rule 17g-5. In addition, the Commission
believes proposed paragraph (g) may promote efficiency by incorporating
existing processes for sanctioning NRSROs (i.e., those provided for
Sections 15E(d) or Section 21C of the Exchange Act).
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to the proposed
amendments to Rule 17g-5 would impose minimal incremental costs.
However, the Commission preliminarily estimates that the costs
discussed below resulting from the proposed amendments to Rule 17g-5
would be attributable largely to the rulemaking mandated by Dodd-Frank
Act.\1114\
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\1114\ Compare 15 U.S.C. 78o-7(h)(3)(A), (B)(i), and (B)(ii)
with proposed new paragraphs (c)(8), (f), and (g) of Rule 17g-5.
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The Commission notes that, when it adopted three new absolutely
prohibited conflicts by amending paragraph (c) of Rule 17g-5 in 2009,
the Commission provided estimates of one-time and annual compliance
costs for NRSROs resulting from the amendments.\1115\ Moreover, one of
those amendments resulted in an absolute prohibition that is similar to
the Commission's proposed new absolute prohibition in that it prohibits
an NRSRO from issuing or maintaining a credit rating where the fee paid
for the rating was negotiated, discussed, or arranged by a person
within the NRSRO who has responsibility for participating in
determining credit ratings or for
[[Page 33515]]
developing or approving procedures or methodologies used for
determining credit ratings, including qualitative and quantitative
models.\1116\ With respect to the 2009 amendments, the Commission
estimated that the costs to the three largest NRSROs as a result of the
three new prohibited conflicts would be approximately $5,442,100 per
firm in one-time costs and $1,563,800 per firm in annual costs.\1117\
In addition, the Commission estimated that the costs to the seven
smaller NRSROs would be approximately $47,600 per firm in one-time
costs and $13,760 per firm in annual costs.\1118\ The Commission
preliminarily believes that the compliance cost for the new absolute
prohibition proposed in this release would be proportionally less than
the estimates provided above for the three 2009 prohibitions. The
Commission also preliminarily believes that granting an exemption from
the proposed new absolute prohibition for a small NRSRO that applied in
writing for such exemption could reduce potential costs for a smaller
NRSRO for which the complete separation of sales and marketing
activities from the analytical function would not be appropriate.
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\1115\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009).
\1116\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009)
and 17 CFR 240.17g-5(c)(6).
\1117\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009).
\1118\ Id.
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The Commission therefore preliminarily believes any incremental
cost resulting from the amendments would not impact competition or
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new paragraphs (c)(8), (f), and (g)
of Rule 17g-5.
C. ``Look-Back'' Review
Section 932(a)(4) of the Dodd-Frank Act amended Section 15E(h) of
the Exchange Act to add a new paragraph (4).\1119\ The Commission is
proposing to implement the rulemaking required in Section
15E(h)(4)(A)(ii) of the Exchange Act through proposed paragraph (c) of
new Rule 17g-8.\1120\ Proposed paragraph (c) would require that the
policies and procedures the NRSRO establishes, maintains, and enforces
pursuant to Section 15E(h)(4)(A) of the Exchange Act must address
instances in which a review conducted pursuant to those policies and
procedures determines that a conflict of interest influenced a credit
rating assigned to an obligor, security, or money market instrument by
including, at a minimum, procedures that are reasonably designed to
ensure the NRSRO will: (1) Immediately place the credit rating on
credit watch; (2) promptly determine whether the credit rating must be
revised so it no longer is influenced by a conflict of interest and is
solely the product of the NRSRO's documented procedures and
methodologies for determining credit ratings; and (3) promptly publish
a revised credit rating, if appropriate, or affirm the credit rating if
appropriate.\1121\
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\1119\ See Public Law 111-203 Sec. 932(a)(4) and 15 U.S.C. 78o-
7(h)(4).
\1120\ See proposed paragraph (c) of new Rule 17g-8; see also
Section II.C.1 of this release for a more detailed discussion of
this proposal. Sections 15E(h)(4)(A)(i) and (ii) of the Exchange Act
require an NRSRO to establish, maintain, and enforce policies and
procedures reasonably designed to ensure that, in any case in which
an employee of a person subject to a credit rating of the NRSRO or
the issuer, underwriter, or sponsor of a security or money market
instrument subject to a credit rating of the NRSRO, was employed by
the NRSRO and participated in any capacity in determining credit
ratings for the person or the securities or money market instruments
during the 1-year period preceding the date an action was taken with
respect to the credit rating, the NRSRO shall: (1) Conduct a review
to determine whether any conflicts of interest of the employee
influenced the credit rating; and (2) take action to revise the
rating if appropriate, in accordance with such rules as the
Commission shall prescribe. See 15 U.S.C. 78o-7(h)(4)(A)(i) and
(ii).
\1121\ See proposed paragraphs (c)(1), (2) and (3) of new Rule
17g-8.
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In addition, the Commission proposes adding paragraph (a)(9) to
Rule 17g-2 to identify the policies and procedures an NRSRO is required
to establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of
the Exchange Act and proposed paragraph (c) of new Rule 17g-8 as a
record an NRSRO must make and retain.\1122\ As a result, the policies
and procedures would need to be documented in writing and subject to
the record retention and production requirements in paragraphs (c)
through (f) of Rule 17g-2.\1123\
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\1122\ See proposed new paragraph (a)(9) to Rule 17g-2; see also
Section II.C.2 of this release for a more detailed discussion of
this proposal.
\1123\ See 17 CFR 240.17g-2(c)-(f).
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1. Benefits
The Commission preliminarily believes that the proposed look-back
review provisions would provide three primary benefits. First, they
would implement the rulemaking mandate in a way that would require an
NRSRO to notify users of its credit ratings that a prior rating action
was subject to a conflict and to review whether the credit rating
should be revised. This would help ensure as quickly as possible that
the credit rating assigned to the obligor, security, or money market
instrument is solely a product of the NRSRO's procedures and
methodologies for determining credit ratings. In addition, by
prescribing the steps an NRSRO must take to remove the uncertainty
surrounding the credit rating, the rule proposal could limit the
potential that investors and other users of credit ratings might make
investment or other credit based decisions based on incomplete, biased
or inaccurate information.
Second, the Commission preliminarily believes that the proposal
could operate within the existing framework of an NRSRO's policies and
procedures for taking rating actions and procedures and methodologies
for determining credit ratings. Placing a rated obligor, security, or
money market instrument on credit watch and subsequently affirming or
revising (i.e., upgrading or downgrading the rating) are among the
rating actions NRSRO's commonly take with respect to their credit
ratings. In addition, in terms of revising the conflicted credit
rating, the proposal would rely on an NRSRO's policies and procedures
for determining credit ratings and not require revisions that are
contrary to those policies and procedures. The Commission preliminarily
believes that the approach in proposed paragraph (c) of new Rule 17g-8
appropriately avoids regulating the substance of credit ratings or the
procedures and methodologies an NRSRO uses to determine credit ratings
but, at the same time, requires an NRSRO to have procedures reasonably
designed to ensure that it promptly addresses a credit rating that is
subject to a conflict of interest.\1124\
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\1124\ The Commission also notes an NRSRO would violate Section
15E(h) of the Exchange Act (15 U.S.C. 78o-7(h)) and Rule 17g-5,
among other rules, if it continued to assign an obligor, security,
or money, market instrument a credit rating that, absent the undue
influence of the conflict of interest, would be different because
the NRSRO could not be deemed to have policies and procedures
reasonably designed to address and manage conflicts of interest that
can arise from its business under such a circumstance. See 15 U.S.C.
78o-7(h) and 17 CFR 17g-5.
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Third, the Commission preliminarily believes that having these
policies and procedures in writing would promote better understanding
of them among the individuals within the NRSRO and, therefore, promote
compliance with the policies and procedures. In addition, the record
retention requirements would facilitate Commission oversight of NRSROs.
In this regard, recordkeeping rules such as Rule 17g-2 have proven
[[Page 33516]]
integral to the Commission's investor protection function because the
preserved records are the primary means of monitoring compliance with
applicable securities laws.\1125\
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\1125\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33582 (June 18, 2007).
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The Commission preliminarily believes that the proposed
implementation of Section 15E(h)(4)(A)(ii) of the Exchange Act as
mandated by the Dodd-Frank Act may promote efficiency. As noted above,
the proposal would be designed to work within the existing processes
NRSROs have for taking rating actions and would not interfere with
their procedures and methodologies for determining credit ratings.
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to proposed paragraph
(c) of new Rule 17g-8 would impose minimal incremental costs. The
Commission preliminarily estimates that the costs resulting from
proposed paragraph (c) of new Rule 17g-8 would be attributable largely
to the rulemaking mandated by Dodd-Frank Act.\1126\ As discussed above
in Section IV.D.6, the Commission preliminarily estimates that for PRA
purposes, the average annual cost to each NRSRO would be approximately
$7,000, resulting in an industry-wide annual cost of approximately
$70,000.\1127\
---------------------------------------------------------------------------
\1126\ Compare 15 U.S.C. 78o-7(h)(4)(A) with proposed paragraph
(c) of new Rule 17g-8.
---------------------------------------------------------------------------
The Commission preliminarily estimates that the costs resulting
from the proposed amendment to Rule 17g-2 discussed below largely would
be attributable to the Commission's discretionary rulemaking. As
discussed above in Section IV.D.3 of this release with respect to the
PRA, the Commission preliminary believes applying the recordkeeping
requirements of Rule 17g-2 to five new types of records would result in
one-time and annual hour burdens for NRSROs in connection with updating
their record retention policies and procedures to account for and
retain these new records. Also, as discussed above in Section IV.D.3 of
this release with respect to the PRA, based on staff experience, the
Commission preliminarily estimates that the additional one-time hour
burden for each NRSRO to update its record retention policies and
procedures to account for the new records that would need to be
retained under proposed new paragraphs (a)(9), (b)(12), (b)(13),
(b)(14), and (b)(15) of Rule 17g-2 would be 20 hours. Based on that
estimate, the Commission preliminary believes that the one-time hour
burden resulting from proposed new paragraph (a)(9) of Rule 17g-2 would
be approximately 4 hours per NRSRO, resulting in an industry-wide hour
burden of approximately 40 hours.\1128\ As discussed above in Section
IV.D.3 of this release with respect to the PRA, the Commission
preliminarily estimates it would take an average of approximately one
hour each year for an NRSRO to retain updated versions of the internal
control structure, resulting in an annual industry-wide hour burden of
10 hours.\1129\
---------------------------------------------------------------------------
\1128\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4
hours = 40 hours.
\1129\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------
The Commission believes that in addition to the compliance costs
calculated above for PRA purposes, there could be other potential
economic effects resulting from the proposed release that are hard to
quantify. For example, former subscribers, who bought on the basis of
the original rating but who no longer subscribe to the rating service,
would not be notified when a rating has been revised.
For the foregoing reasons, the Commission preliminarily believes
any incremental cost resulting from the amendments would not impact
competition or impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed paragraph (c) of new Rule 17g-8 and
proposed new paragraph (a)(9) of Rule 17g-2.
D. Fines and Other Penalties
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new subsection (p), which contains four paragraphs:
(1), (2), (3), and (4).\1130\ Section 15E(p)(4)(A) provides that the
Commission shall establish, by rule, fines and other penalties
applicable to any NRSRO that violates the requirements of Section 15E
of the Exchange Act and the rules under the Exchange Act.\1131\ The
Commission proposes to amend the instructions to Form NRSRO by adding
new Instruction A.10.\1132\ This new instruction would provide notice
to credit rating agencies applying for registration and NRSROs that an
NRSRO is subject to the fine and penalty provisions, and other
available sanctions contained in Sections 15E, 21, 21A, 21B, 21C, and
32 of the Exchange Act for violations of the securities laws.\1133\
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\1130\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(p)(1)-(4).
\1131\ See 15 U.S.C. 78o-7(p)(4)(A).
\1132\ See proposed new Instruction A.10 to Form NRSRO; see also
Section II.D of this release for a more detailed discussion of this
proposal.
\1133\ See 15 U.S.C. 78o-7, 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff, respectively.
---------------------------------------------------------------------------
1. Benefits
The Commission preliminarily believes this amendment to Form NRSRO
would benefit credit rating agencies applying for registration as
NRSROs and NRSROs because it would notify them of the potential
consequences of violating provisions of the Exchange Act and Commission
rules. The Commission also believes that this notification could
potentially cause the NRSROs to enhance their compliance and compliance
procedures, which would benefit investors and other users of credit
ratings. In addition, the Commission believes implementing the rule in
this manner would create efficiencies by relying on existing authority
to seek fines, penalties, and other available sanctions contained in
Sections 15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act for
violations of the securities laws.\1134\
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\1134\ Id.
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2. Costs
The Commission preliminarily estimates that the proposed amendment
to the instructions to Form NRSRO would not result in additional
regulatory obligations for NRSROs. Consequently, the Commission
preliminarily believes it would not impact competition or impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the benefits and
costs associated with the proposal to amend the instructions to Form
NRSRO by adding new Instruction A.10.
E. Proposed Enhancements to Disclosures of Performance Statistics
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new subsection (q), which contains paragraphs (1)
and (2).\1135\ Section 15E(q)(1) provides that
[[Page 33517]]
the Commission shall, by rule, require each NRSRO to publicly disclose
information on the initial credit ratings determined by the NRSRO for
each type of obligor, security, and money market instrument, and any
subsequent changes to such credit ratings, for the purpose of allowing
users of credit ratings to evaluate the accuracy of ratings and compare
the performance of ratings by different NRSROs.\1136\ Section 15E(q)(2)
provides that the Commission's rules shall require, at a minimum,
disclosures that, among other things: (1) Are comparable among NRSROs,
to allow users of credit ratings to compare the performance of credit
ratings across NRSROs;\1137\ (2) are clear and informative for
investors having a wide range of sophistication who use or might use
credit ratings;\1138\ (3) include performance information over a range
of years and for a variety of types of credit ratings, including for
credit ratings withdrawn by the NRSRO;\1139\ and (4) are appropriate to
the business model of an NRSRO.\1140\
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\1135\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2).
\1136\ See 15 U.S.C. 78o-7(q)(1).
\1137\ See 15 U.S.C. 78o-7(q)(2)(A).
\1138\ See 15 U.S.C. 78o-7(q)(2)(B).
\1139\ See 15 U.S.C. 78o-7(q)(2)(C).
\1140\ See 15 U.S.C. 78o-7(q)(2)(E).
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The Commission proposes to implement the rulemaking mandated in
Section 15E(q) of the Exchange Act, in part, by significantly enhancing
the requirements applicable to NRSROs with respect to generating and
disclosing performance statistics in Exhibit 1 of Form NRSRO.\1141\
Among other things, the amendments would confine the disclosures in the
Exhibit to transition and default rates and certain limited
supplemental information.\1142\ Moreover, the amendments would
standardize the production and presentation of the transition and
default rates.\1143\ Specifically, the amendments would require the
transition and default rates in Exhibit 1 to be produced using a
``single cohort approach.'' \1144\ Under this approach, an applicant
and NRSRO, on an annual basis, would be required to compute how the
credit ratings assigned to obligors, securities, and money market
instruments in a particular class or subclass of credit rating
outstanding on the date 1, 3, and 10 years prior to the most recent
calendar year-end performed during those respective 1, 3, and 10-year
time periods.\1145\
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\1141\ See proposed amendments to Instruction H to Form NRSRO
(as it relates to Exhibit 1); see also Section II.E.1.a of this
release for a more detailed discussion of this proposal.
\1142\ See proposed amendments to the instructions for Exhibit
1.
\1143\ Id.
\1144\ Id.
\1145\ Id.
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Under the amendments, the proposed new instructions would be
divided into paragraphs (1), (2), (3), and (4), some of which would
have subparagraphs.\1146\ The proposed new paragraphs would contain
specific instructions with respect to, among other things, how required
information should be presented in the Exhibit (including the order of
presentation) and how transition and default rates should be produced
using a single cohort approach.\1147\ As with all information that must
be submitted in Form NRSRO and its Exhibits, applicants and NRSROs
would be subject to these new requirements.\1148\
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\1146\ See proposed paragraphs (1)-(4) of the instructions for
Exhibit 1.
\1147\ Id.
\1148\ See, e.g., 17 CFR 240.17g-1; see also Instructions A.1,
B, C, D, E, and F to Form NRSRO.
---------------------------------------------------------------------------
The Commission also is proposing implementing Section 15E(q)(2)(D)
of the Exchange Act, which requires that the Commission's rules must
require NRSROs to make its performance statistics freely available and
disclose them on an easily accessible portion of its Web site, and in
writing when requested, by amending paragraph (i) of Rule 17g-1.\1149\
The amendment would require an NRSRO to make Form NRSRO and Exhibits 1
through 9 ``freely available on an easily accessible portion of its Web
site.'' The proposed amendment to paragraph (i) also would remove the
option for an NRSRO to make its Form NRSRO publicly available ``through
another comparable, readily accessible means'' as an alternative to Web
site disclosure.
---------------------------------------------------------------------------
\1149\ A detailed discussion of this proposal is at Section
II.E.1.b of this release.
---------------------------------------------------------------------------
1. Benefits
Section 15E(q)(1) of the Exchange Act provides that the Commission
shall, by rule, require each NRSRO to publicly disclose information on
the initial credit ratings determined by the NRSRO for each type of
obligor, security, and money market instrument, and any subsequent
changes to such credit ratings, for the purpose of allowing users of
credit ratings to evaluate the accuracy of ratings and compare the
performance of ratings by different NRSROs.\1150\ The Commission is
proposing to implement this rulemaking mandate, in part, through
amendments to the instructions for Exhibit 1 to Form NRSRO. The
amendments would be designed to meet the goal in Section 15E(q)(1) that
the information disclosed by NRSROs allows users of credit ratings to
evaluate the accuracy of credit ratings and compare the performance of
credit ratings by different NRSROs. In this regard, the amendments are
designed to make disclosures simply presented, easy to understand,
uniform in appearance, and comparable across NRSROs.\1151\
---------------------------------------------------------------------------
\1150\ 15 U.S.C. 78o-7(q)(1).
\1151\ See Section 15E(q)(2)(A) of the Exchange Act, which
provides that the disclosure of information about the performance of
credit ratings should be comparable among NRSROs, to allow users of
credit ratings to compare the performance of credit ratings across
NRSROs. 15 U.S.C. 78o-7(q)(2)(A). See also Section 15E(q)(2)(B) of
the Exchange Act, which provides that the disclosure of information
about the performance of credit ratings should be clear and
informative for investors having a wide range of sophistication who
use or might use credit ratings. 15 U.S.C. 78o-7(q)(2)(B).
---------------------------------------------------------------------------
As the Commission stated when originally adopting Form NRSRO, the
information provided in Exhibit 1 is an important indicator of the
performance of an NRSRO in terms of its ability to assess the
creditworthiness of issuers and obligors and, consequently, will be
useful to users of credit ratings in evaluating an NRSRO.\1152\ The
performance statistics required to be disclosed in Exhibit 1 of Form
NRSRO were designed to allow users of the credit ratings to compare the
credit ratings quality of different NRSROs and, thereby, make it easier
for users of credit ratings to compare the ratings performance of the
NRSROs. The performance statistics also were designed to allow an NRSRO
to demonstrate that it has a superior ratings methodology or competence
and, thereby, attract clients. In doing so, the Commission believed,
the performance statistics would therefore enhance competition in the
credit ratings industry.\1153\ The proposed amendments to the
instructions to Exhibit 1 of Form NRSRO are designed to improve the
utility of the required performance statistics disclosure to investors
and other users of credit ratings and facilitate comparisons between
[[Page 33518]]
NRSROs, thereby amplifying this positive effect on competition.
---------------------------------------------------------------------------
\1152\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33574 (June 18, 2007); see also Amendments to Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 6474 (Feb. 9,
2009) (``The amendments to the instructions to Exhibit 1 to Form
NRSRO will require NRSROs to provide more detailed performance
statistics and, thereby, make it easier for users of credit ratings
to compare the performance of the NRSROs. In addition, these
amendments will make it easier for an NRSRO to demonstrate that it
has a superior ratings methodology or competence and, thereby,
attract clients.'').
\1153\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33612 (June 18, 2007); Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6474 (Feb. 9, 2009).
---------------------------------------------------------------------------
In addition, the proposed amendments could improve the Commission's
ability to carry out its oversight function for NRSRO which, in turn,
would benefit investors. For example, the enhanced utility of the
performance statistics provided in an applicant's initial application
for registration and in an NRSRO's Form NRSRO could aid the Commission
in, among other things, assessing whether the applicant or NRSRO has
adequate financial and managerial resources to consistently produce
credit ratings with integrity.\1154\ Furthermore, the disclosure of the
enhanced performance statistics in an applicant's initial application
would allow the Commission staff to verify that the applicant, if
granted registration, would publicly disclose the information in
accordance with the proposed amendments to the Instructions for Exhibit
1.\1155\
---------------------------------------------------------------------------
\1154\ See, e.g., 15 U.S.C. 78o-7(a)(2)(C) (setting forth
grounds to deny an initial application) and 15 U.S.C. 78o-7(d)(1)(E)
and (d)(2) (setting forth grounds to sanction an NRSRO, including
revoking the NRSRO's registration); see also Oversight of Credit
Rating Agencies Registered as Nationally Recognized Statistical
Rating Organizations, 72 FR at 33612 (June 18, 2007) (``Form NRSRO
requires that a credit rating agency provide information required
under Section 15E(a)(1)(B) of the Exchange Act and certain
additional information. The additional information will assist the
Commission in making the assessment regarding financial and
managerial resources required under Section 15E(a)(2)(C)(2)(ii)(I)
of the Exchange Act.'').
\1155\ As indicated above, paragraph (i) requires an NRSRO to
make Form NRSRO and Exhibits 1 through 9 publicly available within
10 business days of being granted an initial registration. See 17
CFR 240.17g-1(i). In addition, the public disclosure of Form NRSRO
and Exhibits 1 through 9 could be accelerated if the Commission
adopts the proposal that this information be filed through the EDGAR
system upon registration.
---------------------------------------------------------------------------
In addition, the Commission preliminarily believes that applying
the requirement to disclose Form NRSRO and Exhibits 1 through 9 on an
``easily accessible'' portion of the NRSRO's Web site would assist
investors and other users of credit ratings by making it easier to
locate a Form NRSRO. The Commission also believes that amending
paragraph (i) to provide that Exhibit 1 be made freely available in
writing when requested \1156\ would benefit those investors who do not
have access to the Internet.
---------------------------------------------------------------------------
\1156\ See proposed amendments to paragraph (i) of Rule 17g-1.
---------------------------------------------------------------------------
The Commission preliminarily believes that enhancing the existing
requirements in Exhibit 1 to Form NRSRO is an efficient means of
implementing the rulemaking mandated through Section 15E(q) of the
Exchange Act. An NRSRO already should have in place information
technology systems to meet the existing requirements of the
instructions for Exhibit 1 to Form NRSRO, which it could adjust to
comply with the proposed new disclosure requirements.
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion in proposing amendments to the
instructions for Exhibit 1 of Form NRSRO would impose incremental
costs. The Commission preliminarily estimates, however, that the costs
discussed below would be attributable largely to the rulemaking
mandated by the Dodd-Frank Act \1157\ and that the incremental costs
would be minimal.
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\1157\ Compare 15 U.S.C. 78o-7(q) with the proposed amendments
to the instructions for Exhibit 1 to Form NRSRO; see also GAO Report
10-782, pp. 27-40 (indicating the current requirements for
disclosing performance statistics in Exhibit 1 to Form NRSRO may not
achieve the objectives of 15 U.S.C. 78o-7(q)).
---------------------------------------------------------------------------
An NRSRO should already have in place information technology
systems to meet the existing requirements of the instructions to
Exhibit 1 of Form NRSRO, which it could adjust to comply with the
proposed new disclosure requirements. NRSROs are already subject to
substantial performance statistic disclosure requirements, including
the requirement to provide transition and default rates in Exhibit 1
for each class of credit rating for which they are registered and for
1, 3, and 10-year periods. The Commission preliminarily believes that
NRSROs could use the internal information technology systems and
expertise and other resources they currently devote to processing the
information necessary to monitor credit ratings and calculate
transitions and default statistics in order to program a system to
comply with the proposed amendments to the Instructions for Exhibit 1.
At the same time, the Commission notes that under the proposed
amendments, NRSROs would be required to adhere to specific requirements
that may not follow their traditional practices for calculating and
presenting transitions and default rates. Consequently, the Commission
preliminarily estimates that the proposed amendments requiring
standardized Transition/Default Matrices would result in one-time costs
to program existing systems to create the Transition/Default Matrices
that would be required under the proposed amendments and annual costs
to comply with the requirement to update the transition and default
rates in Exhibit 1.
As discussed above in Section IV.D.2, the Commission preliminarily
believes that the one-time and annual hour burden estimates for
implementing these changes should be based on the number of credit
ratings outstanding. Based on the annual certifications submitted by
the NRSROs for the 2009 calendar year-end, there were approximately
2,905,824 credit ratings outstanding across all 10 NRSROs.\1158\ The
Commission preliminarily estimates that the one-time industry-wide
burden to establish systems to process the relevant information
necessary to calculate the Transition/Default Matrices and make the
necessary calculations would be an average of approximately 3 seconds
per outstanding credit rating, resulting in a one-time industry-wide
hour burden of approximately 2,420 hours.\1159\
---------------------------------------------------------------------------
\1158\ Id.
\1159\ 2,905,824 credit ratings x 3 seconds = 2,421.52 hours
(rounded to 2,420 hours).
---------------------------------------------------------------------------
The Commission preliminarily believes that the annual hours burden
to comply with the proposed amendments to the Instructions for Exhibit
1 would be less than the one-time burden since the NRSROs would have
established systems to process the necessary information to produce the
required Transition/Default Matrices. As discussed above in Section
IV.D.2 of this release with respect to the PRA, the Commission
preliminarily estimates that the annual industry-wide hour burden to
calculate the Transition/Default Matrices would be an average of
approximately 1.5 seconds per outstanding credit rating, resulting in
an industry-wide annual hour burden of approximately 1,210 hours.\1160\
---------------------------------------------------------------------------
\1160\ 2,905,824 credit ratings x 1.5 seconds = 1,210.76 hours
(rounded to 1,210 hours).
---------------------------------------------------------------------------
As discussed above in Section IV.D.1 of this release with respect
to the PRA, the Commission preliminarily estimates that there would be
a minimal one-time hour burden attributable to requiring that an NRSRO
make Form NRSRO and Exhibits 1 through 9 freely available on an easily
accessible portion of its corporate Internet Web site and removing the
option for an NRSRO to make its Form NRSRO and Exhibits 1 through 9
available through another comparable, readily accessible means.
Currently, all NRSROs make Form NRSRO and Exhibits 1 through 9
available on their corporate Internet Web sites.\1161\ However, the
Commission preliminarily believes that
[[Page 33519]]
a Form NRSRO and Exhibits 1 through 9 would be ``easily accessible'' if
they could be accessed through a clearly and prominently labeled
hyperlink on the home page of the NRSRO's corporate Internet Web site.
Consequently, NRSROs may need to make changes to their corporate
Internet Web sites to disclose the information on an ``easily
accessible'' portion of the Web site. The Commission preliminarily
estimates re-configuring a corporate Internet Web site for this purpose
would take an NRSRO an average of approximately 5 hours. For these
reasons, the Commission preliminarily estimates that the proposed
requirement would result in an average one-time hour burden of 5 hours
per NRSRO, resulting in a one-time industry-wide hour burden of 50
hours.\1162\
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\1161\ See, e.g., Annual Report on Nationally Recognized
Statistical Rating Organizations. Commission (Jan. 2011), pp. 18-19.
\1162\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------
Also as discussed in Section IV.D.1 with respect to the PRA, the
Commission expects that the proposed requirement that an NRSRO provide
a written copy of Exhibit 1 on request would result in a one-time hour
burden for each NRSRO to establish procedures and protocols for
receiving and processing these requests. The Commission preliminarily
estimates that each NRSRO would spend an average of approximately 48
hours establishing such procedures and protocols, resulting in an
industry-wide one-time hour burden of approximately 480 hours.\1163\
---------------------------------------------------------------------------
\1163\ 10 NRSROs x 48 hours = 480 hours.
---------------------------------------------------------------------------
Also as discussed in Section IV.D.1 with respect to the PRA, the
Commission preliminarily estimates that an NRSRO would receive an
average of 200 requests per year to provide Exhibit 1 in writing and
that it would take an average of 20 minutes to respond to each request.
Therefore, the Commission preliminarily estimates that the average
annual hour burden to each NRSRO would be approximately 67 hours,
resulting in an annual industry-wide burden of approximately 670 hours.
\1164\
---------------------------------------------------------------------------
\1164\ 200 requests x \1/3\ hours = 67 hours per NRSRO; 10
NRSROs x 67 hours = 670 hours.
---------------------------------------------------------------------------
In addition, the Commission preliminarily estimates that the
incremental cost resulting from implementing the rulemaking mandated by
Section 15E(q) of the Exchange Act in this manner would be minimal and,
as noted above, the proposal would have substantial benefits.
Consequently, the Commission preliminarily believes any incremental
cost resulting from the amendments would not impact competition or
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the benefits and
costs associated with the proposals to amend the Instructions to
Exhibit 1 of Form NRSRO and paragraph (i) of Rule 17g-1.
F. Proposed Enhancements to Rating Histories Disclosures
As discussed above, Section 932(a)(8) of the Dodd-Frank Act amended
Section 15E of the Exchange Act to add new subsection (q), which
contains paragraphs (1) and (2).\1165\ In addition to the proposed
amendments to the Instructions for Exhibit 1 discussed in the preceding
section, the Commission proposes to further implement the rulemaking
mandated in Section 15E(q) of the Exchange Act, in part, by adding new
paragraph (b) to Rule 17g-7.\1166\ This proposed amendment would
implement rulemaking mandated in Section 15E(q) of the Exchange Act by:
(1) Re-codifying in paragraph (b) of Rule 17g-7 requirements currently
contained in paragraph (d)(3) of Rule 17g-2; and (2) substantially
enhancing those requirements.\1167\ More specifically, paragraph (d)(3)
of Rule 17g-2 requires an NRSRO to, among other things, make publicly
available on its corporate Internet Web site in an XBRL format the
information required to be documented pursuant to paragraph (a)(8) of
the rule with respect to any credit rating initially determined by the
NRSRO on or after June 26, 2007, the effective date of the Rating
Agency Act of 2006.\1168\
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\1165\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2). See Section
\1166\ See proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
\1167\ See 15 U.S.C. 78o-7(q) and proposed new paragraph (b) of
Rule 17g-7; see also Section II.E.2 of this release for a more
detailed discussion of this proposal.
\1168\ 17 CFR 240.17-2(d)(3)(i)(A). Paragraph (a)(8) of Rule
17g-2 requires an NRSRO to make and retain a record that, ``for each
outstanding credit rating, shows all rating actions and the date of
such actions from the initial credit rating to the current credit
rating identified by the name of the rated security or obligor and,
if applicable, the CUSIP of the rated security or the Central Index
Key (``CIK'') number of the rated obligor.'' 17 CFR 240.17-2(a)(8).
---------------------------------------------------------------------------
These requirements would be enhanced in four ways. The first
enhancement would make the disclosure easier for investors and other
users of credit ratings to locate. Specifically, new proposed paragraph
(b)(1) of Rule 17g-7 would require the NRSRO, among other things, to
publicly disclose the ratings history information for free on an easily
accessible portion of its corporate Internet Web site.\1169\
---------------------------------------------------------------------------
\1169\ See proposed new paragraph (b)(1) of Rule 17g-7.
---------------------------------------------------------------------------
The second enhancement would broaden the scope of credit ratings
subject to the disclosure requirements. Specifically, proposed new
paragraph (b)(1)(i) of Rule 17g-7 would require an NRSRO to disclose
each credit rating assigned to an obligor, security, and money market
instrument in every class of credit ratings for which the NRSRO is
registered that was outstanding as of June 26, 2007 and any subsequent
upgrades or downgrades of a credit rating assigned to the obligor,
security, or money market instrument (including a downgrade to, or
assignment of, default), any placements of a credit rating assigned to
the obligor, security, or money market instrument on watch or review,
any affirmation of a credit rating assigned to the obligor, security,
or money market instrument, and a withdrawal of a credit rating
assigned to the obligor, security, or money market instrument.\1170\
With respect to credit ratings initially determined on or after June
26, 2007, the amendments would clarify that the disclosure of the
rating history information would be triggered when an NRSRO publishes
an initial credit rating, and any subsequent upgrades or downgrades of
a credit rating assigned to the obligor, security, or money market
instrument (including a downgrade to, or assignment of, default), any
placements of a credit rating assigned to the obligor, security, or
money market instrument on watch or review, any affirmation of a credit
rating assigned to the obligor, security, or money market instrument,
and a withdrawal of a credit rating assigned to the obligor, security,
or money market instrument.\1171\
---------------------------------------------------------------------------
\1170\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
\1171\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
---------------------------------------------------------------------------
The third enhancement would increase the scope of information that
must be disclosed about a rating action. Specifically, proposed
paragraph (b)(2) of Rule 17g-7 would identify 7 categories of data that
would need to be disclosed when a credit rating action is published
pursuant to proposed new paragraph (b)(1) of Rule 17g-7.\1172\ The
fourth enhancement, contained in proposed new paragraph (b)(5) to Rule
17g-7, would be to require that a rating history not be removed from
the disclosure until 20 years after the NRSRO withdraws the credit
rating
[[Page 33520]]
assigned to the obligor, security, or money market instrument.\1173\
---------------------------------------------------------------------------
\1172\ See proposed new paragraph (b)(2) of Rule 17g-7.
\1173\ See proposed new paragraph (b)(5) of Rule 17g-7.
---------------------------------------------------------------------------
1. Benefits
Section 15E(q)(1) of the Exchange Act provides that the Commission
shall, by rule, require each NRSRO to publicly disclose information on
the initial credit ratings determined by the NRSRO for each type of
obligor, security, and money market instrument, and any subsequent
changes to such credit ratings, for the purpose of allowing users of
credit ratings to evaluate the accuracy of ratings and compare the
performance of ratings by different NRSROs.\1174\ The Commission is
proposing to implement this rulemaking mandate, in part, through
proposed new paragraph (b) of Rule 17g-7. The amendments would be
designed to meet the goal in Section 15E(q)(1) that the information
disclosed by NRSROs allows users of credit ratings to evaluate the
accuracy of credit ratings and compare the performance of credit
ratings by different NRSROs.
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\1174\ 15 U.S.C. 78o-7(q)(1).
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As the Commission stated when adopting the current ratings history
disclosure requirement, the ``intent of the rule is to facilitate
comparisons of credit rating accuracy across all NRSROs--including
direct comparisons of different NRSROs' treatment of the same obligor
or instrument--in order to enhance NRSRO accountability, transparency,
and competition.'' \1175\ The proposals also are designed to provide
persons with the ``raw data'' necessary to generate statistical
information about the performance of each NRSRO's credit ratings.\1176\
Finally, the proposals also are designed to implement provisions of
Section 15E(q)(2) of the Exchange Act, which provides, among other
things, that the Commission's rules shall require NRSROs to disclose
information about the performance of credit ratings that is comparable
among NRSROs, to allow users of credit ratings to compare the
performance of credit ratings across NRSROs.\1177\
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\1175\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63838 (Dec. 4, 2009)
(``Ratings history information for outstanding credit ratings is the
most direct means of comparing the performance of two or more
NRSROs. It allows an investor or other user of credit ratings to
compare how all NRSROs that maintain a credit rating for a
particular obligor or instrument initially rated that obligor or
instrument and, thereafter, how and when they adjusted their credit
rating over time.''). The Commission notes that under the proposals
the disclosures would not contain complete histories for many credit
ratings because the NRSRO would not need to include information
about rating actions taken before June 26, 2007. However, the
Commission believes that the disclosures would still be used to
compare how different NRSROs rated a particular obligor, security,
or money market instrument beginning as of June 26, 2007 and from
that date forward.
\1176\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4,
2009) (``The raw data to be provided by NRSROs pursuant to the new
ratings history disclosure requirements * * * will enable market
participants to develop performance measurement statistics that
would supplement those required to be published by NRSROs themselves
in Exhibit 1, tapping into the expertise of credit market observers
and participants in order to create better and more useful means to
compare the credit ratings performance of NRSROs.'').
\1177\ See 15 U.S.C. 78o-7(q)(2).
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The Commission preliminarily believes that implementing the
rulemaking mandated through Section 15E(q) of the Exchange Act through
proposed new paragraph (b) of Rule 17g-7 would promote an efficient
process for NRSROs. An NRSRO already should have in place information
technology systems to meet the existing requirements of paragraph
(d)(3) of Rule 17g-2, which it could adjust to comply with the proposed
new disclosure requirements.
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion in proposing new paragraph (b) of
Rule 17g-7 would impose incremental costs. However, the Commission
preliminarily estimates that the costs discussed below resulting from
the proposed new paragraph would be attributable largely to the
rulemaking mandated by Dodd-Frank Act \1178\ and that the incremental
costs would be minimal.
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\1178\ Compare 15 U.S.C. 78o-7(q) with proposed new paragraph
(b) of Rule 17g-7; see also GAO Report 10-782, pp. 40-46 (indicating
the current requirements of paragraph (d)(3) of Rule 17g-2 may not
achieve the objectives of 15 U.S.C. 78o-7(q)).
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The Commission preliminarily believes that requiring an NRSRO to
make ratings histories available on an ``easily accessible'' portion of
its Web site would result in the same burden as re-configuring a
corporate Internet Web site for the purpose of making Form NRSRO and
Exhibits 1 through 9 ``easily accessible.'' The Commission, therefore,
preliminarily believes that the hour burden estimates discussed above
in Section V.F.2 of this release with respect to the PRA would be
appropriate for estimating the costs resulting from this requirement.
Consequently, the Commission preliminarily estimates that requiring an
NRSRO to make ratings histories available on an ``easily accessible''
portion of its corporate Internet Web site would take each NRSRO an
average of approximately 5 hours, resulting in a one-time industry-wide
hour burden of 50 hours.\1179\
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\1179\ 10 NRSROs x 5 hours = 50 hours.
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Pursuant to paragraph (d)(3) of Rule 17g-2, NRSROs currently are
required to provide ratings history information for each credit rating
initially determined on or after June 26, 2007. Proposed new paragraph
(b) of Rule 17g-7 would incorporate the requirements currently
contained in paragraph (d)(3) of Rule 17g-2 with substantial
enhancements that would require NRSROs to add more ratings histories to
their disclosures and provide more information about each rating action
in the ratings history for each given obligor, security, or money
market instrument.\1180\ The Commission preliminarily estimates that
NRSROs would meet the requirements of new paragraph (b) of Rule 17g-7
by adapting the internal information technology systems and expertise
and other resources they currently devote to complying with paragraph
(d)(3) of Rule 17g-2, which would result in one-time costs to NRSROs.
Consequently, the Commission preliminarily estimates that the proposed
amendments would result in one-time costs to reprogram existing systems
as well as to add the required information for all credit ratings
outstanding as of (as opposed to initially determined on or after) June
26, 2007. As discussed in section IV.D.5 of this release with respect
to the PRA, the Commission preliminarily estimates that the proposed
enhancements to the current disclosure requirements would result in an
average one-time hour burden to each NRSRO of approximately 135 hours,
resulting in an industry-wide one-time hour burden of approximately
1,350 hours.\1181\ The Commission preliminarily believes that NRSROs
would implement the required changes internally.
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\1180\ See proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
\1181\ 10 NRSRO x 135 hours = 1,350 hours.
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In addition, as discussed in section IV.D.5 of this release with
respect to the PRA, the Commission preliminarily estimates that the
proposed enhanced disclosure requirements would result in an average
annual hour burden per NRSRO of approximately 45 hours, resulting in an
industry-wide annual hour burden of approximately 450 hours.\1182\
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\1182\ 10 NRSRO x 45 hours = 450 hours.
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Finally, the Commission preliminarily believes any incremental cost
resulting from the amendments would not impact competition or impose a
burden on
[[Page 33521]]
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the benefits and
costs associated with proposed new paragraph (b) of Rule 17g-7.
G. Credit Rating Methodologies
Section 932(a)(8) of the Dodd-Frank Act amends Section 15E of the
Exchange Act to add new subsection (r).\1183\ Section 15E(r) of the
Exchange Act provides that the Commission shall prescribe rules, for
the protection of investors and in the public interest, with respect to
the procedures and methodologies, including qualitative and
quantitative data and models, used by NRSROs that require each NRSRO to
ensure a number of objectives.\1184\ The Commission is proposing to
implement Section 15E(r) of the Exchange Act through paragraph (a) of
proposed new Rule 17g-8.\1185\
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\1183\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(r).
\1184\ See 15 U.S.C. 78o-7(r)(1)-(3).
\1185\ See proposed paragraph (a) of new Rule 17g-8; see also
Section II.F.1 of this release for a more detailed discussion of
this proposal.
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In particular, proposed paragraph (a)(1) would require the NRSRO to
have policies and procedures that are reasonably designed to ensure
that the procedures and methodologies, including qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are approved by its board of directors or, if the NRSRO does
not have a board of directors, another body performing a function
similar to that of a board of directors.\1186\ Proposed paragraph
(a)(2) would require an NRSRO to have policies and procedures that are
reasonably designed to ensure that the procedures and methodologies,
including qualitative and quantitative data and models, the NRSRO uses
to determine credit ratings are developed and modified in accordance
with the policies and procedures of the NRSRO.\1187\ Proposed paragraph
(a)(3)(i) would require an NRSRO to have policies and procedures that
are reasonably designed to ensure that material changes to the
procedures and methodologies, including changes to qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are applied consistently to all credit ratings to which the
changed procedures or methodologies apply.\1188\ Proposed paragraph
(a)(3)(ii) would require the NRSRO to have policies and procedures that
are reasonably designed to ensure that material changes to the
procedures and methodologies, including changes to qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings, to the extent that the changes are to surveillance or
monitoring procedures and methodologies, are applied to then-current
credit ratings within a reasonable period of time taking into
consideration the number of ratings impacted, the complexity of the
procedures and methodologies used to determine the credit ratings, and
the type of obligor, security, or money market instrument being
rated.\1189\ Proposed paragraph (a)(4)(i) would require the NRSRO to
have policies and procedures that are reasonably designed to ensure
that the NRSRO promptly publishes on an easily accessible portion of
its corporate Internet Web site material changes to the procedures and
methodologies, including to qualitative models or quantitative inputs,
the NRSRO uses to determine credit ratings, the reason for the changes,
and the likelihood the changes will result in changes to any current
ratings.\1190\ Proposed paragraph (a)(4)(ii) would require the NRSRO to
have policies and procedures that are reasonably designed to ensure the
NRSRO promptly publishes on its corporate Internet Web site significant
errors identified in a procedure or methodology, including a
qualitative or quantitative model, the NRSRO uses to determine credit
ratings that may result in a change in current credit ratings.\1191\
Finally, proposed paragraph (a)(5) would require the NRSRO to have
policies and procedures that are reasonably designed to ensure that it
discloses the version of a credit rating procedure or methodology,
including the qualitative methodology or quantitative inputs, used with
respect to a particular credit rating.\1192\
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\1186\ See proposed paragraph (a)(1) of new Rule 17g-8.
\1187\ See proposed paragraph (a)(2) of new Rule 17g-8.
\1188\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
\1189\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
\1190\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
\1191\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
\1192\ See proposed paragraph (a)(5) of new Rule 17g-8.
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The Commission also is proposing that the policies and procedures
required pursuant to proposed paragraph (a) of new Rule 17g-8 be
subject to the record retention and production requirements of Rule
17g-2.\1193\ Consequently, the Commission proposes adding new paragraph
(b)(13) to Rule 17g-2 to identify the policies and procedures an NRSRO
is required to establish, maintain, enforce, and document pursuant to
proposed paragraph (a) of new Rule 17g-8 as a record that must be
retained.\1194\
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\1193\ 17 CFR 240.17g-2.
\1194\ See proposed new paragraph (b)(13) to Rule 17g-2; see
also Section II.F.2 of this release for a more detailed discussion
of this proposal.
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1. Benefits
The Commission is proposing to implement Sections 15E(r) of the
Exchange Act through paragraph (a) of proposed new Rule 17g-8. The
Commission preliminarily believes that the proposals would provide
several primary benefits for investors and other users of credit
ratings. First, having the NRSRO's board of directors or a body
performing a function similar to a board approve the NRSRO's procedures
and methodologies for determining credit ratings could promote the
quality and consistency of the procedures and methodologies.\1195\ In
addition, taking steps to ensure that such procedures and methodologies
are developed and modified pursuant to the NRSRO's policies and
procedures also could promote the quality and consistency of the
procedures and methodologies.\1196\
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\1195\ See proposed paragraph (a)(1) of new Rule 17g-8.
\1196\ See proposed paragraph (a)(2) of new Rule 17g-8.
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Furthermore, taking steps to ensure that material changes to the
procedures and methodologies, including changes to qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are applied consistently to all credit ratings to which the
changed procedures or methodologies apply could promote consistent and
timely application of such changes, which could benefit investors and
other users of credit ratings.\1197\ Similarly, the consistent and
timely application of changes to procedures and methodologies for
determining credit ratings could be promoted by an NRSRO taking steps
to ensure that material changes to the procedures and methodologies,
including changes to qualitative and quantitative data and models, the
NRSRO uses to determine credit ratings are, to the extent that the
changes are to surveillance or monitoring procedures and methodologies,
applied to then-current credit ratings within a reasonable period of
time taking into consideration the number of ratings impacted, the
[[Page 33522]]
complexity of the procedures and methodologies used to determine the
credit ratings, and the type of obligor, security, or money market
instrument being rated.\1198\
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\1197\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
\1198\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
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In addition, the Commission preliminarily believes the proposal
would benefit investors and other users of credit ratings by improving
the transparency of an NRSRO's procedures and methodologies for
determining credit ratings. Specifically, investors and other users of
credit ratings would benefit from the transparency arising from
requiring that an NRSRO promptly publishes on an easily accessible
portion of its corporate Internet Web site material changes to the
procedures and methodologies, including to qualitative models or
quantitative inputs, the reason for the changes, and the likelihood the
changes will result in changes to any current ratings as well as
significant errors identified in a procedure or methodology, including
a qualitative or quantitative model.\1199\ Finally, transparency also
would be promoted by requiring that an NRSRO disclose the version of a
credit rating procedure or methodology, including the qualitative
methodology or quantitative inputs, used with respect to a particular
credit rating.\1200\
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\1199\ See proposed paragraph (a)(4) of new Rule 17g-8.
\1200\ See proposed paragraph (a)(5) of new Rule 17g-8.
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The Commission preliminarily believes that an additional benefit of
the proposal is that implementing Section 15E(r) of the Exchange Act by
requiring the NRSRO to have policies and procedures designed to achieve
the objectives set forth in that section would provide the NRSRO with
flexibility to integrate the required policies and procedure with its
procedures and methodologies for determining credit ratings. In other
words, the proposal would rely on the NRSRO's policies and procedures
for determining credit ratings and not require revisions that are
contrary to those policies and procedures. The Commission preliminarily
believes this approach appropriately avoids regulating the substance of
credit ratings or the procedures and methodologies an NRSRO uses to
determine credit ratings but, at the same time, requires an NRSRO to
have procedures reasonably designed to achieve the objectives set forth
in Section 15E(r) of the Exchange Act.
The Commission preliminarily believes this proposed implementation
of Section 15E(r) of the Exchange Act would promote an efficient
process for NRSROs to comply with the requirements. As noted above, the
proposal would be designed to provide the NRSRO with flexibility to
integrate the required policies and procedure with its procedures and
methodologies for determining credit ratings.
The Commission proposes to further implement Section 15E(r) of the
Exchange Act by adding new paragraph (b)(13) to Rule 17g-2 to apply the
record retention and production requirements of Rule 17g-2 to the
policies and policies and procedures required pursuant to paragraph (a)
of proposed new Rule 17g-8.\1201\ The record retention requirements
would promote efficiency by facilitating Commission oversight of
NRSROs. In this regard, recordkeeping rules such as Rule 17g-2 have
proven integral to the Commission's investor protection function
because the preserved records are the primary means of monitoring
compliance with applicable securities laws.\1202\ Rule 17g-2 is
designed to ensure that an NRSRO makes and retains records that will
assist the Commission in monitoring, through its examination authority,
whether an NRSRO is complying with the provisions of Section 15E of the
Exchange Act and the rules thereunder.\1203\ The proposed amendment to
Rule 17g-2 is designed to assist the Commission in monitoring an
NRSRO's compliance with paragraph (a) of proposed new Rule 17g-8.
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\1201\ See 17 CFR 240.17g-2(a), (c), (d), (e) and (f).
\1202\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33582 (June 18, 2007).
\1203\ Id.
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2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion in proposed paragraph (a) of new Rule
17g-8 would impose incremental costs. However, the Commission
preliminarily estimates that the costs discussed below resulting from
proposed paragraph (a) of new Rule 17g-8 would be attributable largely
to the rulemaking mandated by Dodd-Frank Act \1204\ and that the
incremental costs would be minimal.
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\1204\ Compare 15 U.S.C. 78o-7(r)(1)-(3), with proposed
paragraph (a) of new Rule 17g-8.
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As discussed in Section IV.D.6 of this release with respect to the
PRA, the Commission preliminarily estimates that an NRSRO would spend
an average of approximately 200 hours establishing the policies and
procedures that would be required under paragraph (a) of proposed new
Rule 17g-8, resulting in an industry-wide one-time hour burden of
approximately 2,000 hours.\1205\ In addition, as discussed in Section
IV.D.6 of this release with respect to the PRA, the Commission
preliminarily estimates an NRSRO would spend an average of
approximately 50 hours annually reviewing and updating the policies and
procedures required under proposed paragraph (a) of Rule 17g-8,
resulting in an annual industry-wide hour burden of approximately 500
hours.\1206\
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\1205\ 10 NRSROs x 200 hours = 2,000 hours.
\1206\ 10 NRSROs x 50 hours = 500 hours.
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As noted above, the Commission preliminarily estimates that the
costs resulting from proposed new paragraph (b)(13) of new Rule 17g-2
largely would be attributable to the Commission's discretionary
rulemaking. As discussed above in Section IV.D.3 of this release with
respect to the PRA, the Commission preliminary believes applying the
recordkeeping requirements of Rule 17g-2 to five new types of records
would result in one-time and annual hour burdens for NRSROs in
connection with updating their record retention policies and procedures
to account for and retain these new records. As discussed above in
Section IV.D.3 of this release with respect to the PRA, based on staff
experience, the Commission preliminarily estimates that the additional
one-time hour burden for each NRSRO to update its record retention
policies and procedures to account for the new records that would need
to be retained under proposed new paragraphs (a)(9), (b)(12), (b)(13),
(b)(14), and (b)(15) of Rule 17g-2 would be 20 hours. Based on that
estimate, the Commission preliminary believes that the average one-time
hour burden resulting from proposed new paragraph (b)(13) to Rule 17g-2
would be approximately 4 hours per NRSRO, resulting an industry-wide
one-time hour burden of approximately 40 hours.\1207\ As discussed
above in Section IV.D.3 of this release with respect to the PRA, the
Commission preliminarily estimates it would take an average of
approximately one hour each year for an NRSRO to retain updated
versions of the information required pursuant to paragraph (a) of new
Rule 17g-8 resulting in an annual industry-wide burden of 10
hours.\1208\
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\1207\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4
hours = 40 hours.
\1208\ 10 NRSROs x 1 hour = 10 hours.
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For the foregoing reasons, Commission preliminarily believes any
incremental cost resulting from the amendments would not impact
competition or impose a burden on
[[Page 33523]]
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new paragraph (a)(8) of Rule 17g-8
and proposed new paragraph (b)(13) of Rule 17g-2.
H. Form and Certification to Accompany Credit Ratings
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new paragraph (s).\1209\ Sections 15E(s)(1) through
(4), among other things, set forth provisions specifying Commission
rulemaking with respect to disclosures an NRSRO must make with the
publication of a credit rating.\1210\ The Commission proposes to
implement these provisions by adding new paragraph (a) to Rule 17g-
7.\1211\ As discussed in detail below, the prefatory text of proposed
new paragraph (a) would require an NRSRO to publish two items when
taking a rating action: (1) A form containing information about the
credit rating resulting from or subject to the rating action; \1212\
and (2) any certification of a provider of third-party due diligence
services received by the NRSRO that relates to the credit rating.\1213\
Proposed paragraph (a)(1) of Rule 17g-7 would contain three primary
components: Paragraph (a)(1)(i) prescribing the format of the form;
\1214\ paragraph (a)(1)(ii) prescribing the content of the form; \1215\
and paragraph (a)(1)(iii) prescribing an attestation requirement for
the form.\1216\ Proposed paragraph (a)(2) of Rule 17g-7 would identify
the certification from a provider of third-party due diligence services
as an item to be published with the rating action.\1217\
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\1209\ See 15 U.S.C. 78o-7(s).
\1210\ See 15 U.S.C. 78o-7(s)(1)-(4).
\1211\ See proposed new paragraph (a) of Rule 17g-7. See also
Sections II.G.1 through G.5 of this release for a more detailed
discussion of this proposal.
\1212\ See proposed new paragraph (a)(1) of Rule 17g-7. This
paragraph would implement, in large part, rulemaking specified in
Sections 15E(s)(1), (2), and (3) of the Exchange Act. See 15 U.S.C.
78o-7(s)(1), (2), and (3).
\1213\ See proposed new paragraph (a)(2) of Rule 17g-7. This
paragraph would implement, in part, rulemaking specified in Section
15E(s)(4) of the Exchange Act. See 15 U.S.C. 78o-7(s)(4).
\1214\ See proposed new paragraph (a)(1)(i) of Rule 17g-7. This
paragraph would implement, in large part, rulemaking specified in
Section 15E(s)(2) of the Exchange Act. See 15 U.S.C. 78o-7(s)(2).
\1215\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7. This
paragraph would implement, in large part, rulemaking specified in
Section 15E(s)(3) of the Exchange Act. See 15 U.S.C. 78o-7(s)(3). It
would also incorporate the existing text of Rule 17g-7 as adopted by
the Commission on January 20, 2011 to implement Section 943 of the
Dodd-Frank Act. See Disclosure for Asset-Backed Securities Required
by Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Securities Act of 1933 (``Securities Act'') Release
No. 9175 (Jan. 20, 2011), 76 FR 4489 (Jan. 26, 2011) and 17 CFR
240.17g-7.
\1216\ See proposed new paragraph (a)(1)(iii) of Rule 17g-7.
This paragraph would implement, in large part, rulemaking specified
in Section 15E(q)(2)(F) of the Exchange Act. See 15 U.S.C. 78o-
7(q)(2)(F). Section 15E(q)(2)(F) of the Exchange Act requires that
the Commission's rules require an NRSRO to include an attestation
with any credit rating it issues affirming that no part of the
rating was influenced by any other business activities, that the
rating was based solely on the merits of the instruments being
rated, and that such rating was an independent evaluation of the
risks and merits of the instrument. See 15 U.S.C. 78o-7(q)(2)(F).
Proposed paragraph (a)(1)(iii) of Rule 17g-7 would require the NRSRO
to attach to the form a signed statement by a person within the
NRSRO who has responsibility for the credit rating affirming that:
(1) No part of the credit rating was influenced by any other
business activities; (2) the credit rating was based solely upon the
merits of the instruments being rated; and (3) the credit rating was
an independent evaluation of the risks and merits of the instrument.
Thus, the proposed requirement would mirror the statutory text in
terms of the representations that would need to be made in the
attestation. Compare proposed new paragraphs (a)(1)(iii)(A) through
(C) of Rule 17g-7, with 15 U.S.C. 78o-7(q)(2)(F).
\1217\ See proposed paragraph (a)(2) of Rule 17g-7.
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1. Benefits
The Commission preliminarily believes that the proposed
implementation of the rulemaking mandated by Sections 15E(s)(1), (2),
(3), and (4)(D) through disclosure requirements in proposed new
paragraph (a) of Rule 17g-7 could be used by investors and other users
of credit ratings to better understand credit ratings in each class of
credit rating issued by the NRSRO and to determine the adequacy and
level of due diligence services provided by a third party with respect
to an issuance of Exchange Act-ABS.\1218\ As the Commission has noted
previously, the NRSRO credit ratings of structured finance products
such as Exchange Act-ABS played a role in the recent credit
crisis.\1219\ The proposed information to be disclosed in the form,
including information about the limitations of credit ratings and
information regarding the due diligence performed on Exchange Act-ABS,
could promote more prudent use of credit ratings by investors and other
users of credit ratings, and discourage undue reliance by investors and
other users of credit ratings in making investment and other credit
based decisions.
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\1218\ See 15 U.S.C. 78o-7(s)(1)(B).
\1219\ See Proposed Rules for Nationally Recognized Statistical
Rating Organizations, 73 FR 36212 (June 25, 2008).
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The Commission preliminarily believes that the proposed
implementation of Section 15E(s) of the Exchange Act as mandated by the
Dodd-Frank Act may promote efficiency. As noted above, the proposal
would be designed to enable investors and other users of credit ratings
to better understand the credit ratings and, thereby, promote more
prudent use of credit ratings in terms of not unduly relying on credit
ratings in making investment and other credit based decisions.
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion in proposed new paragraph (a) of Rule
17g-7 would impose incremental costs. However, the Commission
preliminarily estimates that the costs discussed below resulting from
the proposed new paragraph (a) of Rule 17g-7 would be attributable
largely to the rulemaking mandated by Dodd-Frank Act and that the
incremental costs would be minimal.\1220\
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\1220\ Compare 15 U.S.C. 78o-7(s)(1), (2), (3) and (4)(D) with
proposed new paragraph (a) of Rule 17g-7.
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The Commission preliminarily estimates that proposed new paragraph
(a) to Rule 17g-7 would result in a one-time cost to develop the
standardized disclosures and establish systems, protocols, and
procedures for generating the new information as well as protocols,
procedures, and systems designed to ensure that all the information
required to be included in the form is input into a form prior to the
publication of the credit rating, that any certifications received from
a provider of third-party due diligence services are attached to the
form, and that the form and certifications are published with the
credit rating.
As discussed in above in Section IV.D.5 of this release with
respect to the PRA, the Commission preliminarily estimates that the
one-time hour burden to develop the required disclosures and establish
systems, protocols, and procedures would be approximately 5,000 hours,
resulting in a one-time industry-wide hour burden of approximately
50,000 hours.\1221\ In addition, the Commission preliminarily allocates
75% of these burden hours (37,500 hours) to internal burden and the
remaining 25% (12,500 hours) to external burden to hire outside
professionals to assist in setting up the process to generate the forms
and publish them with applicable credit ratings.\1222\ The Commission
[[Page 33524]]
preliminarily estimates $273 per hour for internal costs \1223\ and
$400 per hour for external costs for retaining outside professionals
such as attorneys and information technology consultants,\1224\
resulting in an industry-wide one-time cost of approximately
$15,237,500.\1225\
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\1221\ 10 NRSROs x 5,000 hours = 50,000 hours.
\1222\ 50,000 hours x 0.75 = 37,500 hours; 50,000 hours x 0.25 =
12,500 hours. This allocation is based on the Commission's
allocation of the industry-wide hour burden for the amount of time
it would take a securitizer to set-up a system to make the
disclosures required by Form ABS-15G. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan.
26, 2011).
\1223\ The $273 per hour figure is based on the salary for
compliance managers from SIFMA's Management & Professional Earnings
in the Securities Industry 2010, modified by Commission staff to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits, and overhead.
\1224\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an
estimate of $400 an hour engage outside professionals) and Proposed
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR 63889 (Dec. 4, 2009) (providing an estimate of $400 per hour to
engage an outside attorney).
\1225\ 37,500 hours x $273 = $10,237,500; 12,500 hours x $400 =
$5,000,000; $10,237,500 + $5,000,000 = $15,237,500.
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With respect to the annual costs, the Commission preliminarily
believes that the estimate should be broken into two components. The
first component would constitute the cost to an NRSRO to update its
standardized disclosures. As discussed in above in Section IV.D.5 of
this release with respect to the PRA, the Commission preliminarily
believes an NRSRO would spend substantially less time updating the
disclosures than the one-time estimate of approximately 5,000 hours per
NRSRO to initially develop the standardized disclosures and establish
the systems, protocols, and procedures to generate the forms.
Consequently, the Commission preliminarily estimates that each NRSRO
would spend an average of approximately 500 hours per year updating the
standardized disclosures, resulting in an annual industry-wide burden
of approximately 5,000 hours. The Commission preliminarily believes
that the update process would be handled by the NRSROs internally.
The second component would constitute the amount of time an NRSRO
would spend generating and publishing each form and attaching to the
form applicable certifications. The Commission preliminarily believes
this estimate should be based on the number of rating actions taken per
year by the NRSROs because the requirement to generate and publish the
form and attach the certifications would be triggered upon the taking
of a rating action. As discussed above in Section IV.D.5 of this
release with respect to the PRA, the Commission preliminarily estimates
that the 10 NRSROs take approximately 2,909,958 credit rating actions
per year.\1226\ The Commission preliminarily estimates that the time it
would take to generate a form by populating it with the required
disclosures (most of which would have been pre-established) and to
publish the form and any applicable certifications with the credit
rating would be 15 minutes, resulting in an industry-wide annual hour
burden of approximately 727,490.\1227\ Moreover, although larger NRSROs
may realize economies of scale, the Commission preliminarily believes
that the annual hour burden would be allocated to the 10 NRSROs based
on the number of credit ratings they have outstanding.
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\1226\ [2,000,000 credit rating actions constituting upgrades,
downgrades, placements on credit watch, and withdrawals] + [4,134
preliminary or expected credit ratings] + [415,117 initial credit
ratings] + [490,707 affirmations of existing credit ratings] =
2,909,958 rating actions per year. See Section IV.D.5 of this
release for an extensive discussion and explanation of these
numbers.
\1227\ 2,909,958 rating actions x .25 hours = 727,489.5 hours
(rounded to 727,490 hours).
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Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new paragraph (a) of Rule 17g-7.
I. Rule 15GA-2 and Form ABS-15G
The Commission is proposing new Rule 15Ga-2 and amendments to Form
ABS-15G.\1228\ The new rule and amended form would implement Section
15E(s)(4)(A) of the Exchange Act.\1229\ Proposed new Rule 15Ga-2 would
require an issuer or underwriter of any Exchange Act-ABS that is to be
rated by an NRSRO to furnish a Form ABS-15G on the EDGAR system
containing the findings and conclusions of any third-party ``due
diligence report'' obtained by the issuer or underwriter. Under the
proposal, the disclosure would be furnished using Form ABS-15G for both
registered and unregistered offerings of Exchange Act-ABS. In addition,
under the Commission's proposal, an issuer or underwriter would not
need to furnish Form ABS-15G if the issuer or underwriter obtains a
representation from each NRSRO engaged to produce a credit rating for
the Exchange Act-ABS that can be reasonably relied on that the NRSRO
will publicly disclose the findings and conclusions of any third-party
due diligence report obtained by the issuer or underwriter with the
publication of the credit rating five business days prior to the first
sale in the offering in an information disclosure form generated
pursuant to proposed new paragraph (a)(1) of Rule 17g-7.
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\1228\ See proposed new Rule 15Ga-2 and proposed amendments to
Form ABS-15G.
\1229\ See 15 U.S.C. 78o-7(s)(4)(A); see also Section II.H.1 of
this release for a more detailed discussion of this proposal.
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1. Benefits
The proposed rulemaking would provide a standardized format for an
issuer or underwriter to make the disclosures required by Section
15E(s)(4)(A). In addition, the Commission proposes to permit an issuer
or underwriter to rely on an NRSRO to make the required disclosure.
This would avoid duplicate disclosures. The Commission preliminarily
believes these proposals would give effect to the objective in Section
15E(s)(4)(A) of the Exchange Act that there be public disclosure of the
findings and conclusions of a provider of third-party due diligence
services. In addition to directly using the summaries of due diligence
findings contained in the disclosure to evaluate the Exchange Act-ABS,
investors and other users of credit ratings could benefit by being able
to review that disclosure to determine the adequacy and the level of
due diligence services provided by a third party. The required
increased transparency regarding the due diligence process could
promote greater rigor and discipline in that process, to the benefit of
investors. In addition, if no disclosure is made, investors and other
users of credit ratings would be put on notice that the issuer or
underwriter did not employ a provider of third-party due diligence
services in connection with the offering of an Exchange Act-ABS.
The Commission also is proposing amendments to Rule 314 of
Regulation S-T that would permit municipal securitizers of Exchange
Act-ABS, or underwriters in the offering of municipal Exchange Act-ABS,
to provide the information required by Form ABS-15G on EMMA, the
Municipal Securities Rulemaking Board's centralized public
database.\1230\ The Commission preliminarily believes that the use of
this pre-existing database would promote an efficient process for
municipal securitizers of Exchange Act-ABS or underwriters in the
offering of municipal Exchange Act-ABS, who would use it to file the
required information, as well as for investors and other market
participants, who would
[[Page 33525]]
use it to access that information. The Commission preliminarily
believes that the proposed implementation of Section 15E(s)(4)(A) of
the Exchange Act would promote an efficient process for issuers and
underwriters by requiring an issuer or underwriter to use a
standardized form to make the disclosure. It also would permit an
issuer or underwriter to rely on an NRSRO to make the disclosures,
thereby eliminating duplicate disclosure requirements.
---------------------------------------------------------------------------
\1230\ See proposed amendments to Rule 314 of Regulation S-T (17
CFR 231.314); see also Section II.H.1 of this release for a more
detailed discussion of this proposal.
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2. Costs
The Commission preliminarily estimates that the costs arising from
proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-15G
would be attributable largely to the requirements set forth in Section
15E(s)(4)(A) of the Exchange Act.\1231\ Specifically, the Commission
believes that the costs to issuers and underwriters arising from
preparing a summary of the findings and conclusions of any third-party
due diligence report they obtained would be directly attributable to
the Dodd-Frank Act, while the incremental costs associated with placing
such summaries into Form ABS-15G and furnishing the form on EDGAR (or
EMMA, as appropriate) would be attributable to the Commission's
rulemaking. As noted above, however, the Commission's rulemaking would
provide issuers and underwriters with guidelines as to how they can
meet the requirements of Section 15E(s)(4)(A) of the Exchange Act,
which the Commission believes would eliminate costs that could
potentially arise from uncertainty as to how those requirements could
be fulfilled.
---------------------------------------------------------------------------
\1231\ Compare 15 U.S.C. 78o-7(s)(4)(A), with proposed new Rule
15Ga-2 and the proposed amendments to Form ABS-15G.
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As discussed above in Section IV.D.9 of this release with respect
to the PRA, the Commission preliminarily estimates that proposed new
Rule 15Ga-2 and the proposed amendments to Form ABS-15G would result in
one-time and annual costs for issuers and underwriters in offerings of
registered and unregistered Exchange Act-ABS.\1232\ The Commission
preliminarily estimates that issuers and underwriters would incur a
one-time cost in connection with developing processes and protocols to
provide the required information to comply with new Rule 15Ga-2,
including modifying their existing Form ABS-15G processes and protocols
to accommodate the requirements of Rule 15Ga-2. In the adopting release
for Form ABS-15G, the Commission estimated that 270 unique securitizers
would be required to file the form.\1233\ The Commission preliminarily
estimates that each securitizer would spend an average of approximately
100 hours to develop processes and protocols to comply with new Rule
15Ga-2 and to modify their existing Form ABS-15G processes and
protocols to provide for the disclosure of the information required
pursuant to Rule 15Ga-2, resulting in an industry-wide one-time hour
burden of approximately 27,000 hours.\1234\ The Commission further
believes that this work would be done internally.
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\1232\ As discussed above in Section IV.D.9, although issuers
and underwriters likely will seek to obtain representations from
NRSROs engaged to produce a credit rating for Exchange Act-ABS that
the NRSRO will publicly disclose the findings and conclusions of any
third-party due diligence report obtained by the issuer or
underwriter with the publication of the credit rating five business
days prior to the first sale in the offering in an information
disclosure form generated pursuant to proposed new paragraph (a)(1)
of Rule 17g-7, thus removing the need for the issuer or underwriter
to do so. Consequently, the PRA burden for issuers and underwriters
may be reduced substantially. However, to be conservative, the
Commission preliminarily allocates the PRA burden for complying with
proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-15G
to the issuers and underwriters. The Commission also is proposing to
permit issuers of municipal Exchange Act-ABS, or underwriters in
such offerings, to provide the information required by Form ABS-15G
on EMMA, which would also limit the PRA burden on issuers and
underwriters of municipal Exchange Act-ABS subject to the proposed
rule.
\1233\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4506 (Jan. 26, 2011).
\1234\ 270 unique securitizers x 100 hours = 27,000 hours. This
estimate is based on the Commission's estimate for the amount of
time it would take a securitizer to set up a system to make the
disclosures required by Form ABS-15G as originally adopted by the
Commission. See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011). The Commission,
however, believes that the hour burden for amending existing Form
ABS-15G processes and protocols will be significantly lower than the
estimate of 850 hours used to initially develop those processes and
protocols.
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As discussed above in Section IV.D.9 of this release with respect
to the PRA, the Commission has preliminarily based its estimate of the
annual hour burden for preparing and furnishing Form ABS-15G on an
estimate of the total number of Exchange Act-ABS offerings per year. In
the adopting release for Rule 17g-7, the Commission estimated that
there would be an average of approximately 2,067 Exchange Act-ABS
offerings per year.\1235\ The Commission preliminarily estimates that
an issuer or underwriter would spend an average of approximately one
hour completing and submitting each Form ABS-15G for purpose of meeting
the requirement in Rule 15Ga-2. The Commission bases this preliminary
estimate on the fact that the information that would be required to be
included in Form ABS-15G pursuant to proposed new Rule 15Ga-2 could be
drawn directly from the due diligence reports the Commission expects
providers of third-party due diligence services to generate with
respect to their performance of due diligence services. Therefore, the
Commission preliminarily estimates that the industry-wide annual hour
burden resulting from proposed new Rule 15Ga-2 and the amendments to
Form ABS-15G would be approximately 2,067 hours.\1236\ The Commission
believes that this work would be done internally.
---------------------------------------------------------------------------
\1235\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). As noted above,
issuers, underwriters, and NRSROs may not use providers of third-
party due diligence services with respect to every issuance of
Exchange Act-ABS. For example, as discussed in Section II.H of this
release, the Commission preliminarily believes that providers of
third-party due diligence services are used primarily for RMBS
transactions. However, the Commission's estimate uses the total
number of estimated Exchange Act-ABS offerings (as opposed to a
lesser amount based on an estimate of RMBS offerings) because the
use of providers of third-party due diligence services may migrate
to other types of Exchange Act-ABS. This also makes the Commission's
estimates more conservative.
\1236\ 2,067 Exchange Act-ABS transactions x 1 hour = 2,067
hours.
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The Commission preliminarily believes any incremental cost
resulting from the amendments would not impact competition or impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new Rule 15Ga-2 and the proposed
amendments to Form ABS-15G.
J. Third-Party Due Diligence for Asset-Backed Securities
Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new paragraph (s)(4).\1237\ The Commission is
proposing new Rule 17g-10 and new Form ABS Due Diligence-15E to
implement rulemaking mandated in Sections 15E(s)(4)(B) and (C) of the
Exchange Act.\1238\ Proposed new Rule 17g-10 would contain three
paragraphs: (a), (b)
[[Page 33526]]
and (c).\1239\ Proposed paragraph (a) would provide that the written
certification of a provider of third-party due diligence services
required pursuant to Section 15E(s)(4)(B) of the Exchange Act must be
made on Form ABS Due Diligence-15E.\1240\ Proposed paragraph (b) of new
Rule 17g-10 would provide that the written certification must be signed
by an individual who is duly authorized by the person providing the
third-party due diligence services to make such a certification.\1241\
Proposed paragraph (c) of new Rule 17g-10 would contain four
definitions to be used for the purposes of Section 15E(s)(4)(B) and
Rule 17g-10; namely, a definition of ``due diligence services,'' \1242\
``issuer,'' \1243\ ``originator,'' \1244\ and ``securitizer.'' \1245\
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\1237\ See Public Law 111-203 Sec. 932(a)(8) and 15 U.S.C. 78o-
7(s)(4).
\1238\ See proposed new Rule 17g-10, and proposed new Form ABS
Due Diligence-15E; see also Sections II.H.2 and II.H.3 of this
release for a more detailed discussion of this proposal.
\1239\ See proposed paragraphs (a), (b) and (c) of Rule 17g-10
see also Sections II.H.2 of this release for a more detailed
discussion of this proposal.
\1240\ See proposed paragraph (a) of new Rule 17g-10.
\1241\ See proposed paragraph (b) of Rule 17g-10.
\1242\ See proposed paragraph (c)(1) of new Rule 17g-10.
\1243\ See proposed paragraph (c)(2) of new Rule 17g-10.
\1244\ See proposed paragraph (c)(3) of new Rule 17g-10.
\1245\ See proposed paragraph (c)(4) of new Rule 17g-10.
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Proposed Form ABS Due Diligence-15E would contain five line items
identifying information the provider of third-party due diligence
services would need to provide in the form.\1246\ It also would contain
a signature line with a corresponding representation.\1247\ Item 1
would elicit the identity and address of the provider of third-party
due diligence services.\1248\ Item 2 would elicit the identity and
address of the issuer, underwriter, or NRSRO that employed the provider
of third-party due diligence services.\1249\ Item 3 would instruct the
provider of third-party due diligence services to identify each NRSRO
whose published criteria for performing due diligence the provider of
third-party due diligence services satisfied in performing the due
diligence review.\1250\ Item 4 would require the provider of third-
party due diligence services to describe the scope and manner of the
due diligence performed.\1251\ Item 5 would require the provider of
third-party due diligence services to describe the findings and
conclusions resulting from the review.\1252\
---------------------------------------------------------------------------
\1246\ See proposed new Form ABS Due Diligence-15E; see also
Section II.H.3 of this release for a more detailed discussion of
this proposal.
\1247\ See proposed new Form ABS Due Diligence-15E.
\1248\ See Item 1 to proposed Form ABS Due Diligence-15E.
\1249\ See Item 2 to proposed Form ABS Due Diligence-15E.
\1250\ See Item 3 to proposed Form ABS Due Diligence 15E.
\1251\ See Item 4 to proposed Form ABS Due Diligence 15E.
\1252\ See Item 5 to proposed Form ABS Due Diligence 15E.
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1. Benefits
The proposed rulemaking would be designed to promote a thorough
review by the provider of third-party due diligence services of data,
documentation, and other relevant information necessary for an NRSRO to
provide an accurate credit rating.\1253\ The Commission also
preliminarily believes that, in combination with the proposed
requirement in proposed new paragraph (a)(2) of Rule 17g-7 that the
NRSRO disclose the certifications, the proposed rulemaking would allow
the public to determine the adequacy and level of due diligence
services provided by a third party.
---------------------------------------------------------------------------
\1253\ See 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------
The Commission preliminarily believes that the proposed
implementation of Section 15E(s)(4)(C) of the Exchange Act as mandated
by the Dodd-Frank Act would promote an efficient process for NRSROs by
establishing a standardized format for the certification and providing
clarity through the definition of ``due diligence services'' as to when
the requirement was triggered.
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to proposed new Rule
17g-10 and new Form ABS Due Diligence-15E would impose incremental
costs. However, the Commission preliminarily estimates that the costs
discussed below resulting from proposed new Rule 17g-10 and new Form
ABS Due Diligence-15E would be attributable largely to the rulemaking
mandated by Dodd-Frank Act \1254\ and that the incremental costs would
be minimal.
---------------------------------------------------------------------------
\1254\ Compare 15 U.S.C. 78o-7(s)(4)(B) and (C), with proposed
new Rule 17g-10 and proposed new Form ABS Due Diligence-15E.
---------------------------------------------------------------------------
As discussed above in Section IV.D.8 of this release with respect
to the PRA, the Commission preliminarily estimates that the proposed
new rule and form would result in one-time hour burdens for providers
of third-party due diligence services to develop processes and
protocols to provide the required information in new Form ABS Due
Diligence-15E and submit the certifications to NRSROs. The Commission
preliminarily estimates that there are approximately 10 firms that
provide, or would begin providing, third-party ``due diligence
services'' to issuers and underwriters of Exchange Act-ABS as the term
``due diligence services'' would be defined in paragraph (a) of
proposed new Rule 17g-10. The Commission preliminarily estimates that
each of these providers of third-party due diligence services would
spend approximately 300 hours to develop these processes and protocols,
resulting in a one-time industry-wide burden of 3,000 hours.\1255\ In
addition, the Commission preliminarily allocates 75% of these burden
hours (2,250 hours) to internal burden and the remaining 25% (750
hours) to external burden to hire outside attorneys to provide legal
advice on the requirements of new Rule 17g-10 and Form ABS Due
Diligence-15E.\1256\ The Commission, therefore, preliminarily estimates
that the average one-time cost to each provider third-party due
diligence services would be $91,425, resulting in an industry-wide one-
time cost of $914,250.\1257\
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\1255\ 10 Providers of third-party due diligence services x 300
hours = 3,000 hours. This estimate is based on the Commission's
estimate for the amount of time it would take a securitizer to set
up a system to make the disclosures required by Form ABS-15G as
originally adopted by the Commission. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan.
26, 2011). The Commission, however, reduces the hour estimate of 850
hours originally used for Form ABS-15G by approximately two-thirds
because information required to provided in proposed new Form ABS
Due Diligence-15E is substantially less detailed and complex than
the information required in Form ABS-15G as initially adopted by the
Commission.
\1256\ 3,000 hours x 0.75 = 2,250 hours; 3,000 hours x 0.25 =
750 hours.
\1257\ 2,250 hours x $273 = $614,250; 750 hours x $400 =
$300,000; $614,250 + $300,000 = $914,250; $914,250/10 providers of
third-party due diligence services = $91,250. The $273 per hour
figure is based on the rate for compliance managers from SIFMA's
Management & Professional Earnings in the Securities Industry 2010,
modified by Commission staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead. The $400 figure is based on the Commission's
estimate of $400 per hour to engage an outside attorney. See
Proposed Rules for Nationally Recognized Statistical Rating
Organizations, 74 FR 63889 (Dec. 4, 2009).
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With respect to the annual cost, the Commission preliminarily
believes that the estimate should be based on the number of issuances
per year of Exchange Act-ABS, since the requirement to produce the
certification and provide it to NRSROs would be triggered when an
issuer, underwriter, or NRSRO hires a provider of third-party due
diligence services with respect to such transactions.\1258\ In the
adopting release for Rule 17g-7, the
[[Page 33527]]
Commission estimated there would be an average of approximately 2,067
Exchange Act-ABS offerings per year.\1259\ In addition, the Commission
preliminarily estimates that a provider of third-party due diligence
services would spend approximately 30 minutes completing and submitting
Form ABS Due Diligence-15E. The Commission bases this preliminary
estimate on the fact that first three Items in the form require basic
information and the fourth Item (the due diligence performed) and the
fifth Item (the findings and conclusions of the review) could be drawn
directly from the due diligence reports the Commission expects
providers of third-party due diligence services generate with respect
to their performance of due diligence services. Therefore, the
Commission preliminarily estimates that the industry-wide annual hour
burden resulting from proposed new Rule 17g-10 and Form ABS Due
Diligence-15E would be approximately 1,034 hours.\1260\ The Commission
believes that completing and submitting Form ABS Due Diligence-15E
would be done internally.
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\1258\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), and proposed new
Rule 17g-10.
\1259\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). The Commission
notes that issuers, underwriters, and NRSROs may not use providers
of third-party due diligence services with respect to every issuance
of Exchange Act-ABS. For example, as discussed in Section II.H of
this release, the Commission preliminarily believes that providers
of third-party due diligence services are used primarily for RMBS
transactions. However, the Commission's estimate uses the total
number of estimated Exchange Act-ABS offerings (as opposed to a
lesser amount based on an estimate of RMBS offerings) because the
use of providers of third-party due diligence services may migrate
to other types of Exchange Act-ABS. This also makes the Commission's
estimates more conservative.
\1260\ 2,067 Exchange Act-ABS offerings x 30 minutes = 1,034
hours.
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The Commission preliminarily believes any incremental cost
resulting from the amendments would not impact competition or impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new Rule 17g-10 and new Form ABS Due
Diligence-15E.
K. Standards of Training, Experience, and Competence
Section 936 of the Dodd-Frank Act provides that the Commission
shall issue rules that are reasonably designed to ensure that any
person employed by an NRSRO to perform credit ratings: (1) Meets
standards of training, experience, and competence necessary to produce
accurate ratings for the categories of issuers whose securities the
person rates; \1261\ and (2) is tested for knowledge of the credit
rating process.\1262\ The Commission proposes to implement Section 936
by proposing new Rule 17g-9 and amending Rule 17g-2.\1263\
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\1261\ See Public Law 111-203 Sec. 936(1).
\1262\ See Public Law 111-203 Sec. 936(2).
\1263\ See proposed new Rule 17g-9 and proposed new paragraph
(b)(15) of Rule 17g-2.
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Proposed paragraph (a) of new Rule 17g-9 would require an NRSRO to
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings that are reasonably designed to achieve the objective
that such individuals produce accurate credit ratings in the classes
and subclasses of credit ratings for which the NRSRO is
registered.\1264\
---------------------------------------------------------------------------
\1264\ See proposed paragraph (a) of new Rule 17g-9; see also
Section II.I.1.a of this release for a more detailed discussion of
this proposal.
---------------------------------------------------------------------------
Proposed paragraph (b) would identify factors the NRSRO must
consider when designing the standards.\1265\ Specifically, the NRSRO
would need to consider:
---------------------------------------------------------------------------
\1265\ See proposed paragraph (b) of new Rule 17g-9; see also
Section II.I.1.b of this release for a more detailed discussion of
this proposal.
---------------------------------------------------------------------------
If the credit rating procedures and methodologies used by
the individual involve qualitative analysis, the knowledge necessary to
effectively evaluate and process the data relevant to the
creditworthiness of the obligor being rated or the issuer of the
securities or money market instruments being rated;
If the credit rating procedures and methodologies used by
the individual involve quantitative analysis, the technical expertise
necessary to understand any models and model inputs that are a part of
the procedures and methodologies;
The classes and subclasses of credit ratings for which the
individual participates in determining credit ratings and the factors
relevant to such classes and subclasses, including the geographic
location, sector, industry, regulatory and legal framework, and
underlying assets, applicable to the obligors or issuers in the classes
and subclasses; and
The complexity of the obligors, securities, or money
market instruments being rated by the individuals.
Proposed paragraph (c) of new Rule 17g-9 would prescribe two
requirements that an NRSRO must incorporate into its standards of
training, experience, and competence.\1266\ Proposed paragraph (c)(1)
of new Rule 17g-9 would provide that the standards of training,
experience, and competence must include a requirement for periodic
testing of the individuals employed by the NRSRO to determine credit
ratings on their knowledge of the procedures and methodologies used by
the NRSRO to determine credit ratings in the classes or subclasses of
credit ratings for which the individual is responsible for determining
credit ratings.\1267\ Proposed paragraph (c)(2) of new Rule 17g-9 would
provide that the standards of training, experience, and competence must
include a requirement that at least one individual with three years or
more experience in performing credit analysis participates in the
determination of a credit rating.\1268\
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\1266\ See proposed paragraphs (c)(1) and (2) of new Rule 17g-9;
see also Section II.I.1.c of this release for a more detailed
discussion of this proposal.
\1267\ See proposed paragraph (c)(1) of new Rule 17g-9.
\1268\ See proposed paragraph (c)(2) of new Rule 17g-9.
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In addition, the Commission proposes adding new paragraph (b)(15)
to Rule 17g-2 to identify the standards of training, experience, and
competence the NRSRO must establish, maintain, enforce, and document
pursuant to proposed new Rule 17g-9 as a record that must be
retained.\1269\ As a result, the procedures would be subject to the
record retention and production requirements in paragraphs (c) through
(f) of Rule 17g-2.\1270\
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\1269\ See proposed new paragraph (b)(15) to Rule 17g-2.
\1270\ See 17 CFR 240.17g-2; see also Section II.I.2 of this
release for a more detailed discussion of this proposal.
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1. Benefits
The Commission is proposing to implement rulemaking mandated by
Section 936 of the Dodd-Frank Act through proposed new Rule 17g-9. The
proposed rule would be designed to achieve the objectives in Section
936 that any person employed by an NRSRO to perform credit ratings: (1)
Meets standards of training, experience, and competence necessary to
produce accurate ratings for the categories of issuers whose securities
the person rates; \1271\ and (2) is tested for knowledge of the credit
rating process.\1272\ The Commission preliminarily believes that the
proposed new rule could promote the integrity of the ratings process to
the benefit of
[[Page 33528]]
investors and other users of credit ratings.
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\1271\ See Public Law 111-203 Sec. 936(1).
\1272\ See Public Law 111-203 Sec. 936(2).
---------------------------------------------------------------------------
Paragraph (a) of proposed new Rule 17g-9 would require the NRSRO to
design its own standards but provide that they must be reasonably
designed to achieve the common objective that individuals employed by
the NRSRO to determine credit ratings produce accurate credit ratings
in the classes of credit ratings for which the NRSRO is registered.
This could benefit NRSROs by providing flexibility to allow each NRSRO
to customize the standards according to its unique procedures and
methodologies for determining credit ratings and its size.
Paragraph (b) of proposed new Rule 17g-9 would identify factors the
NRSRO must consider when designing the standards.\1273\ This would
provide guidance to NRSROs about the Commission's expectations for the
design of the standards of training, experience, and competence. It
also could serve an investor protection function by providing
benchmarks that Commission examiners could use to evaluate whether a
given NRSRO's standards are reasonably designed to meet the objective
that individuals employed by the NRSRO to determine credit ratings
produce accurate credit ratings in the classes of credit ratings for
which the NRSRO is registered.
---------------------------------------------------------------------------
\1273\ See proposed paragraph (b) of new Rule 17g-9.
---------------------------------------------------------------------------
Paragraph (c)(1) of proposed new Rule 17g-9 would provide that the
standards of training, experience, and competence must include a
requirement for periodic testing of the individuals employed by the
NRSRO to determine credit ratings on their knowledge of the procedures
and methodologies used by the NRSRO to determine credit ratings in the
classes or subclasses of credit ratings for which the individual
participates in determining credit ratings.\1274\ The rule could
benefit NRSROs by allowing each NRSRO to establish the frequency and
manner of testing its analysts. These considerations may depend on the
number of analysts the NRSRO employs, the complexity of the products
that are being rated, and the varying levels of experience of the
analysts.
---------------------------------------------------------------------------
\1274\ Id.
---------------------------------------------------------------------------
Paragraph (c)(2) of proposed new Rule 17g-9 would provide that the
standards of training, experience, and competence must include a
requirement that at least one individual with three years or more
experience in performing credit analysis participates in the
determination of a credit rating.\1275\ This would establish a minimum
requirement that someone with experience performing credit analysis is
involved in determining the credit rating.
---------------------------------------------------------------------------
\1275\ Id.
---------------------------------------------------------------------------
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to proposed new Rule
17g-9 would impose incremental costs. However, the Commission
preliminarily estimates that the costs discussed below resulting from
proposed new Rule 17g-9 would be attributable largely to the rulemaking
mandated by Dodd-Frank Act and that the incremental costs would be
minimal.\1276\
---------------------------------------------------------------------------
\1276\ Compare Public Law 111-203 Sec. 936 with proposed new
Rule 17g-9.
---------------------------------------------------------------------------
As discussed above in Section IV.D.7 of this release with respect
to the PRA, the Commission preliminary estimates that an NRSRO would
incur one-time and annual hour burdens as a result of proposed new Rule
17g-9. Also, the Commission preliminarily estimates that the degree of
the one-time and annual hour burdens resulting from proposed Rule 17g-9
would depend on the number of credit analysts an NRSRO employs as well
as the range and complexity of the obligors, securities, and money
market instruments it rates. Thus, hour burdens in the PRA and the
costs estimated below are based on the number of credit rating analysts
employed by the NRSROs.
As discussed above in Section IV.D.7 of this release with respect
to the PRA, the Commission preliminarily estimates that the one-time
hour burden to establish the standards that would be required under
proposed new Rule 17g-9 would be approximately 5 hours per credit
analyst. Based on the 2009 annual certifications, the Commission
estimates that the NRSROs currently employ approximately 3,520 credit
analysts,\1277\ resulting in an industry-wide one-time hour burden of
17,600 hours.\1278\ In addition, the Commission estimates that 75% of
the burden hours (13,200 hours) would be internal and the remaining 25%
(4,400 hours) would be external to hire outside professionals to assist
in setting up training programs.\1279\ Consequently, the Commission
preliminarily estimates that the industry-wide one-time internal cost
would be approximately $3,603,000.\1280\ With respect to the external
costs associated with the proposal, the Commission preliminarily
estimates that outside professionals would charge approximately $400
per hour.\1281\ Consequently, the Commission preliminarily estimates
that the industry-wide external cost would be approximately
$1,760,000.\1282\ The Commission, therefore, preliminarily estimates
that the total industry-wide one-time cost of proposed Rule 17g-9 would
be approximately $5,363,000.\1283\ The Commission preliminarily
estimates that this cost would be allocated to the 10 NRSROs based on
the number of credit analysts each employs.
---------------------------------------------------------------------------
\1277\ See Figure 3.
\1278\ 3,520 credit analysts x 5 hours = 17,600 hours.
\1279\ 17,600 hours x 0.75 = 13,200 hours; 17,600 hours x 0.25 =
4,400 hours.
\1280\ 13,200 hours x $273 = $3,603,600. The $273 per hour
figure is based on the rate for compliance managers from SIFMA's
Management & Professional Earnings in the Securities Industry 2010,
modified by Commission staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
\1281\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an
estimate of $400 an hour engage outside professionals) and Proposed
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR 63889 (Dec. 4, 2009) (providing an estimate of $400 per hour to
engage an outside attorney).
\1282\ 4,400 hours x $400 = $1,760,000.
\1283\ $1,760,000 + $3,603,000 = $5,363,000.
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As discussed above in Section IV.D.7 of this release with respect
to the PRA, the Commission believes that the annual cost to comply with
proposed new Rule 17g-9 would be less than the one-time cost since
NRSROs already would have established the standards of training,
experience, and competence for the individuals they employ to determine
credit ratings and, therefore, only would need to update them. The
Commission preliminarily estimates that reviewing and updating the
standards as appropriate would take approximately 1 hour per credit
analyst, resulting in an annual industry-wide hour burden of
approximately 3,520 hours.\1284\ The Commission estimates that
approximately 75% of these burden hours (2,640 hours) would be internal
and the remaining 25% (880 hours) would be external to hire outside
professionals to assist in updating the training programs.
Consequently, the Commission preliminarily estimates that the industry-
wide annual internal costs would be approximately $720,720.\1285\ With
respect to the external costs, the Commission preliminarily estimates
that outside
[[Page 33529]]
professionals would charge approximately $400 per hour.\1286\
Consequently, the Commission preliminarily estimates that the annual
industry-wide external costs would be approximately $352,000.\1287\ The
Commission, therefore, preliminarily estimates that the total industry-
wide annual cost would be approximately $1,072,720.\1288\ The
Commission preliminarily estimates that this cost would be allocated to
the 10 NRSROs based on the number of credit analysts each employs.
---------------------------------------------------------------------------
\1284\ 3,520 credit analysts x 1 hour = 3,520 hours.
\1285\ 2,640 hours x $273 = $720,720. The $273 per hour figure
is based on the rate for compliance managers from SIFMA's Management
& Professional Earnings in the Securities Industry 2010, modified by
Commission staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
\1286\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an
estimate of $400 an hour engage outside professionals) and Proposed
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR 63889 (Dec. 4, 2009) (providing an estimate of $400 per hour to
engage an outside attorney).
\1287\ 880 hours x $400 = $352,000.
\1288\ $720,720 + $352,000 = $1,072,072.
---------------------------------------------------------------------------
The Commission acknowledges that the three-year analyst experience
requirement proposed in paragraph (c)(2) of proposed new Rule 17g-9
could impose a barrier to entry to becoming an NRSRO. It is possible
that this requirement, as well as the increased training standards in
general, could increase labor costs for NRSROs by increasing the
competition for credit analysts with the requisite amount of
experience. The Commission further understands that the effects could
likely be more pronounced with existing smaller NRSROs, as well as with
new NRSRO entrants, as these smaller firms would presumably be less
able to bear the costs. This could, in turn, decrease competition
amongst NRSROs. The Commission requests comment on this potential
effect of the proposed rulemaking.
The Commission preliminarily estimates that, although the costs
resulting from proposed new paragraph (b)(15) of new Rule 17g-2 would
be attributable to the Commission's discretionary rulemaking, those
incremental costs would be minimal. As discussed above in Section
IV.D.3 of this release with respect to the PRA, the Commission
preliminary believes that applying the recordkeeping requirements of
Rule 17g-2 to five new types of records would result in one-time and
annual hour burdens for NRSROs in connection with updating their record
retention policies and procedures to retain these new records. As
discussed above in Section IV.D.3 of this release with respect to the
PRA, based on staff experience, the Commission preliminarily estimates
that the additional one-time hour burden for each NRSRO to update its
record retention policies and procedures for the new records that would
need to be retained under proposed new paragraphs (a)(9), (b)(12),
(b)(13), (b)(14), and (b)(15) of Rule 17g-2 would be 20 hours. Based on
that estimate, the Commission preliminary believes that the average
one-time hour burden attributable to proposed new paragraph (b)(15) of
Rule 17g-2 would be approximately 4 hours per NRSRO, resulting in an
industry-wide hour burden of approximately 40 hours.\1289\ As discussed
above in Section IV.D.3 of this release with respect to the PRA, the
Commission preliminarily estimates it would take an average of
approximately one hour each year for an NRSRO to retain updated
versions of the information required pursuant to proposed new paragraph
(b)(15) of Rule 17g-2, resulting in an industry-wide hour burden of 10
hours.\1290\
---------------------------------------------------------------------------
\1289\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4
hours = 40 hours.
\1290\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new Rule 17g-9 and new paragraph
(b)(15) of Rule 17g-2.
L. Universal Rating Symbols
Section 938(a) of the Dodd-Frank Act provides that the Commission
shall require, by rule, each NRSRO to establish, maintain, and enforce
written policies and procedures that: (1) Assess the probability that
an issuer of a security or money market instrument will default, fail
to make timely payments, or otherwise not make payments to investors in
accordance with the terms of the security or money market instrument;
\1291\ (2) clearly define and disclose the meaning of any symbol used
by the NRSRO to denote a credit rating; \1292\ and (3) apply any symbol
described in item (2) in a manner that is consistent for all types of
securities and money market instruments for which the symbol is
used.\1293\
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\1291\ See Public Law 111-203 Sec. 938(a)(1).
\1292\ See Public Law 111-203 Sec. 938(a)(2).
\1293\ See Public Law 111-203 Sec. 938(a)(3).
---------------------------------------------------------------------------
The Commission proposes to implement this rulemaking mandate
through paragraph (b) of proposed new Rule 17g-8. In particular,
paragraph (b)(1) of proposed new Rule 17g-8 would require the NRSRO to
have policies and procedures reasonably designed to assess the
probability that an issuer of a security or money market instrument
will default, fail to make timely payments, or otherwise not make
payments to investors in accordance with the terms of the security or
money market instrument.\1294\ Paragraph (b)(2) of proposed new Rule
17g-8 would require the NRSRO to have policies and procedures
reasonably designed to clearly define the meaning of each symbol,
number, or score in the rating scale used by the NRSRO to denote a
credit rating category and notches within a category for each class and
subclass of credit ratings for which the NRSRO is registered and to
include such definitions in Exhibit 1 to Form NRSRO.\1295\ Paragraph
(b)(3) of proposed new Rule 17g-8 would require the NRSRO to have
policies and procedures reasonably designed to apply any symbol,
number, or score defined pursuant to paragraph (b)(2) of new Rule 17g-8
in a manner that is consistent for all types of obligors, securities,
and money market instruments for which the symbol, number, or score is
used.\1296\
---------------------------------------------------------------------------
\1294\ See proposed paragraph (b)(1) of new Rule 17g-8.
\1295\ See proposed paragraph (b)(2) of new Rule 17g-8.
\1296\ See proposed paragraph (b)(1) of new Rule 17g-8.
---------------------------------------------------------------------------
The Commission also is proposing that the policies and procedures
required pursuant to proposed paragraph (b) of new Rule 17g-8 be
subject to the record retention and production requirements of Rule
17g-2.\1297\ Consequently, the Commission proposes adding new paragraph
(b)(14) to Rule 17g-2 to identify the policies and procedures an NRSRO
is required to establish, maintain, enforce, and document pursuant to
proposed paragraph (b) of new Rule 17g-8 as a record that must be
retained.\1298\
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\1297\ 17 CFR 240.17g-2.
\1298\ See proposed new paragraph (b)(13) to Rule 17g-2; see
also Section II.F.2 of this release for a more detailed discussion
of this proposal.
---------------------------------------------------------------------------
1. Benefits
The proposal could facilitate investor understanding of credit
ratings by promoting a consistent application of rating methodologies
to particular credit ratings, at least within a class of credit
ratings. In addition, the proposed requirement for NRSROs to disclose
the meaning of credit rating symbols, numbers, and scores could benefit
investors and other users of credit ratings by promoting a better
understanding of credit rating terminology and allowing them to better
compare the various ratings issued by a single NRSRO.
[[Page 33530]]
2. Costs
The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to proposed paragraph
(b) of new Rule 17g-8 would impose incremental costs. However, the
Commission preliminarily estimates that the costs discussed below
resulting from proposed paragraph (b) of new Rule 17g-8 would be
attributable largely to the rulemaking mandated by Dodd-Frank Act
\1299\ and that the incremental costs would be minimal.
---------------------------------------------------------------------------
\1299\ Compare Public Law 111-203 Sec. 938, with proposed new
Rule 17g-9.
---------------------------------------------------------------------------
As discussed in above in Section IV.D.6 with respect to the PRA,
the Commission preliminarily estimates each NRSRO would spend an
average of approximately 200 hours establishing the policies and
procedures that would be required under paragraph (b) of proposed new
Rule 17g-8, resulting in an industry-wide one-time hour burden of 2,000
hours.\1300\ In addition, as discussed in above in Section IV.D.6 with
respect to the PRA, the Commission preliminarily estimates an NRSRO
would spend an average of approximately 50 hours annually reviewing and
updating those policies and procedures, resulting in an industry-wide
annual burden of 500 hours.\1301\
---------------------------------------------------------------------------
\1300\ 10 NRSROs x 200 hours = 2000 hours.
\1301\ 10 NRSROs x 50 hours = 500 hours.
---------------------------------------------------------------------------
The Commission preliminarily estimates that, although the costs
resulting from proposed new paragraph (b)(14) of new Rule 17g-2 would
be attributable to the Commission's discretionary rulemaking, those
incremental costs would be minimal. As discussed above in Section
IV.D.3 of this release with respect to the PRA, the Commission
preliminary believes applying the recordkeeping requirements of Rule
17g-2 to five new types of records would result in one-time and annual
hour burdens for NRSROs in connection with updating their record
retention policies and procedures to account for and retain these new
records. As discussed above in Section IV.D.3 of this release with
respect to the PRA, based on staff experience, the Commission
preliminarily estimates that the additional one-time hour burden for
each NRSRO to update its record retention policies and procedures to
account for the new records that would need to be retained under
proposed new paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and (b)(15)
of Rule 17g-2 would be 20 hours. Based on that estimate, the Commission
preliminary believes that the average one-time hour burden attributable
to proposed new paragraph (b)(14) of Rule 17g-2 would be approximately
4 hours per NRSRO, resulting in an industry-wide hour burden of
approximately 40 hours.\1302\
---------------------------------------------------------------------------
\1302\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4
hours = 40 hours.
---------------------------------------------------------------------------
As discussed above in Section IV.D.3 of this release with respect
to the PRA, the Commission preliminarily estimates it would take an
average of approximately one hour each year for an NRSRO to retain
updated versions of the information required pursuant to proposed new
paragraph (b)(14) of Rule 17g-2, resulting in an industry-wide hour
burden of 10 hours.\1303\
---------------------------------------------------------------------------
\1303\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------
The Commission preliminarily believes any incremental cost
resulting from the amendments would not impact competition or impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed paragraph (b) of new Rule 17g-8.
M. Annual Report of Designated Compliance Officer
Section 932(a)(5) of the Dodd-Frank Act amended Section 15E(j) of
the Exchange Act to re-designate paragraph (j) as paragraph (j)(1) and
to add new paragraphs (j)(2) through (j)(5).\1304\ Section 15E(j)(1) of
the Exchange Act contains a self-executing provision that an NRSRO
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,\1305\ and for compliance with the
securities laws and the rules and regulations thereunder, including
those promulgated by the Commission under Section 15E of the Exchange
Act.\1306\ Section 15E(j)(5)(A) of the Exchange Act requires the
designated compliance officer to submit to the NRSRO an annual report
on the compliance of the NRSRO with the securities laws and the
policies and procedures of the NRSRO that includes: (1) A description
of any material changes to the code of ethics and conflict of interest
policies of the NRSRO; and (2) a certification that the report is
accurate and complete.\1307\ Section 15E(j)(5)(B) of the Exchange Act
provides that the NRSRO shall file the report required pursuant to
Section 15E(j)(5)(A) together with the financial report that is
required to be submitted to the Commission under Section 15E of the
Exchange Act.\1308\
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\1304\ See 15 U.S.C. 78o-7(j)(1) through (5).
\1305\ See 15 U.S.C 780-7(g) and (h).
\1306\ See 15 U.S.C. 78o-7(j)(1).
\1307\ See 15 U.S.C. 78o-7(j)(5)(A).
\1308\ See 15 U.S.C. 78o-7(j)(5)(B).
---------------------------------------------------------------------------
As discussed above in Section II.A.3 of this release, Rule 17g-3
requires an NRSRO to submit five or, in certain cases, six separate
reports not more than 90 days after the end of the NRSRO's fiscal year
and identifies the reports to be submitted to the Commission.\1309\ In
order to further clarify the self-executing requirement in Section
15E(j)(5)(B) of the Exchange Act, the Commission is proposing to amend
Rule 17g-3 to identify the annual report of the designated compliance
officer as one of the reports that must be submitted to the
Commission.\1310\ Specifically, the Commission proposes adding a new
paragraph (a)(8) to Rule 17g-3 to identify the report on the compliance
of the NRSRO with the securities laws and the policies and procedures
of the NRSRO required pursuant to Section 15E(j)(5)(B) of the Exchange
Act.\1311\ The Commission preliminarily estimates that the costs and
benefits of this proposal are entirely attributable to the mandates of
the Dodd-Frank Act, and are not a result of decisions made by the
Commission to fulfill the mandates of the Dodd-Frank Act within its
permitted discretion. Proposed new paragraph (a)(8) to Rule 17g-3 is
intended only to clarify how an NRSRO must adhere to the self-executing
provisions in Section 15E(j)(5)(B) of the Exchange Act and would result
in no additional costs. Moreover, the Commission is not proposing to
add any additional requirements with respect to the filing other than
the proposed requirement that this report and the other annual reports
be filed through the EDGAR system, which is addressed separately below.
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\1309\ See 17 CFR 240.17g-3(a)(1)-(6). As discussed above in
Section II.A.3 of this release, the Commission is proposing that
Rule 17g-3 be amended to add a new paragraph (a)(7) to implement
Section 15E(c)(3)(B) of the Exchange Act by requiring an NRSRO to
file the annual internal controls report. See 15 U.S.C. 78o-
7(c)(3)(B).
\1310\ See proposed new paragraph (a)(8) of Rule 17g-3.
\1311\ Id.
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Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with proposed new paragraph (a)(8) to Rule 17g-3.
[[Page 33531]]
N. Electronic Submission of Form NRSRO and the Rule 17g-3 Annual
Reports
The Commission is proposing that certain Form NRSRO submissions and
all Rule 17g-3 annual report submissions be submitted to the Commission
using the EDGAR system. In order to implement this requirement, the
Commission is proposing amendments to Rule 101 of Regulation S-T to
require the electronic submission using the EDGAR system of Form NRSRO
pursuant to paragraphs (e), (f), and (g) of Rule 17g-1 and the annual
reports pursuant Rule 17g-3.\1312\ The Commission also is proposing to
amend Rule 201 of Regulation S-T, which governs temporary hardship
exemptions from electronic filing, to make this exemption unavailable
for NRSRO submissions.\1313\
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\1312\ See proposed amendment of Rule 101 of Regulation S-T (17
CFR 231.101); see also Section II.L of this release for a more
detailed discussion of this proposal.
\1313\ See proposed amendment of Rule 201 of Regulation S-T (17
CFR 231.201); see also Section II.L of this release for a more
detailed discussion of this proposal.
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1. Benefits
One of the primary goals of the EDGAR system since its inception is
to facilitate the rapid dissemination of financial and business
information in connection with filings the Commission receives.
Although paragraph (i) of Rule 17g-1 currently requires NRSROs to make
the public portions of their current Form NRSROs publicly available
within 10 business days after submission to the Commission, the
Commission believes that having all such information available
immediately upon submission in one location would make the information
more easily available and searchable to investors and other users of
credit ratings. Further, the Commission believes that submissions made
to the Commission are more valuable to investors and other users of
credit ratings if they are available in electronic form and that adding
the Form NRSRO submissions to the EDGAR database would provide a more
complete picture for the public. The Commission preliminarily estimates
that, as a result of the proposals, the EDGAR page of the Commission's
Web site,\1314\ in conjunction with the NRSRO page of the Commission's
Web site,\1315\ would be a comprehensive source from which to find most
public information submitted to the Commission, as well as other
information, related to NRSROs. The Commission preliminarily believes
that the electronic submission of Form NRSRO would benefit investors
and other users of credit ratings by increasing the efficiency of
retrieving and comparing NRSRO public submissions and enabling the
investors and other users of credit ratings to access information more
quickly.
---------------------------------------------------------------------------
\1314\ http://www.sec.gov/investor/pubs/edgarguide.htm.
\1315\ http://www.sec.gov/divisions/marketreg/ratingagency.htm.
---------------------------------------------------------------------------
In addition, while the Rule 17g-3 annual reports would not be made
public on EDGAR, having them submitted on EDGAR would assist the
Commission in its oversight of NRSROs. For example, Commission
examiners could easily retrieve the annual reports of a specific NRSRO
to prepare for an examination. Moreover, having these records submitted
and stored through EDGAR in a centralized location would assist the
Commission from a records management perspective by establishing a more
automated storage process and creating efficiencies in terms of
reducing the volume of paper submissions that must be manually
processed and stored.
Moreover, the Commission preliminarily believes that the electronic
submission of the Form NRSROs and the Rule 17g-3 annual reports would
benefit NRSROs. For example, NRSROs would avoid the uncertainties,
delay, and expense related to the manual delivery of paper submissions.
Further, NRSROs would benefit from no longer having to submit multiple
paper copies of these submissions to the Commission.
The Commission preliminarily believes that the proposed requirement
that Form NRSROs and Exhibits 1 through 9 and the Rule 17g-3 annual
reports be submitted through the EDGAR system would promote efficiency.
As noted above, the proposal would provide a central location for an
investor or other user of credit ratings to access the Forms and
Exhibits. It also would assist the Commission staff in storing and
accessing these records in furtherance of the Commission's NRSRO
oversight function. Furthermore, it would provide NRSROs with a more
efficient way to submit these forms and reports to the Commission.
2. Costs
The Commission preliminarily estimates that, although the
Commission's exercise of rulemaking discretion with respect to the
proposed amendments to Rules 101 and 201 of Regulation S-T, Rule 17g-1,
and Rule 17g-3 would impose incremental costs, those incremental costs
would be minimal.
As discussed in Section IV.D.1 of this release with respect to the
PRA, the Commission preliminarily estimates that each NRSRO would spend
an average of approximately 5 hours becoming familiar with the EDGAR
filing system and completing and submitting Form ID.\1316\ The
Commission preliminarily estimates that the annual cost attributable to
submitting the Form NRSROs and Rule 17g-3 annual reports through the
EDGAR system would be no greater than the annual costs attributable to
submitting them in paper form.
---------------------------------------------------------------------------
\1316\ An NRSRO would need to complete Form ID in order to be
eligible to submit documents using the EDGAR system. However,
completing Form ID is a simple process. The Commission has noted in
the past that the burden associated with Form ID is 15 minutes. See
Securities Exchange Act Release No. 57280 (Feb. 6, 2008), 73 FR
10592, 10610 (Feb. 27, 2008). Thus, the Commission preliminarily
estimates that the one-time hour burden per NRSRO associated with
the filing of Form ID would be 15 minutes, resulting in an industry-
wide burden of 1.5 hours.
---------------------------------------------------------------------------
The Commission preliminarily believes any incremental cost
resulting from the amendments would not impact competition or impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with the proposed amendments to Rules 101 and 201
of Regulation S-T, Rule 17g-1, and Rule 17g-3.
O. Other Amendments
The Commission is proposing additional amendments to several of the
NRSRO rules in response to amendments the Dodd-Frank Act made to
sections of the Exchange Act that authorize or otherwise are relevant
to these rules. The Commission preliminarily estimates that these
proposals would not result in any one-time or annual incremental costs
to NRSROs. Furthermore, the Commission preliminarily believes these
proposals would benefit NRSROs and Commission staff be making terms in
Commission rules applicable to NRSROs consistent with terms in Section
15E of the Exchange. This could promote greater clarity as to the
requirements in the rules and remove potential ambiguity caused by
inconsistent terms.
The Commission preliminarily believes that the proposals would
promote efficiency. As noted above, the proposals would be designed to
promote greater clarity as to the requirements in the rules and remove
potential
[[Page 33532]]
ambiguity caused by inconsistent terms. In addition, as discussed
above, the Commission preliminarily estimates that the proposals would
not result in any one-time or annual incremental costs to NRSROs and
would have substantial benefits. Consequently, the Commission
preliminarily believes that the proposals would not impact competition
or impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
1. Changing ``Furnish'' To ``File''
In accordance with the Dodd-Frank Act, the Commission is proposing
amending certain provisions of Rule 17g-1 and Rule 17g-3 to replace the
word ``furnish'' with the word ``file''.\1317\ The Commission also is
proposing to make conforming amendments to Form NRSRO and the
instructions for Form NRSRO.
---------------------------------------------------------------------------
\1317\ See Section II.M.1 of this release.
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Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with these proposed amendments, including whether
they would result in one-time or annual incremental costs to NRSROs.
2. Amended Definition of ``NRSRO''
The definition of ``nationally recognized statistical rating
organization'' in Section 3(a)(62) of the Exchange Act, prior to being
amended by the Dodd-Frank Act, included a condition in Section
3(a)(62)(A) that the entity ``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 under Section 15E''.\1318\
Section 932(b) of the Dodd-Frank Act struck subparagraph (A) of Section
3(a)(62).\1319\ Form NRSRO contains a definition of ``NRSRO'' that
tracks Section 3(a)(62) as originally enacted. The Commission proposes
amending this definition to conform it to Section 3(a)(62) as amended
by the Dodd-Frank Act.\1320\ The Commission does not believe these
proposals would result in any incremental costs to NRSROs.
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\1318\ See Section 3(a)(62)(A) of the Exchange Act (15 U.S.C.
78c(a)(62)(A)) added by the Rating Agency Act of 2006.
\1319\ The Dodd-Frank Act did not, however, amend Section
15E(a)(1)(C), which requires that the certifications from qualified
institutional buyers that are required to be submitted with an
application for registration as an NRSRO under Section 15E(a)(1)(B),
include a representation that the qualified institutional buyer
``has used the credit ratings of the applicant for at least the 3
years immediately preceding the date of the certification in the
subject category or categories of obligors.''
\1320\ See Section II.M.2 of this release.
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Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with these proposed amendments, including whether
they would result in one-time or annual incremental costs to NRSROs.
3. Definition of Asset-Backed Security
Section 941(a) of the Dodd-Frank Act amended Section 3 of the
Exchange Act to add Section 3(a)(77), which defines ``asset-backed
security.'' \1321\ In response, the Commission is proposing that
certain language in Exchange Act Rules 17g-2(a)(2)(iii); 17g-2(a)(7);
17g-5(a)(3); 17g-5(b)(9); 17g-6(a)(4); and Form NRSRO be amended to
reflect this new definition.\1322\ The Commission preliminarily
estimates that these proposals would result in no incremental costs to
NRSROs.
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\1321\ 15 U.S.C. 78c(a)(77).
\1322\ See Section II.M.3 of this release.
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Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with these proposed amendments, including whether
they would result in one-time or annual incremental costs to NRSROs.
4. Other Amendments to Form NRSRO
The Commission is proposing a number of additional amendments to
the Instructions to Form NRSRO to clarify certain requirements because
the instructions, as written, have created some confusion among NRSROs.
The Commission preliminarily estimates that these proposals would not
result in any one-time or annual incremental costs to NRSROs as they
would clarify existing requirements (not create new requirements).
Furthermore, the Commission preliminarily believes these proposals
would benefit NRSROs and Commission staff by addressing parts of the
instructions that have led to inconsistent interpretations among the
NRSROs as to the requirements.
The Commission preliminarily believes that the proposals would
promote efficiency. As noted above, the proposals would be designed to
promote greater clarity as to the requirements in the instructions. In
addition, as discussed above, the Commission preliminarily estimates
that the proposals would not result in any one-time or annual
incremental costs to NRSROs and would have substantial benefits.
Consequently, the Commission preliminarily believes that the proposals
would not impact competition or impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
a. Clarification With Respect to Items 6 and 7
The Commission is proposing amendments to Form NRSRO and the
Instructions for Form NRSRO to remove potential ambiguity as to how an
applicant and NRSRO must determine the approximate number of credit
ratings outstanding for the purposes of Items 6 and 7. In particular,
the Commission is proposing to amend the text in Items 6.A and 7.A of
Form NRSRO to clarify that an applicant or NRSRO must provide the
approximate number of obligors, securities, and money market
instruments in each class of credit ratings for which the applicant or
NRSRO has an outstanding credit rating.\1323\
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\1323\ See proposed amendments to the text in Items 6.A and 7.A
respectively.
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In addition, the Commission is proposing to amend Instruction H to
Form NRSRO (as it relates to Items 6.A and 7.A) in four ways. First, in
conformity with the proposed amendments to the text of Items 6.A and
7.A in the Form, the Instructions would be amended to provide that the
applicant or NRSRO must, for each class of credit ratings, provide in
the appropriate box the approximate number of obligors, securities, and
money market instruments in that class for which the applicant or NRSRO
presently has a credit rating outstanding as of the date of the
application (Item 6.A) or had a credit rating outstanding as of the end
of the most recently ended calendar year (Item 7.A).
Second, Instruction H would be amended to provide that the
applicant or NRSRO must treat as a separately rated security or money
market instrument each individually rated security and money market
instrument that, for example, is assigned a distinct CUSIP or other
unique identifier, has distinct credit enhancement features as compared
with other securities or money market instruments of the same issuer,
or has a different maturity date as compared with other securities or
money market instruments of the same issuer. This proposed instruction
would be designed to clarify that each security or money market
instrument of an issuer must be included in the count if it is assigned
a credit rating by the applicant or NRSRO.
Third, Instruction H would be amended to provide that the applicant
or NRSRO must not include an obligor,
[[Page 33533]]
security, or money market instrument in more than one class of credit
rating. In other words, the applicant or NRSRO cannot double count an
obligor, security, or money market instrument by including it in total
credit ratings outstanding for two or more classes. Fourth, Instruction
H would be amended to provide that the applicant or NRSRO must include
in the class of credit ratings described in Section 3(a)(62)(B)(iv) of
the Exchange Act (issuers of asset-backed securities) to the extent not
described in Section 3(a)(62)(B)(iv), any rated security or money
market instrument issued by an asset pool or as part of any asset-
backed securities transaction. As discussed above in Section II.M.3 of
this release, Section 3(a)(62)(B)(iv) contains a narrower definition of
``asset-backed security'' than the Commission uses for the purposes of
its NRSRO rules.\1324\
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\1324\ Compare 15 U.S.C. 78c(a)(62)(B)(iv) with: Instructions
for Exhibit 1 to Form NRSRO; paragraphs (a)(2)(iii), (a)(7), and
(b)(9) of Rule 17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs
(a)(3) and (b)(9) of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.
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Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with these proposed amendments, including whether
they would result in one-time or annual incremental costs to NRSROs.
b. Clarification With Respect to Exhibit 8
The Commission proposes to amend Instruction H to Form NRSRO as it
relates to Exhibit 8. Exhibit 8 requires an applicant and NRSRO to
provide the number of credit analysts it employs and the number of
credit analyst supervisors. The Commission is proposing two amendments
to the instructions for Exhibit 8. The first amendment would delete a
parenthesis in the instructions that provides that the applicant or
NRSRO should ``see definition below'' of the term ``credit analyst.''
There is no such definition. The second amendment would clarify that
the applicant or NRSRO, in providing the number of credit analysts,
should include the number of credit analyst supervisors. This would be
designed to ensure that the disclosures in Form NRSRO are comparable
across NRSROs by avoiding the situation in which some NRSROs include
credit analyst supervisors in the total number of credit analysts and
some NRSROs do not include credit analyst supervisors in that amount.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with these proposed amendments, including whether
they would result in one-time or annual incremental costs to NRSROs.
c. Clarification With Respect to Exhibits 10 through 13
The Commission proposes to amend Instruction H in several places to
add a ``Note'' instructing that after registration, Exhibits 10 through
13 are not required to be made publicly available by the NRSRO pursuant
to Rule 17g-1(i) and they should not be updated with the filing of the
annual certification. The ``Note'' further would instruct that similar
information is required in the annual reports that must be filed with
the Commission not more than 90 days after the end of each fiscal year
under Rule 17g-3.\1325\
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\1325\ See ``Notes'' proposed to be added to Instruction H to
Form NRSRO.
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The Commission preliminarily believes that none of these proposed
clarifications entail any changes to the existing requirements of the
Commission's rules, but instead merely explain more clearly what those
rules already require. Therefore, Commission does not attribute any
costs or benefits to these clarifications.
Request for Comment
The Commission requests comment on all aspects of the costs and
benefits associated with these proposed amendments, including whether
they would result in one-time or annual incremental costs to NRSROs.
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \1326\ the Commission must advise OMB as to
whether the proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in: (1) An annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (2)
a major increase in costs or prices for consumers or individual
industries; or (3) 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.
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\1326\ Public Law 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).
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The Commission requests comment on the potential impact of the
proposed amendments to existing rules and proposed new rules on the
economy on an annual basis, on the costs or prices for consumers or
individual industries, and on competition, investment or innovation.
Commenters are requested to provide empirical data and other factual
support for their view to the extent possible.
VII. Initial Regulatory Flexibility Analysis
The Commission has prepared this Initial Regulatory Flexibility
Analysis (IRFA) in accordance with Section 603(a) of the Regulatory
Flexibility Act (RFA).\1327\ This IRFA relates to the Commission's
proposed new requirements for NRSROs that would result from the
amendments to Rule 101 of Regulation S-T, Rule 201 of Regulation S-T,
Rule 17g-1, Rule 17g-2, Rule 17g-3, Rule 17g-5, Rule 17g-6, Rule 17g-7,
and Form NRSRO, and proposed new Rule 17g-8 and new Rule 17g-9. In
addition, the IRFA relates to the Commission's proposed new
requirements for providers of third-party due diligence services that
would result from new Rule 17g-10 and new Form ABS Due Diligence-15E.
Finally, this IRFA relates to the Commission's proposed new
requirements for issuers and underwriters of Exchange Act-ABS that
would result from the amendments to Rule 314 of Regulation S-T and Form
ABS-15G, and new Rule 15Ga-2.
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\1327\ See 5 U.S.C. 603(a).
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A. Reasons and Objectives
Section II of this release describes the reasons and objectives of
the proposed amendments to existing rules and proposed new rules. In
addition, Section IV.B of this release describes the intended use of
the collection of information requirements that would result from the
proposed amendments to existing rules and proposed new rules. Moreover,
as described in Section II of this release, these proposed amendments
and proposed new rules would implement rulemaking mandated in Title IX,
Subtitle C of the Dodd-Frank Act.\1328\ In Section 931 of Title IX,
Subtitle C of the Dodd-Frank Act, Congress made the following findings:
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\1328\ See Public Law 111-203 Sec. Sec. 931-939H.
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Because of the systemic importance of credit ratings and
the reliance placed on credit ratings by individual and institutional
investors and financial regulators, the activities and performances of
credit rating agencies, including NRSROs, are matters of national
public interest, as credit rating agencies are central to capital
formation, investor confidence, and the efficient
[[Page 33534]]
performance of the United States economy.\1329\
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\1329\ Public Law 111-203 Sec. 931(1).
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Credit rating agencies, including NRSROs, play a critical
``gatekeeper'' role in the debt market that is functionally similar to
that of securities analysts, who evaluate the quality of securities in
the equity market, and auditors, who review the financial statements of
firms. Such role justifies a similar level of public oversight and
accountability.\1330\
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\1330\ Public Law 111-203 Sec. 931(2).
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Because credit rating agencies perform evaluative and
analytical services on behalf of clients, much as other financial
``gatekeepers'' do, the activities of credit rating agencies are
fundamentally commercial in character and should be subject to the same
standards of liability and oversight as apply to auditors, securities
analysts, and investment bankers.\1331\
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\1331\ Public Law 111-203 Sec. 931(3).
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In certain activities, particularly in advising arrangers
of structured financial products on potential ratings of such products,
credit rating agencies face conflicts of interest that need to be
carefully monitored and that therefore should be addressed explicitly
in legislation in order to give clearer authority to the Securities and
Exchange Commission.\1332\
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\1332\ Public Law 111-203 Sec. 931(4).
---------------------------------------------------------------------------
In the recent financial crisis, the ratings on structured
financial products have proven to be inaccurate. This inaccuracy
contributed significantly to the mismanagement of risks by financial
institutions and investors, which in turn adversely impacted the health
of the economy in the United States and around the world. Such
inaccuracy necessitates increased accountability on the part of credit
rating agencies.\1333\
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\1333\ Public Law 111-203 Sec. 931(5).
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B. Legal Basis
The Commission's proposed amendments to existing rules and proposed
new rules are made pursuant to the Exchange Act,\1334\ particularly
Sections 15E, 17(a) and 36 of the Exchange Act,\1335\ and Sections 936
and 938(a) of the Dodd-Frank Act.\1336\
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\1334\ 15 U.S.C. 78a et seq.
\1335\ 15 U.S.C. 78o-7, 78q and 78mm.
\1336\ Public Law 111-203 Sec. Sec. 936 and 938(a).
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C. Small Entities Subject to the Rule
1. NRSROs and Providers of Third-Party Due Diligence Services
Under section 601(3) of the RFA, the term ``small business'' is
defined as having ``the same meaning as the term `small business
concern' under Section 3 of the Small Business Act, unless an agency,
after consultation with the Office of Advocacy of the Small Business
Administration and after opportunity for public comment, establishes
one or more definitions of such term which are appropriate to the
activities of the agency and publishes such definition(s) in the
Federal Register.'' \1337\ The Commission's rules do not define ``small
business'' or ``small organization'' with respect to NRSROs. However,
paragraph (a) of Rule 0-10 provides that for purposes of the RFA, 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.'' \1338\ The Commission has stated in the past
that an NRSRO with total assets of $5 million or less would qualify as
a ``small'' entity for purposes of the RFA.\1339\ The Commission
continues to believe this threshold of total assets of $5 million or
less would qualify an NRSRO as ``small'' for purposes of the RFA. In
addition, the Commission preliminarily believes this would be an
appropriate threshold for determining whether a provider of third-party
due diligence services is ``small'' for purposes of the RFA.
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\1337\ 5 U.S.C. 601(3).
\1338\ 17 CFR 240.0-10(a).
\1339\ See e.g., Oversight of Credit Rating Agencies Registered
as Nationally Recognized Statistical Rating Organizations, 72 FR
33618 (June 18, 2007); Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6481 (Feb. 9, 2009); and
Amendments to Rules for Nationally Recognized Statistical Rating
Organizations, 74 FR at 63863 (Dec. 4, 2009).
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Currently, there are 10 NRSROs and, based on their most recently
filed annual reports pursuant to Rule 17g-3, one NRSRO is a small
entity under the above definition. For purposes of the PRA, the
Commission preliminarily estimates that there will be 10 providers of
third-party due diligence services subject to the proposed new
requirements.\1340\ Of these 10 respondents, the Commission estimates
that all 10 would be ``small'' entities.
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\1340\ See Section VI.C of this release.
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2. Issuers and Underwriters
The proposing release for Form ABS-15G certified that the form
would not have a significant economic impact on a substantial number of
small entities.\1341\ As discussed above in Section V.I.2 of this
release, the Commission believes that the costs to the issuers and
underwriters subject to proposed new Rule 15Ga-2 and the proposed
amendments to Form ABS-15G would be less than those arising from the
adoption of Form ABS-15G. The Commission, therefore, certifies pursuant
to 5 U.S.C. 605(b) that proposed new Rule 15Ga-2 and the proposed
amendments to Form ABS-15G contained in this release, if adopted, would
not have a significant economic impact on a substantial number of small
entities. The proposals relate to disclosure requirements for Exchange
Act-ABS. As noted above, Rule 0-10(a) \1342\ defines an issuer, other
than an investment company, to be a ``small business'' or ``small
organization'' if it had total assets of $5 million or less on the last
day of its most recent fiscal year. The Commission's data indicates
that only one sponsor could meet the definition of a small broker-
dealer for purposes of the Regulatory Flexibility Act.\1343\
Accordingly, the Commission does not believe that proposed new Rule
15Ga-2 and the proposed amendments to Form ABS-15G, if adopted, would
have a significant economic impact on a substantial number of small
entities.
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\1341\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Securities Act Release No. 9148 (Oct. 4, 2010), 75
FR 62718 at 62734 (Oct. 13, 2010).
\1342\ 17 CFR 240.0-10(a).
\1343\ This is based on data from Asset-Backed Alert.
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D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposed amendments and proposed new rules would impose certain
reporting, recordkeeping, and other compliance requirements on small
NRSROs and small providers of third-party due diligence services.
Preliminary estimates of the costs attributable to these proposals are
discussed in detail in Section V of this release. As discussed in
Section V of this release, the Commission preliminarily estimates that
the costs are largely attributable to rulemaking mandates in the Dodd-
Frank Act and not to the exercise of Commission discretionary
rulemaking.
The Commission is providing summary information below about the
preliminary cost estimates in Section V of this release to estimate the
impact the proposals would have on the one small NRSRO and the 10 small
providers of third-party due diligence services. In some cases, the
Commission preliminarily believes it is appropriate to estimate the
one-time and annual costs per small NRSRO using average costs across
all NRSROs that would be subject to the proposed amendments and new
rules. The NRSROs vary, in terms of size and complexity, from
[[Page 33535]]
small entities that employ less than 20 credit analysts to complex
global organizations that employ over a thousand credit analysts.\1344\
Given the variance in size between the largest NRSROs and the smallest
NRSROs, the average costs are skewed higher because the largest firms
currently dominate in terms of size and the volume of credit rating
activities.\1345\ In other cases, as described below, the Commission
preliminarily believes it is appropriate to estimate the one-time and
annual costs per small NRSRO based on the number of credit ratings
outstanding or the number of credit analysts employed by the seven
smaller NRSROs.\1346\ In a cost estimate based on the number of credit
ratings outstanding, the Commission preliminarily proposes to use the
number of credit ratings outstanding of the 7 smaller NRSROs.\1347\ In
a cost estimate based on the number of credit analysts, the Commission
preliminarily proposes to use the number of credit analysts employed by
the 7 smaller NRSROs.\1348\
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\1344\ See, e.g., Annual Report on Nationally Recognized
Statistical Rating Organizations. Commission (Jan. 2011), pp. 4-9.
\1345\ As discussed above in Section IV.D of this release, based
on data collected from the NRSROs in their Form NRSROs and Rule 17g-
3 annual reports, the Commission has calculated an HHI number using
the number credit ratings outstanding per NRSRO and that number is
3,495, which is equivalent to there being approximately 2.86 equally
sized firms. The HHI using earnings reported by NRSROs in the Rule
17g-3 annual reports is 3,926, which the equivalent of 2.55 equally
sized firms.
\1346\ The seven smaller NRSROs are: A.M. Best Company, Inc.,
DBRS Ltd., Egan-Jones Rating Company, Japan Credit Rating Agency,
Ltd., Kroll Bond Rating Agency, Inc. (formerly LACE Financial
Corp.), Rating and Investment Information, Inc., and Realpoint LLC.
See Figures 2 and 3. The small NRSRO is one these NRSROs.
\1347\ 80,648 (total credit ratings outstanding for the seven
smaller NRSROs)/2,905,825 (total credit ratings outstanding for all
ten NRSROs)/7 (the number of smaller NRSROs) = 0.00396. See Figure
2.
\1348\ 370 (the total number of credit analysts employed by the
seven smaller NRSROs)/3,520 (the total number of credit analysts
employed by all ten NRSROs)/7 (the number of smaller NRSROs) =
.01502. See Figure 3.
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As discussed above in Section V.A.2 of this release, the Commission
preliminarily estimates that the proposed amendments to Rule 17g-3
would result in one-time and annual costs to NRSROs.\1349\ In
particular, the Commission preliminarily estimates that the proposal
would result in an average one-time cost to each NRSRO of approximately
$40,000 and an average annual cost to each NRSRO of approximately
$60,950.\1350\
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\1349\ See proposed new paragraph (a)(7) and proposed amendments
to paragraph (b) of Rule 17g-3; see also Section II.A.1 of this
release for a more detailed discussion of these provisions.
\1350\ See Section V.A.2 of this release for a more detailed
discussion of the basis for these cost estimates.
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As discussed above in Section V.B.2 of this release, the Commission
preliminarily estimates that the proposed amendments to Rule 17g-5
would result in one-time and annual costs to each NRSRO.\1351\
Moreover, the Commission provides separate preliminary cost estimates
for the three larger NRSROs and the seven smaller NRSROs. In
particular, the Commission preliminarily estimates that the proposal
would result in an average one-time cost to each of the seven smaller
NRSROs of approximately $15,867 and an average annual cost to each of
the seven smaller NRSROs of approximately $4,587.\1352\
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\1351\ See proposed new paragraph (c)(8) of Rule 17g-5; see also
Section II.B.1 of this release for a more detailed discussion of
this proposal.
\1352\ See Section V.B.2 of this release for a more detailed
discussion of the basis for these cost estimates.
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As discussed above in Section V.C.2 of this release, the Commission
preliminarily estimates proposed paragraph (c) to new Rule 17g-8 would
result in one-time and annual costs to each NRSRO.\1353\ In particular,
the Commission preliminarily estimates that the proposal would result
in an average one-time cost to each NRSRO of approximately $27,300 and
an average annual cost to each NRSRO of approximately $6,825.\1354\
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\1353\ See proposed paragraph (c) of new Rule 17g-8; see also
Section II.C.1 of this release for a more detailed discussion of
this proposal.
\1354\ See Section V.C.2 of this release for a more detailed
discussion of the basis for these cost estimates.
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As discussed above in Section V.E.2 of this release, the Commission
preliminarily estimates that the proposed amendments to the
instructions to Exhibit 1 of Form NRSRO would result in one-time and
annual costs to each NRSRO.\1355\ Based on the total number of ratings
outstanding across all 10 NRSROs, the Commission preliminarily
estimates an industry-wide one-time cost of approximately $735,680 and
an industry-wide annual cost of approximately $367,840.\1356\ Moreover,
because of the wide variance in the number of credit ratings
outstanding among the NRSROs, the Commission preliminarily believes
that it is appropriate to allocate these costs to NRSROs based on the
number of credit ratings each has outstanding (although larger NRSROs
may realize economies of scale). Consequently, the Commission
preliminarily estimates that the proposal would result in an average
one-time cost to the small NRSRO of approximately $2,913 and an average
annual cost to the small NRSRO of approximately $1,457.\1357\
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\1355\ See proposed amendments to Instruction H to Form NRSRO
(as it relates to Exhibit 1); see also Section II.E.1.a of this
release for a more detailed discussion of this proposal.
\1356\ See Section V.E.2 of this release for a more detailed
discussion of the basis for these cost estimates.
\1357\ $735,680 x .00396 = $2,913.29, rounded to $2,913;
$367,840 x .00396 = $1,456.65, rounded to $1,457.
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As discussed above in Section V.E.2 of this release, the Commission
preliminarily estimates that the proposed amendments to Rule 17g-1
would result in one-time and annual costs to each NRSRO.\1358\ First,
the Commission preliminarily estimates that the proposal to require an
NRSRO to it make its Form NRSRO and Exhibits 1 through 9 freely
available on an ``easily accessible'' portion of its corporate Internet
Web site would result in an average one-time cost to each NRSRO of
approximately $1,125.\1359\ Second, the Commission preliminarily
estimates that the proposal to require an NRSRO to provide, when
requested, a written copy of Exhibit 1 would result in an average one-
time cost to each NRSRO of approximately $13,104 and an average annual
cost to each NRSRO of approximately $18,291.\1360\
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\1358\ See proposed amendments to paragraph (i) of Rule 17g-1;
see also Section II.E.1.b of this release for a more detailed
discussion of this proposal.
\1359\ See Section V.E.2 of this release for a more detailed
discussion of the basis for this cost estimate.
\1360\ Id.
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As discussed above in Section V.F.2 of this release, the Commission
preliminarily estimates that proposed new paragraph (b) of Rule 17g-7
would result in one-time and annual costs to each NRSRO.\1361\ First,
the Commission preliminarily estimates that the proposal to make the
ratings histories available on an ``easily accessible'' portion of the
NRSRO's corporate Internet Web site would result in an average one-time
cost to each NRSRO of approximately $1,125.\1362\ Second, the
Commission preliminarily estimates that the proposed enhancements to
the current ratings history disclosure requirements would result in an
average one-time cost to each NRSRO of approximately $30,375 and an
average
[[Page 33536]]
annual cost to each NRSRO of approximately $10,125.\1363\
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\1361\ See proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
\1362\ See Section V.F.2 of this release for a more detailed
discussion of the basis for this cost estimate.
\1363\ See Section V.F.2 of this release for a more detailed
discussion of the basis for these cost estimates.
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As discussed above in Section V.G.2 of this release, the Commission
preliminarily estimates that paragraph (a) of proposed new Rule 17g-8
would result in one-time and annual costs to each NRSRO.\1364\ In
particular, the Commission preliminarily estimates that the proposal
would result in an average one-time cost to each NRSRO of approximately
$54,600 and an average annual cost to each NRSRO of approximately
$13,650.\1365\
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\1364\ See paragraph (a) of new Rule 17g-8; see also Section
II.F.1 of this release for a more detailed discussion of this
proposal.
\1365\ See Section V.G.2 of this release for a more detailed
discussion of the basis for these cost estimates.
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As discussed above in Section V.H.2 of this release, the Commission
preliminarily estimates that proposed new paragraph (a) of Rule 17g-7
would result in one-time and annual costs to each NRSRO.\1366\ Based on
the total number of ratings outstanding across all 10 NRSROs, the
Commission preliminarily estimates an industry-wide one-time cost of
approximately $15,237,500 and an industry-wide annual cost of
approximately $115,580,930.\1367\ Moreover, the Commission
preliminarily estimates that the one-time and annual costs would vary
considerably among NRSROs based on the number of credit ratings they
issue and monitor and the number of classes and subclasses of credit
ratings for which they issue and monitor credit ratings. Consequently,
the Commission preliminarily estimates that the proposal would result
in an average one-time cost to the small NRSRO of approximately $60,340
and an average annual cost to the small NRSRO of approximately
$457,700.\1368\
---------------------------------------------------------------------------
\1366\ See proposed new paragraph (a) of Rule 17g-7 see also
Sections II.G.1 through G.5 of this release for a more detailed
discussion of this proposal.
\1367\ See Section V.H.2 of this release for a more detailed
discussion of the basis for these cost estimates.
\1368\ $15,237,500 x .00396 = $60,340.50, rounded to $60,340;
$115,580,930 x .00396 = $457,700.48, rounded to $457,700.
---------------------------------------------------------------------------
As discussed above in Section V.K.2 of this release, the Commission
preliminarily estimates that proposed new Rule 17g-9 would result in
one-time and annual costs to each NRSRO.\1369\ Based on the total
number of credit rating analysts employed by the 10 NRSROs, the
Commission preliminarily estimates an industry-wide one-time cost of
approximately $5,363,000 and an industry-wide annual cost of
approximately $1,072,720.\1370\ Moreover, the Commission preliminarily
estimates that these costs would be allocated to the 10 NRSROs based on
the number of credit analysts each employs. Consequently, the
Commission preliminarily estimates that the proposal would result in an
average one-time cost to the small NRSRO of approximately $80,552 and
an average annual cost to the small NRSRO of approximately
$16,112.\1371\
---------------------------------------------------------------------------
\1369\ See proposed new Rule 17g-9; see also Section II.I.1 of
this release for a more detailed discussion of this proposal.
\1370\ See Section V.K.2 of this release for a more detailed
discussion of the basis for these cost estimates.
\1371\ $5,363,000 x .01502 = $80,552.26, rounded to $80,552;
$1,072,720 x .01502 = $16,112.25, rounded to $16,112..
---------------------------------------------------------------------------
As discussed above in Section V.L.2 of this release, the Commission
preliminarily estimates that paragraph (b) of proposed new Rule 17g-8
would result in one-time and annual costs to each NRSRO.\1372\ In
particular, the Commission preliminarily estimates that the proposal
would result in an average one-time cost to each NRSRO of approximately
$54,600 and an average annual cost to each NRSRO of approximately
$13,650.\1373\
---------------------------------------------------------------------------
\1372\ See paragraph (b) of proposed new Rule 17g-8; see also
Section II.J.1 of this release for a more detailed discussion of
this proposal.
\1373\ See Section V.L.2 of this release for a more detailed
discussion of the basis for these cost estimates.
---------------------------------------------------------------------------
As discussed above in Section V.N.2 of this release, the Commission
preliminarily estimates that proposed requirement to file certain Form
NRSROs (and Exhibits 1 through 9) and the Rule 17g-3 annual reports
with the Commission through the EDGAR system would result in one-time
costs to each NRSRO.\1374\ In particular, the Commission preliminarily
estimates that the proposal would result in an average one-time cost to
each NRSRO of approximately $1,365.\1375\
---------------------------------------------------------------------------
\1374\ See proposed amendments to Regulation S-T, Rule 17g-1,
and Rule 17g-3; see also Section II.L of this release for a more
detailed discussion of this proposal.
\1375\ See Section V.N.2 of this release for a more detailed
discussion of the basis for this cost estimate.
---------------------------------------------------------------------------
As discussed above in Sections V.A.2, V.C.2, V.G.2, V.K.2, and
V.L.2 of this release, the Commission has proposed applying the
recordkeeping requirements of Rule 17g-2 to five new types of
records.\1376\ The Commission preliminarily estimates that these
proposals would result in one-time and annual costs to each NRSRO. In
particular, the Commission preliminarily estimates an average one-time
cost to each NRSRO of approximately $5,460 and an average annual cost
to each NRSRO of approximately $1,365.\1377\
---------------------------------------------------------------------------
\1376\ See proposed new paragraphs (a)(9), (b)(12), (b)(13),
(b)(14), and (b)(15) of Rule 17g-2; see also Sections II.A.2,
II.C.2, II.F.2, II.I.2, and II.J.2 of this release, respectively,
for a more detailed discussion of these proposals.
\1377\ $1,092 x 5 = $5,460; $273 x 5 = $1,365. See Sections
V.A.2, V.C.2, V.G.2, V.K.2, and V.L.2 of this release for a more
detailed discussion of the basis for these cost estimates.
---------------------------------------------------------------------------
Finally, as discussed in Section V.J.2 of this release, the
Commission preliminarily estimates that proposed new Rule 17gx10 and
proposed new Form ABS Due Diligence-15E would result in one-time and
annual costs to providers of third-party due diligence services.\1378\
In particular, the Commission estimates an average one-time cost to
each provider of third-party due diligence services of approximately
$91,425.\1379\ In addition, the Commission preliminarily estimates that
the annual cost resulting from these proposals would be based on the
number of Exchange Act-ABS transactions issued per year. Consequently,
the Commission preliminarily estimates that the industry-wide annual
cost would be approximately $282,282.\1380\ For this reason, the
Commission preliminarily estimates that the average annual cost to each
provider of third-party due diligence services would be approximately
$28,228.\1381\
---------------------------------------------------------------------------
\1378\ See proposed new Rule 17g-10 and proposed new Form ABS
Due Diligence-15E; see also Sections II.H.2 and II.H.3 of this
release, respectively, for a more detailed discussion of these
proposals.
\1379\ See Section V.J.2 of this release for a more detailed
discussion of the basis for this cost estimate.
\1380\ Id.
\1381\ $282,282/10 small providers of third-party due diligence
services = $28,228.20 (rounded to $28,228).
---------------------------------------------------------------------------
As noted above, the Commission preliminarily estimates that these
costs largely are attributable to rulemaking mandates in the Dodd-Frank
Act. The Commission also notes that the Dodd-Frank Act explicitly
provides that the Commission's rulemaking make exceptions for small
NRSROs in one instance.\1382\ The Commission preliminary believes that
the exercise of the Commission's discretionary rulemaking would not
disproportionately affect small entities. The Commission preliminarily
believes that the exercise of discretionary rulemaking strikes an
appropriate balance between minimizing the burden on small entities and
meeting the rulemaking mandates in the Dodd-Frank Act.
---------------------------------------------------------------------------
\1382\ See Public Law 111-203 Sec. 932(a)(4) and 15 U.S.C. 78o-
7(h)(3)(B)(i).
---------------------------------------------------------------------------
[[Page 33537]]
E. Duplicative, Overlapping, or Conflicting Federal Rules
The Commission believes that there are no Federal rules that
duplicate, overlap, or conflict with the proposed rules.
F. Significant Alternatives
Pursuant to Section 3(a) of the RFA,\1383\ the Commission must
consider certain types of alternatives, including: (1) The
establishment of differing compliance or recording 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 proposed rules for
small entities; (3) the use of performance rather than design
standards; and (4) an exemption from coverage of the proposed rules, or
any part of the proposed rules, for small entities.
---------------------------------------------------------------------------
\1383\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------
The Commission preliminarily believes that the exercise of
discretionary rulemaking with respect to the proposed amendments to
existing rules and proposed new rules strike the appropriate balance
between minimizing the burden on entities and allowing the Commission
to meet its mandate under the Dodd-Frank Act. The Commission notes the
Dodd-Frank Act explicitly mandated the Commission provide for
exceptions for small NRSROs with respect to only one rulemaking and the
Commission has proposed a rule amendment to implement this
provision.\1384\ Consequently, the Commission does not believe it is
necessary or appropriate to establish different compliance or reporting
requirements or timetables; clarify, consolidate, or simplify
compliance and reporting requirements under the proposed amendments to
existing rules and proposed new rules for small entities; or summarily
exempt small entities from coverage of the rule, or any part of the
rule. The Commission believes that it is inconsistent with the goals of
the Dodd-Frank Act to use performance standards rather than design
standards. Further, the Commission believes that it would be
inconsistent with the purposes of the Dodd-Frank Act to exempt small
entities from compliance with the proposed rules.
---------------------------------------------------------------------------
\1384\ See 15 U.S.C. 78o-7(h)(3)(B)(i) and proposed new
paragraph (f) of Rule 17g-5; see also Section II.B.2 of this release
for a more detailed discussion of this proposal.
---------------------------------------------------------------------------
G. Request for Comment
The Commission generally requests comment on the certification and
all aspects of its analysis in the IRFA. In addition, the Commission
also seeks comment on the following:
1. Would the number of small entities that would be subject to the
proposed requirements have any effects that have not been discussed?
2. Describe the nature of any effects on small entities subject to
proposed requirements and provide empirical data to support the nature
and extent of such effects.
3. Describe the compliance burdens and how they would affect small
entities.
VIII. Statutory Authority
The Commission is proposing amendments to Sec. Sec. 232.101,
232.201, 232.314, 240.17g-1, 240.17g-2, 240.17g-3, 240.17g-5, 240.17g-
6, 240.17g-7, Form NRSRO, and Form ABS-15G and is proposing to adopt
Sec. Sec. 240.15Ga-2, 240.17g-8, 240.17g-9, 240.17g-10, and Form ABS
Due Diligence-15E pursuant to the authority conferred by the Exchange
Act, including Sections 15E, 17(a) and 36 (15 U.S.C. 78o-7, 78q, and
78mm), and pursuant to authority in Sections 936, 938, and 943 of the
Dodd-Frank Act (Pub. L. 111-203 Sec. Sec. 936, 938, and 943).
List of Subjects in 17 CFR Parts 232, 240, 249, and 249b
Brokers, Reporting and recordkeeping requirements, Securities.
Text of Proposed Rules
In accordance with the foregoing, the Commission proposes that
Title 17, Chapter II of the Code of Federal Regulation be amended as
follows.
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
1. The authority citation for part 232 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *
2. Section 232.101 is amended by adding paragraph (a)(1)(xiv) to
read as follows:
Sec. 232.101 Mandated electronic submissions and exceptions.
(a) * * *
(1) * * *
(xiv) Form NRSRO (Sec. 249b.300 of this chapter), and the
information and documents in Exhibits 1 through 9 of Form NRSRO, filed
with or furnished, as applicable, to the Commission pursuant to Sec.
240.17g-1(e), (f), and (g) of this chapter and the annual reports filed
with or furnished to, as applicable, the Commission pursuant to Sec.
240.17g-3 of this chapter.
* * * * *
3. Section 232.201 is amended by revising paragraph (a)
introductory text to read as follows:
Sec. 232.201 Temporary hardship exemption.
(a) If an electronic filer experiences unanticipated technical
difficulties preventing the timely preparation and submission of an
electronic filing other than a Form 3 (Sec. 249.103 of this chapter),
a Form 4 (Sec. 249.104 of this chapter), a Form 5 (Sec. 249.105 of
this chapter), a Form ID (Sec. Sec. 239.63, 249.446, 269.7, and
274.402 of this chapter), a Form TA-1 (Sec. 249.100 of this chapter),
a Form TA-2 (Sec. 249.102 of this chapter), a Form TA-W (Sec. 249.101
of this chapter), a Form D (Sec. 239.500 of this chapter), an
application for an order under any section of the Investment Company
Act (15 U.S.C. 80a-1 et seq.), an Interactive Data File (Sec. 232.11
of this chapter), or a Form NRSRO (Sec. 249b.300 of this chapter), and
the information and documents in Exhibits 1 through 9 of Form NRSRO,
filed with or furnished to, as applicable, the Commission pursuant to
Sec. 240.17g-1(e), (f), or (g) of this chapter, or the annual reports
filed with or furnished to, as applicable, the Commission pursuant to
Sec. 240.17g-3 of this chapter, the electronic filer may file the
subject filing, under cover of Form TH (Sec. Sec. 239.65, 249.447,
269.10, and 274.404 of this chapter), in paper format no later than one
business day after the date on which the filing was to be made.
* * * * *
4. Section 232.314 is amended by:
a. In the introductory text adding the phrase ``or in response to
Rule 15Ga-2 (Sec. 240.15Ga-2 of this chapter)'' after the phrase ``The
information required in response to Rule 15Ga-1 (Sec. 240.15Ga-1 of
this chapter)'';
b. In paragraph (a), removing the words ``Securities Exchange Act
of 1934'' and in their place inserting the word ``Act''; and
c. In paragraph (b):
i. Adding the words ``or Rule 15Ga-2'' after the phrase ``The
information required by Rule 15Ga-1''; and
ii. Removing the words ``Web site'' and in their place inserting
the word ``website''.
[[Page 33538]]
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
5. The authority citation for part 240 is amended by adding
sectional authorities for Sec. Sec. 240.15Ga-2, 240.17g-8, and
240.17g-9 to read 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, 78n-1, 78o, 78o-4, 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.; 18 U.S.C. 1350; and 12
U.S.C. 5221(e)(3) unless otherwise noted.
* * * * *
Section 240.15Ga-2 is also issued under sec. 943, Public Law 111-
203, 124 Stat. 1376.
* * * * *
Section 240.17g-8 is also issued under sec. 938, Public Law 111-
203, 124 Stat. 1376.
* * * * *
Section 240.17g-9 is also issued under sec. 936, Public Law 111-
203, 124 Stat. 1376.
* * * * *
6. Section 240.15Ga-2 is added to read as follows:
Sec. 240.15Ga-2 Findings and conclusions of third-party due diligence
reports.
(a) The issuer or underwriter of an offering of any asset-backed
security (as that term is defined in Section 3(a)(77) of the Act (15
U.S.C. 78c(a)(77)) shall furnish Form ABS-15G (Sec. 249.1400 of this
chapter) if the security is to be rated by a nationally recognized
statistical rating organization, containing the findings and
conclusions of any third-party due diligence report obtained by the
issuer or underwriter five business days prior to the first sale in the
offering; however, if the issuer or underwriter receives a
representation from a nationally recognized statistical rating
organization that can be reasonably relied upon that the disclosure
required by this paragraph will be publicly disclosed by the nationally
recognized statistical rating organization five business days prior to
the first sale in the offering in an information disclosure form
generated pursuant to Rule 17g-7(a)(1) (Sec. 240.17g-7(a)(1) of this
chapter) and included with the credit rating, the issuer or underwriter
would not be required to furnish Form ABS-15G five days prior to the
first sale in the offering.
(b) If the issuer or underwriter receives a representation pursuant
to paragraph (a) of this section, but the nationally recognized
statistical rating organization has not fulfilled its representation to
publicly disclose the disclosure five business days prior to the first
sale in the offering, the issuer or underwriter shall furnish Form ABS-
15G two business days prior to the first sale in the offering.
(c) For purposes of paragraph (a) of this section, ``third-party
due diligence report'' means any report containing findings and
conclusions of any ``due diligence services'' as defined in Rule 17g-
10(c)(1) (Sec. 240.17g-10(c)(1) of this chapter) performed by a third
party.
Instruction to paragraph (a) of this section: The issuer or
underwriter shall provide to the Commission, upon request, information
regarding the manner in which the representation by the nationally
recognized statistical rating organization was obtained and relied upon
for purposes of this paragraph.
7. Section 240.17g-1 is amended by:
a. In paragraphs (a), (b), and (c) removing the phase ``furnish the
Commission with'' wherever it appears and adding in its place the
phrase ``file with the Commission two paper copies of'';
b. In paragraph (d), adding the phrase ``two paper copies of''
after the phrase ``the applicant must furnish the Commission with'';
and
c. Revising paragraphs (e), (f), (g), (h), and (i).
The revisions read as follows:
Sec. 240.17g-1 Application for registration as a nationally
recognized statistical rating organization.
* * * * *
(e) Update of registration. A nationally recognized statistical
rating organization amending materially inaccurate information in its
application for registration pursuant to section 15E(b)(1) of the Act
(15 U.S.C. 78o-7(b)(1)) must promptly file with the Commission an
update of its registration on Form NRSRO that follows all applicable
instructions for the Form. A Form NRSRO and the information and
documents in Exhibits 1 through 9 of Form NRSRO filed under this
paragraph must be filed electronically with the Commission in the
format required by the EDGAR Filer Manual, as defined in Rule 11 of
Regulation S-T.
(f) Annual certification. A nationally recognized statistical
rating organization amending its application for registration pursuant
to section 15E(b)(2) of the Act (15 U.S.C. 78o-7(b)(2)) must file with
the Commission an annual certification on Form NRSRO that follows all
applicable instructions for the Form not later than 90 days after the
end of each calendar year. A Form NRSRO and the information and
documents in Exhibits 1 through 9 of Form NRSRO filed under this
paragraph must be filed electronically with the Commission in the
format required by the EDGAR Filer Manual, as defined in Rule 11 of
Regulation S-T.
(g) Withdrawal from registration. A nationally recognized
statistical rating organization withdrawing from registration pursuant
to section 15E(e)(1) of the Act (15 U.S.C. 78o-7(e)(1)) must furnish
the Commission with a notice of withdrawal from registration on Form
NRSRO that follows all applicable instructions for the Form. The
withdrawal from registration will become effective 45 calendar days
after the notice is furnished to the Commission upon such terms and
conditions as the Commission may establish as necessary in the public
interest or for the protection of investors. A Form NRSRO furnished
under this paragraph must be furnished electronically with the
Commission in the format required by the EDGAR Filer Manual, as defined
in Rule 11 of Regulation S-T.
(h) Filing or furnishing Form NRSRO. A Form NRSRO filed or
furnished, as applicable, under any paragraph of this section will be
considered filed with or furnished to, as applicable, the Commission on
the date the Commission receives a complete and properly executed Form
NRSRO that follows all applicable instructions for the Form.
Information filed or furnished, as applicable, on a confidential basis
and for which confidential treatment has been requested pursuant to
applicable Commission rules will be accorded confidential treatment to
the extent permitted by law.
(i) Public availability of Form NRSRO. A nationally recognized
statistical rating organization must make its current Form NRSRO and
information and documents in Exhibits 1 through 9 to Form NRSRO
publicly and freely available on an easily accessible portion of its
corporate Internet Web site within 10 business days after the date of
the Commission order granting an initial application for registration
as a nationally recognized statistical rating organization or an
application to register for an additional class of credit ratings and
within 10 business days after filing with or furnishing to, as
applicable, the Commission a Form NRSRO under paragraphs (e), (f), or
(g) of this section. In addition, a nationally recognized statistical
rating organization must make its up-to-date Exhibit 1 to Form NRSRO
freely available in writing to any individual who requests a copy of
the Exhibit.
[[Page 33539]]
8. Section 240.17g-2 is amended by:
a. In paragraphs (a)(2)(iii) and (a)(7) introductory text, removing
the words ``or mortgage-backed'';
b. Adding paragraph (a)(9);
c. Revising paragraph (b)(1);
d. In paragraph (b)(9), removing the words ``or mortgage-backed'';
e. Revising paragraph (b)(11);
f. Adding paragraphs (b)(12) through (15);
g. Re-designating paragraph (d)(1) as paragraph (d); and
h. Removing paragraphs (d)(2) and (d)(3);
The additions and revisions read as follows:
Sec. 240.17g-2 Records to be made and retained by nationally
recognized statistical rating organizations.
(a) * * *
(9) A record documenting the policies and procedures the nationally
recognized statistical rating organization is required to establish,
maintain, and enforce pursuant to Section 15E(h)(4)(A) of the Act (15
U.S.C. 78o-7(h)(4)(A)) and Sec. 240.17g-8(c) of this chapter.
* * * * *
(b) * * *
(1) Significant records (for example, bank statements, invoices,
and trial balances) underlying the information included in the annual
financial reports the nationally recognized statistical rating
organization files with or furnishes to, as applicable, the Commission
pursuant to Sec. 240.17g-3 of this chapter.
* * * * *
(11) Form NRSROs (including Exhibits and accompanying information
and documents) the nationally recognized statistical rating
organization files with or furnishes to, as applicable, the Commission.
(12) The internal control structure the nationally recognized
statistical rating organization is required to establish, maintain,
enforce, and document pursuant to Section 15E(c)(3)(A) of the Act (15
U.S.C. 78o-7(c)(3)(A)).
(13) The policies and procedures the nationally recognized
statistical rating organization is required to establish, maintain,
enforce, and document pursuant to Sec. 240.17g-8(a) of this chapter.
(14) The policies and procedures the nationally recognized
statistical rating organization is required to establish, maintain,
enforce, and document pursuant to Sec. 240.17g-8(b) of this chapter.
(15) The standards of training, experience, and competence for
credit analysts the nationally recognized statistical rating
organization is required to establish, maintain, enforce, and document
pursuant to Sec. 240.17g-9 of this chapter.
* * * * *
9. Section 240.17g-3 is amended by:
a. Revising the heading;
b. Revising the introductory text of paragraph (a);
c. In paragraph (a)(1) introductory text, removing the first word
``Audited'' and adding in its place the phrase ``File with the
Commission a financial report, as of the end of the fiscal year,
containing audited'';
d. In paragraph (a)(2) introductory text, removing the first word
``If'' and adding in its place the phrase ``File with the Commission a
financial report, as of the end of the fiscal year, containing, if'';
e. In the Note to paragraph (a)(2), removing the word ``furnished''
and adding in its place the word ``filed'';
f. In the introductory texts to paragraphs (a)(3), (4), and (5),
removing the first word ``An'' and adding in its place the phrase
``File with the Commission an unaudited financial report, as of the end
of the fiscal year,'';
g. In paragraph (a)(6) introductory text, removing the first word
``An'' and adding in its place the phrase ``Furnish the Commission with
an unaudited report, as of the end of the fiscal year,'';
h. In the Note to paragraph (a)(6), removing the words ``or
mortgage-backed'';
i. Adding paragraphs (a)(7) and (8);
j. Revising paragraph (b);
k. Adding paragraphs (d) and (e).
The additions and revisions read as follows:
Sec. 240.17g-3 Annual financial and other reports to be filed or
furnished by nationally recognized statistical rating organizations.
(a) A nationally recognized statistical rating organization must
annually, not more than 90 calendar days after the end of its fiscal
year (as indicated on its current Form NRSRO):
* * * * *
(7) File with the Commission an unaudited report, as of the end of
the fiscal year, concerning the internal control structure the
nationally recognized statistical rating organization is required to
establish, maintain, enforce, and document pursuant to Section
15E(c)(3)(A) of the Act (15 U.S.C. 78o-7(c)(3)(A)) that contains:
(i) A description of the responsibility of management in
establishing and maintaining an effective internal control structure;
and
(ii) An assessment by management of the effectiveness of the
internal control structure.
(8) File with the Commission an unaudited annual report on the
compliance of the nationally recognized statistical rating organization
with the securities laws and the policies and procedures of the
nationally recognized statistical rating organization pursuant to
Section 15E(j)(5)(B) of the Act (15 U.S.C. 78o-7(j)(5)(B)).
(b) The nationally recognized statistical rating organization must:
(1) Attach to the reports filed or furnished, as applicable,
pursuant to paragraphs (a)(1) through (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 reports and, to the best knowledge of the
person, the 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 filed pursuant to paragraph (a)(7) of this
section a signed statement by the chief executive officer of the
nationally recognized statistical rating organization or, if the
nationally recognized statistical rating organization does not have a
chief executive officer, an individual performing similar functions,
stating that the chief executive officer or individual has
responsibility for the report and, to the best knowledge of the chief
executive officer or other individual, the report fairly presents, in
all material respects, a description of the responsibility of
management in establishing and maintaining an effective internal
control structure and an assessment of the effectiveness of the
internal control structure.
* * * * *
(d) Electronic Filing. The reports must be filed with or furnished
to, as applicable, the Commission electronically in the format required
by the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T.
(e) Confidential Treatment. Information in a report filed or
furnished, as applicable, on a confidential basis and for which
confidential treatment has been requested pursuant to applicable
Commission rules will be accorded confidential treatment to the extent
permitted by law. Confidential treatment may be requested by marking
each page ``Confidential Treatment Requested'' and by complying with
Commission rules governing confidential treatment.
10. Section 240.17g-5 is amended by:
[[Page 33540]]
a. In paragraph (a)(3) introductory text, removing the words ``or
mortgaged-backed'';
b. In paragraphs (a)(3)(i), (a)(3)(ii) introductory text,
(a)(3)(iii)(A), (a)(3)(iii)(B) introductory text, (a)(3)(iii)(C), and
(a)(3)(iii)(D), removing the words ``Web site'' and adding in their
place the word ``Web site'';
c. In paragraph (b)(9), removing the words ``or mortgaged-backed'';
d. In paragraph (c)(6), removing the word ``or'' at the end of the
paragraph after the semicolon;
e. In paragraph (c)(7), removing the period and adding ``; or'' at
the end of the paragraph;
f. Adding paragraph (c)(8);
g. In paragraph (e), removing the words ``Web site'' and adding in
their place the word ``website'' and removing the words ``Web sites''
and adding in their place the word ``websites'' wherever it occurs; and
h. Adding paragraphs (f) and (g).
The additions read as follows:
Sec. 240.17g-5 Conflicts of interest.
* * * * *
(c) * * *
(8) The nationally recognized statistical rating organization
issues or maintains a credit rating where a person within the
nationally recognized statistical rating organization who participates
in sales or marketing of a product or service of the nationally
recognized statistical rating organization or a product or service of a
person associated with the nationally recognized statistical rating
organization also participates in determining or monitoring the credit
rating, or developing or approving procedures or methodologies used for
determining the credit rating, including qualitative or quantitative
models.
* * * * *
(f) Upon written application by a nationally recognized statistical
rating organization, the Commission may exempt, either conditionally or
unconditionally or on specified terms and conditions, such nationally
recognized statistical rating organization from the provisions of
paragraph (c)(8) of this section if the Commission finds that due to
the small size of the nationally recognized statistical rating
organization it is not appropriate to require the separation within the
nationally recognized statistical rating organization of the production
of credit ratings from sales and marketing activities and such
exemption is in the public interest.
(g) In a proceeding pursuant to Section 15E(d) of the Act (15
U.S.C. 78o-7(d)) or Section 21C of the Act (15 U.S.C. 78u-3), the
Commission shall suspend or revoke the registration of a nationally
recognized statistical rating organization if the Commission finds in
such proceeding that the nationally recognized statistical rating
organization has violated a rule issued under Section 15E(h) of the Act
(15 U.S.C. 78o-7(h)), that the violation affected a rating, and that
suspension or revocation is necessary for the protection of investors
and in the public interest.
Sec. 240.17g-6 [Amended]
11. Section 240.17g-6 is amended in paragraph (a)(4) by removing
the words ``or mortgage-backed''.
12. Section 240.17g-7 is revised to read as follows:
Sec. 240.17g-7 Disclosure requirements.
(a) Disclosures to be made when taking a rating action. A
nationally recognized statistical rating organization must publish the
items described in paragraphs (a)(1) and (2) of this section, as
applicable, when taking a rating action with respect to a credit rating
assigned to an obligor, security, or money market instrument in a class
of credit ratings for which the nationally recognized statistical
rating organization is registered. For purposes of this section, the
term ``rating action'' means any of the following: the publication of
an expected or preliminary credit rating assigned to an obligor,
security, or money market instrument before the publication of an
initial credit rating; an initial credit rating; an upgrade or
downgrade of an existing credit rating (including a downgrade to, or
assignment of, default); a placement of an existing credit rating on
credit watch or review; an affirmation of an existing credit rating;
and a withdrawal of an existing credit rating. The items described in
paragraphs (a)(1) and (a)(2) of this section must be published in the
same medium and made available to the same persons who can receive or
access the credit rating that is the result of the rating action or
that is the subject of the rating action.
(1) Information disclosure form. A form generated by the nationally
recognized statistical rating organization that meets the requirements
of paragraphs (a)(1)(i), (ii), and (iii) of this section.
(i) Format. The form generated by the nationally recognized
statistical rating organization must be in a format that:
(A) Is easy to use and helpful for users of credit ratings to
understand the information contained in the form; and
(B) Provides the content described in paragraphs (a)(1)(ii)(K),
(L), and (M) of this section in a manner that is directly comparable
across types of obligors, securities, and money market instruments.
(ii) Content. The form generated by the nationally recognized
statistical rating organization must contain the following information
about the credit rating:
(A) The symbol, number, or score in the rating scale used by the
nationally recognized statistical rating organization to denote credit
rating categories and notches within categories assigned to the
obligor, security, or money market instrument that is the subject of
the credit rating and the identity of the obligor, security, or money
market instrument;
(B) The version of the procedure or methodology used to determine
the credit rating;
(C) The main assumptions and principles used in constructing the
procedures and methodologies used to determine the credit rating,
including qualitative methodologies and quantitative inputs and, if the
credit rating is for a structured finance product, assumptions about
the correlation of defaults across the underlying assets;
(D) The potential limitations of the credit rating, including the
types of risks excluded from the credit rating that the nationally
recognized statistical rating organization does not comment on,
including, as applicable, liquidity, market, and other risks;
(E) Information on the uncertainty of the credit rating, including:
(1) Information on the reliability, accuracy, and quality of the
data relied on in determining the credit rating; and
(2) A statement relating to the extent to which data essential to
the determination of the credit rating were reliable or limited,
including:
(i) Any limits on the scope of historical data; and
(ii) Any limits on accessibility to certain documents or other
types of information that would have better informed the credit rating;
(F) Whether and to what extent third-party due diligence services
were used by the nationally recognized statistical rating organization,
a description of the information that such third party reviewed in
conducting due diligence services, and a description of the findings or
conclusions of such third party;
(G) If applicable, how servicer or remittance reports were used,
and with what frequency, to conduct surveillance of the credit rating;
(H) A description of the data about any obligor, issuer, security,
or money market instrument that were relied upon
[[Page 33541]]
for the purpose of determining the credit rating;
(I) A statement containing an overall assessment of the quality of
information available and considered in determining the credit rating
for the obligor, security, or money market instrument, in relation to
the quality of information available to the nationally recognized
statistical rating organization in rating similar obligors, securities,
or money market instruments;
(J) Information relating to conflicts of interest of the nationally
recognized statistical rating organization, which must include:
(1) A classification of the credit rating as either:
(i) ``Solicited sell-side,'' meaning the credit rating was paid for
by the obligor being rated or the issuer, underwriter, depositor, or
sponsor of the security or money market instrument being rated;
(ii) ``Solicited buy-side,'' meaning the credit rating was paid for
by a person other than the obligor being rated or the issuer,
underwriter, depositor, or sponsor of the security or money market
instrument being rated; or
(iii) ``Unsolicited,'' meaning the nationally recognized
statistical rating organization was not paid to determine the credit
rating;
(2) If the credit rating is classified as either ``solicited sell-
side'' or ``solicited buy-side'' under paragraph (a)(1)(ii)(J)(1) of
this section, disclosure of whether the nationally recognized
statistical rating organization provided services other than
determining credit ratings to the person that paid for the rating
during the most recently ended fiscal year; and
(3) If the rating action results from a review conducted pursuant
to Section 15E(h)(4)(A) of the Act (15 U.S.C. 78o-7(h)(4)(A)) and Sec.
240.17g-8(c) of this chapter, provide the following information (as
applicable):
(i) If the rating action is a placement of the credit rating on
credit watch pursuant to Sec. 240.17g-8(c)(1) of this chapter, an
explanation that the reason for the action is the discovery that a
credit rating assigned to the obligor, security, or money market
instrument in one or more prior rating actions was influenced by a
conflict of interest and the date and associated credit rating of each
prior rating action that the nationally recognized statistical rating
organization currently has determined was influenced by the conflict;
(ii) If the rating action is a revision of the credit rating
pursuant to Sec. 240.17g-8(c)(3)(i) of this chapter, an explanation
that the reason for the action is the discovery that a credit rating
assigned to the obligor, security, or money market instrument in one or
more prior rating actions was influenced by a conflict of interest, the
date and associated credit rating of each prior rating action the
nationally recognized statistical rating organization has determined
was influenced by the conflict, and an estimate of the impact the
conflict had on each such prior rating action;
(iii) If the rating action is an affirmation of the credit rating
pursuant to Sec. 240.17g-8(c)(3)(ii) of this chapter, an explanation
of why no rating action was taken to revise the credit rating
notwithstanding the conflict, the date and associated credit rating of
each prior rating action the nationally recognized statistical rating
organization has determined was influenced by the conflict, and an
estimate of the impact the conflict had on each such prior rating
action.
(K) An explanation or measure of the potential volatility of the
credit rating, including:
(1) Any factors that might lead to a change in the credit rating;
and
(2) The magnitude of the change that could occur under different
market conditions;
(L) Information on the content of the credit rating, including:
(1) If applicable, the historical performance of the credit rating;
and
(2) The expected probability of default and the expected loss in
the event of default;
(M) Information on the sensitivity of the credit rating to
assumptions made by the nationally recognized statistical rating
organization, including:
(1) Five assumptions made in the ratings process that, without
accounting for any other factor, would have the greatest impact on a
rating if the assumptions were proven false or inaccurate; and
(2) An analysis, using specific examples, of how each of the five
assumptions identified in paragraph (a)(1)(ii)(M)(1) of this section
impacts a rating;
(N) If the credit rating is issued with respect to an asset-backed
security, as defined in Section 3(a)(77) of the Act (15 U.S.C.
78c(a)(77)), a description of:
(1) The representations, warranties, and enforcement mechanisms
available to investors; and
(2) How they differ from the representations, warranties, and
enforcement mechanisms in issuances of similar securities.
(iii) Attestation. The nationally recognized statistical rating
organization must attach to the form a signed statement by a person
within the nationally recognized statistical rating organization
stating that the person has responsibility for the rating action and,
to the best knowledge of the person:
(A) No part of the credit rating was influenced by any other
business activities;
(B) The credit rating was based solely upon the merits of the
obligor, security, or money market instrument being rated; and
(C) The credit rating was an independent evaluation of the risks
and merits of the obligor, security, or money market instrument.
(2) Third-party due diligence certification. Any written
certification related to the credit rating received by the nationally
recognized statistical rating organization from a provider of third-
party due diligence services pursuant to Section 15E(s)(4)(B) of the
Act (15 U.S.C. 78o-7(s)(4)(B)).
(b) Disclosure of credit rating histories. (1) Credit ratings
subject to the disclosure requirement. A nationally recognized
statistical rating organization must publicly disclose for free on an
easily accessible portion of its corporate Internet Web site:
(i) Each credit rating assigned to an obligor, security, and money
market instrument in every class of credit ratings for which the
nationally recognized statistical rating organization is registered
that was outstanding as of June 26, 2007, and any subsequent upgrades
or downgrades of a credit rating assigned to the obligor, security, or
money market instrument (including a downgrade to, or assignment of,
default), any placements of a credit rating assigned to the obligor,
security, or money market instrument on credit watch or review, any
affirmation of a credit rating assigned to the obligor, security, or
money market instrument, and a withdrawal of a credit rating assigned
to the obligor, security, or money market instrument; and
(ii) Each credit rating assigned to an obligor, security, and money
market instrument in every class of credit ratings for which the
nationally recognized statistical rating organization is registered
that was initially determined on or after June 26, 2007 and any
subsequent upgrades or downgrades of a credit rating assigned to the
obligor, security, or money market instrument (including a downgrade
to, or assignment of, default), any placements of a credit rating
assigned to the obligor, security, or money market instrument on credit
watch or review, any affirmation of a credit rating assigned to the
obligor, security, or money market instrument, and a withdrawal of a
credit rating assigned to the obligor, security, or money market
instrument.
[[Page 33542]]
(2) Information. A nationally recognized statistical rating
organization must include, at a minimum, the following information with
each credit rating disclosed pursuant to paragraph (b)(1) of this
section:
(i) The identity of the nationally recognized statistical rating
organization disclosing the rating action;
(ii) The date of the rating action;
(iii) If the rating action is taken with respect to a credit rating
of an obligor as an entity, the following identifying information about
the obligor, as applicable:
(A) The Central Index Key (CIK) number of the rated obligor; and
(B) The legal name of the obligor.
(iv) If the rating action is taken with respect to a credit rating
of a security or money market instrument, as applicable:
(A) The Central Index Key (CIK) number of the issuer of the
security or money market instrument;
(B) The legal name of the issuer of the security or money market
instrument; and
(C) The CUSIP of the security or money market instrument;
(v) A classification of the rating action as either:
(A) A disclosure of a credit rating that was outstanding as of June
26, 2007, for the purposes of paragraph (b)(1)(i) of this section;
(B) An initial credit rating;
(C) An upgrade of an existing credit rating;
(D) A downgrade of an existing credit rating, which would include
classifying the obligor, security, or money market instrument as in
default, if applicable;
(E) A placement of an existing credit rating on credit watch or
review;
(F) An affirmation of an existing credit rating; or
(G) A withdrawal of an existing credit rating and, if the
classification is withdrawal, the nationally recognized statistical
rating organization also must classify the reason for the withdrawal as
either:
(1) The obligor defaulted, or the security or money market
instrument went into default;
(2) The obligation subject to the credit rating was extinguished by
payment in full of all outstanding principal and interest due on the
obligation according to the terms of the obligation; or
(3) The credit rating was withdrawn for reasons other than those
set forth in paragraph (b)(2)(v)(G)(1) or (2) of this section; and
(vi) The classification of the class or subclass that applies to
the credit rating as either:
(A) Financial institutions, brokers, or dealers;
(B) Insurance companies;
(C) Corporate issuers; or
(D) Issuers of structured finance products in one of the following
subclasses:
(1) Residential mortgage backed securities (``RMBS'') (for purposes
of this subclass, RMBS means a securitization primarily of residential
mortgages);
(2) Commercial mortgage backed securities (``CMBS'') (for purposes
of this subclass, CMBS means a securitization primarily of commercial
mortgages);
(3) Collateralized loan obligations (``CLOs'') (for purposes of
this subclass, a CLO means a securitization primarily of commercial
loans);
(4) Collateralized debt obligations (``CDOs) (for purposes of this
subclass, a CDO means a securitization primarily of other debt
instruments such as RMBS, CMBS, CLOs, CDOs, other asset backed
securities, and corporate bonds);
(5) Asset-backed commercial paper conduits (``ABCP'') (for purposes
of this subclass, ABCP means short term notes issued by a structure
that securitizes a variety of financial assets, such as trade
receivables or credit card receivables, which secure the notes);
(6) Other asset-backed securities (``other ABS'') (for purposes of
this subclass, other ABS means a securitization primarily of auto
loans, auto leases, floor plans, credit card receivables, student
loans, consumer loans, or equipment leases); or
(7) Other structured finance products (``other SFPs'') (for
purposes of this subclass, other SFPs means any structured finance
product not identified in paragraphs (b)(2)(iv)(D)(1) through (6)) of
this section; or
(E) Issuers of government securities, municipal securities, or
securities issued by a foreign government in one of the following
subclasses:
(1) Sovereign issuers;
(2) United States public finance; or
(3) International public finance; and
(vii) The credit rating symbol, number, or score in the applicable
rating scale of the nationally recognized statistical rating
organization assigned to the obligor, security, or money market
instrument as a result of the rating action or, if the credit rating
remained unchanged as a result of the rating action, the credit rating
symbol, number, or score in the applicable rating scale of the
nationally recognized statistical rating organization assigned to the
obligor, security, or money market instrument as of the date of the
rating action (in either case, include a credit rating in a default
category, if applicable).
(3) Format. The information identified in paragraph (b)(2) of this
section must be disclosed in an interactive data file that uses an XBRL
(eXtensible Business Reporting Language) format and the List of XBRL
Tags for NRSROs as published on the Internet Web site of the
Commission.
(4) Timing. The nationally recognized statistical rating
organization must disclose the information required in paragraph (b)(2)
of this section:
(i) Within twelve months from the date the rating action is taken,
if the credit rating subject to the action was paid for by the obligor
being rated or by the issuer, underwriter, depositor, or sponsor of the
security being rated; or
(ii) Within twenty-four months from the date the rating action is
taken, if the credit rating subject to the action is not a credit
rating described in paragraph (b)(4)(i) of this section.
(5) Removal of a credit rating history. The nationally recognized
statistical rating organization may cease disclosing a rating history
of an obligor, security, or money market instrument no earlier than 20
years after the date a rating action with respect to the obligor,
security, or money market instrument is classified as a withdrawal of
the credit rating pursuant to paragraph (b)(2)(v)(G) of this section,
provided that no subsequent credit ratings are assigned to the obligor,
security, or money market instrument after the withdrawal
classification.
13. Section 240.17g-8 is added to read as follows:
Sec. 240.17g-8 Policies and procedures.
(a) Policies and procedures with respect to the procedures and
methodologies used to determine credit ratings. A nationally recognized
statistical rating organization must establish, maintain, enforce, and
document policies and procedures reasonably designed to ensure:
(1) That the procedures and methodologies, including qualitative
and quantitative data and models, the nationally recognized statistical
rating organization uses to determine credit ratings are approved by
its board of directors or a body performing a function similar to that
of a board of directors.
(2) That the procedures and methodologies, including qualitative
and quantitative data and models, the nationally recognized statistical
rating organization uses to determine credit ratings are developed and
modified in accordance with the policies and procedures of the
nationally recognized statistical rating organization.
(3) That material changes to the procedures and methodologies,
including changes to qualitative and
[[Page 33543]]
quantitative data and models, the nationally recognized statistical
rating organization uses to determine credit ratings are:
(i) Applied consistently to all credit ratings to which the changed
procedures or methodologies apply; and
(ii) To the extent that the changes are to surveillance or
monitoring procedures and methodologies, applied to then-current credit
ratings within a reasonable period of time, taking into consideration
the number of ratings impacted, the complexity of the procedures and
methodologies used to determine the credit ratings, and the type of
obligor, security, or money market instrument being rated.
(4) That the nationally recognized statistical rating organization
promptly publishes on an easily accessible portion of its corporate
Internet Web site:
(i) Material changes to the procedures and methodologies, including
to qualitative models or quantitative inputs, the nationally recognized
statistical rating organization uses to determine credit ratings, the
reason for the changes, and the likelihood the changes will result in
changes to any current ratings; and
(ii) Significant errors identified in a procedure or methodology,
including a qualitative or quantitative model, the nationally
recognized statistical rating organization uses to determine credit
ratings that may result in a change in current credit ratings.
(5) That the nationally recognized statistical rating organization
discloses the version of a credit rating procedure or methodology,
including the qualitative methodology or quantitative inputs, used with
respect to a particular credit rating.
(b) Policies and procedures with respect to credit rating symbols,
numbers, or scores. A nationally recognized statistical rating
organization must establish, maintain, enforce, and document policies
and procedures that are reasonably designed to:
(1) Assess the probability that an issuer of a security or money
market instrument will default, fail to make timely payments, or
otherwise not make payments to investors in accordance with the terms
of the security or money market instrument.
(2) Clearly define each symbol, number, or score in the rating
scale used by the nationally recognized statistical rating organization
to denote a credit rating category and notches within a category for
each class and subclass of credit ratings for which the nationally
recognized statistical rating organization is registered and to include
such definitions in Exhibit 1 to Form NRSRO (Sec. 240b.300 of this
chapter).
(3) Apply any symbol, number, or score defined pursuant to
paragraph (b)(2) of this section in a manner that is consistent for all
types of obligors, securities, and money market instruments for which
the symbol, number, or score is used.
(c) Policies and procedures with respect to look-back reviews. The
policies and procedures a nationally recognized statistical rating
organization is required to establish, maintain, and enforce pursuant
to Section 15E(h)(4)(A) of the Act (15 U.S.C. 78o-7(h)(4)(A)) must
address instances in which a review conducted pursuant to those
policies and procedures determines that a conflict of interest
influenced a credit rating assigned to an obligor, security, or money
market instrument by including, at a minimum, procedures that are
reasonably designed to ensure that the nationally recognized
statistical rating organization will:
(1) Immediately publish a rating action placing the applicable
credit ratings of the obligor, security, or money market instrument on
credit watch or review based on the discovery of the conflict and
include with the publication of the rating action the information
required by Sec. 240.17g-7(a)(1)(ii)(J)(3)(i) of this chapter;
(2) Promptly determine whether the current credit rating assigned
to the obligor, security, or money market instrument must be revised so
that it no longer is influenced by a conflict of interest and is solely
a product of the documented procedures and methodologies the nationally
recognized statistical rating organization uses to determine credit
ratings; and
(3) Promptly publish, based on the determination of whether the
current credit rating assigned to the obligor, security, or money
market instrument must be revised (as applicable):
(i) A revised credit rating, if appropriate, and include with the
publication of the revised credit rating the information required by
Sec. 240.17g-7(a)(1)(ii)(J)(3)(ii) of this chapter; or
(ii) An affirmation of the credit rating, if appropriate, and
include with the publication of the affirmation the information
required by Sec. 240.17g-7(a)(1)(ii)(J)(3)(iii) of this chapter.
14. Section 240.17g-9 is added to read as follows:
Sec. 240.17g-9 Standards of training, experience, and competence for
credit analysts.
(a) A nationally recognized statistical rating organization must
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings that are reasonably designed to achieve the objective
that such individuals produce accurate credit ratings in the classes
and subclasses of credit ratings for which the nationally recognized
statistical rating organization is registered.
(b) The nationally recognized statistical rating organization must
consider the following when establishing the standards required under
paragraph (a) of this section:
(1) If the credit rating procedures and methodologies used by the
individual involve qualitative analysis, the knowledge necessary to
effectively evaluate and process the data relevant to the
creditworthiness of the obligor being rated or the issuer of the
securities or money market instruments being rated;
(2) If the credit rating procedures and methodologies used by the
individual involve quantitative analysis, the technical expertise
necessary to understand any models and model inputs that are a part of
the procedures and methodologies;
(3) The classes and subclasses of credit ratings for which the
individual participates in determining credit ratings and the factors
relevant to such classes and subclasses, including the geographic
location, sector, industry, regulatory and legal framework, and
underlying assets, applicable to the obligors or issuers in the classes
and subclasses; and
(4) The complexity of the obligors, securities, or money market
instruments being rated by the individual.
(c) The nationally recognized statistical rating organization must
include the following in the standards required under paragraph (a) of
this section:
(1) A requirement for periodic testing of the individuals employed
by the nationally recognized statistical rating organization to
determine credit ratings on their knowledge of the procedures and
methodologies used by the nationally recognized statistical rating
organization to determine credit ratings in the classes and subclasses
of credit ratings for which the individual participates in determining
credit ratings; and
(2) A requirement that at least one individual with three years or
more experience in performing credit analysis participates in the
determination of a credit rating.
15. Section 240.17g-10 is added to read as follows:
[[Page 33544]]
Sec. 240.17g-10 Certification of providers of third-party due
diligence services in connection with asset-backed securities.
(a) The written certification that a person employed to provide
third-party due diligence services is required to provide to a
nationally recognized statistical rating organization pursuant to
Section 15E(s)(4)(B) of the Act (15 U.S.C. 78o-7(s)(4)(B)) must be on
Form ABS Due Diligence-15E (Sec. 240b.400 of this chapter).
(b) The written certification must be signed by an individual who
is duly authorized by the person providing the third-party due
diligence services to make such a certification.
(c) For the purposes of Section 15E(s)(4)(B) of the Act (15 U.S.C.
78o-7(s)(4)(B)) and this section:
(1) The term due diligence services means a review of the assets
underlying an asset-backed security, as defined in Section 3(a)(77) of
the Act (15 U.S.C. 78c(a)(77)) for the purpose of making findings with
respect to:
(i) The quality or integrity of the information or data about the
assets provided, directly or indirectly, by the securitizer or
originator of the assets;
(ii) Whether the origination of the assets conformed to, or
deviated from, stated underwriting or credit extension guidelines,
standards, criteria, or other requirements;
(iii) The value of collateral securing such assets;
(iv) Whether the originator of the assets complied with Federal,
state, or local laws or regulations; or
(v) Any other factor or characteristic of such assets that would be
material to the likelihood that the issuer of the asset-backed security
will pay interest and principal according to its terms and conditions.
(2) The term issuer includes a sponsor, as defined in Sec.
229.1011 of this chapter, or depositor, as defined in Sec. 229.1011 of
this chapter, that participates in the issuance of an asset-backed
security, as defined in Section 3(a)(77) of the Act (15 U.S.C.
78c(a)(77)).
(3) The term originator has the same meaning as in Section 15G of
the Act (15 U.S.C. 78o-9).
(4) The term securitizer has the same meaning as in Section 15G of
the Act (15 U.S.C. 78o-9).
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
16. The authority citation for Part 249 continues to read as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
Subpart O--Forms for Securitizers of Asset-Backed Securities
17. Section 249.1400 and Form ABS-15G (referenced in Sec.
249.1400) to Part 249 are revised to read as follows:
Sec. 249.1400 Form ABS-15G, Asset-backed securitizer report pursuant
to Section 15G of the Securities Exchange Act of 1934.
This form shall be used for reports of information required by Rule
15Ga-1 (Sec. 240.15Ga-1 of this chapter) and Rule 15Ga-2 (Sec.
240.15Ga-2 of this chapter).
Note: The text of Form ABS-15G does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM ABS-15G
ASSET-BACKED SECURITIZER REPORT PURSUANT TO SECTION 15G OF THE
SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box to indicate the filing obligation which
this form is intended to satisfy:
-- Rule 15Ga-1 under the Exchange Act (17 CFR 240.15Ga-1) for the
reporting period ------------ to ------------
-- Rule 15Ga-2 under the Exchange Act (17 CFR 240.15Ga-2)
Date of Report (Date of earliest event reported)------------
Commission File Number of securitizer: ------------
Central Index Key Number of securitizer: ------------
-----------------------------------------------------------------------
Name and telephone number, including area code, of the person to
contact in connection with this filing
Indicate by check mark whether the securitizer has no activity to
report for the initial period pursuant to Rule 15Ga-1(c)(1) [ ]
Indicate by check mark whether the securitizer has no activity to
report for the quarterly period pursuant to Rule 15Ga-1(c)(2)(i) [ ]
Indicate by check mark whether the securitizer has no activity to
report for the annual period pursuant to Rule 15Ga-1(c)(2)(ii) [ ]
---- For forms furnished pursuant to Rule 15Ga-2 under the Exchange Act
(17 CFR 240.15Ga-2), also provide the following information:
Commission File Number of depositor: ------------
Central Index Key Number of depositor: ------------
-----------------------------------------------------------------------
(Exact name of issuing entity as specified in its charter)
Central Index Key Number of issuing entity (if applicable): ------
------
Commission File Number of issuing entity (if applicable): --------
----
Commission File Number of underwriter (if applicable): ------------
Central Index Key Number of underwriter (if applicable): ----------
--
GENERAL INSTRUCTIONS
A. Rule as to Use of Form ABS-15G.
This form shall be used to comply with the requirements of Rule
15Ga-1 (17 CFR 240.15Ga-1) and Rule 15Ga-2 (17 CFR 240.15Ga-2) under
the Exchange Act.
B. Events to be Reported and Time for Filing of Reports.
Forms filed under Rule 15Ga-1. In accordance with Rule 15Ga-1, file
the information required by Part I in accordance with Item 1.01, Item
1.02, or Item 1.03, as applicable. If the filing deadline for the
information occurs on a Saturday, Sunday, or holiday on which the
Commission is not open for business, then the filing deadline shall be
the first business day thereafter.
Forms filed under Rule 15Ga-2. In accordance with Rule 15Ga-2,
furnish the information required by Part II no later than five business
days prior to the first sale of securities in the offering.
C. Preparation of Report
This form is not to be used as a blank form to be filled in, but
only as a guide in the preparation of the report on paper meeting the
requirements of Rule 12b-12 (17 CFR 240.12b-12). The report shall
contain the number and caption of the applicable item, but the text of
such item may be omitted, provided the answers thereto are prepared in
the manner specified in Rule 12b-13 (17 CFR 240.12b-13). All items that
are not required to be answered in a particular report may be omitted
and no reference thereto need be made in the report. All instructions
should also be omitted.
D. Signature and Filing of Report
1. Forms filed under Rule 15Ga-1. Any form filed for the purpose of
meeting the requirements in Rule 15Ga-1 must be signed by the senior
officer in charge of securitization of the securitizer.
2. Forms filed under Rule 15Ga-2. Any form filed for the purpose of
meeting the requirements in Rule 15Ga-2 must be signed by the senior
officer in charge of securitization of the depositor if information
required by Item 2.01 is required to be provided and must be signed by
a duly authorized officer of
[[Page 33545]]
the underwriter if information required by Item 2.02 is required to be
provided.
3. Copies of report. If paper filing is permitted, three complete
copies of the report shall be filed with the Commission.
INFORMATION TO BE INCLUDED IN THE REPORT
PART I: REPRESENTATION AND WARRANTY INFORMATION
Item 1.01 Initial Filing of Rule 15Ga-1 Representations and Warranties
Disclosure
Provide the disclosures required by Rule 15Ga-1 (17 CFR 240.15Ga-1)
according to the filing requirements of Rule 15Ga-1(c)(1).
Item 1.02 Periodic Filing of Rule 15Ga-1 Representations and Warranties
Disclosure
Provide the disclosures required by Rule 15Ga-1 (17 CFR 240.15Ga-1)
according to the filing requirements of Rule 15Ga-1(c)(2).
Item 1.03 Notice of Termination of Duty to File Reports under Rule
15Ga-1
If a securitizer terminates its reporting obligation pursuant to
Rule 15Ga-1(c)(3), provide the date of the last payment on the last
asset-backed security outstanding that was issued by or issued by an
affiliate of the securitizer.
PART II: FINDINGS AND CONCLUSIONS OF THIRD-PARTY DUE DILIGENCE REPORTS
Item 2.01 Findings and Conclusions of a Third Party Due Diligence
Report Obtained by the Issuer
Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2)
for any third-party due diligence report obtained by the issuer.
Item 2.02 Findings and Conclusions of a Third-Party Due Diligence
Report Obtained by the Underwriter
Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2)
for any third party engaged by the underwriter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the reporting entity has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
------------ (Securitizer or Underwriter)
Date ------------
------------(Signature)*
*Print name and title of the signing officer under his signature.
PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934
18. The authority citation for part 249b continues to read in part
as follows:
Authority: 15 U.S.C. 78a et seq., unless otherwise noted;
* * * * *
Note: The text of Form NRSRO does not, and this amendment will
not, appear in the Code of Federal Regulations.
19. Form NRSRO (referenced in Sec. 249b.300) is revised to read as
follows:
Form NRSRO
APPLICATION FOR REGISTRATION AS A NATIONALLY RECOGNIZED STATISTICAL
RATING ORGANIZATION (NRSRO)
Persons who respond to the collection of information contained
in this form are not required to respond unless the form displays a
currently valid OMB control number.
SEC 1541 (4-09)
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BILLING CODE 8011-01-C
FORM NRSRO INSTRUCTIONS
A. GENERAL INSTRUCTIONS.
1. Form NRSRO is the Application for Registration as a Nationally
Recognized Statistical Rating Organization (``NRSRO'') under Section
15E of the Securities Exchange Act of 1934 (``Exchange Act'') and
Exchange Act Rule 17g-1. Exchange Act Rule 17g-1 requires an Applicant/
NRSRO to use Form NRSRO to:
File an initial application to be registered as an NRSRO
with the U.S. Securities and Exchange Commission (``Commission'');
File an application to register for an additional class of
credit ratings with the Commission;
File an application supplement with the Commission;
File an update of registration pursuant to Section
15E(b)(1) of the Exchange Act with the Commission;
File an annual certification pursuant to Section 15E(b)(2)
of the Exchange Act with the Commission; and
Furnish a withdrawal of registration pursuant to Section
15E(e) of the Exchange Act to the Commission.
2. Exchange Act Rule 17g-1(c) requires that an Applicant/NRSRO
[[Page 33552]]
promptly file with the Commission a written notice if information filed
with the Commission in an initial application for registration or in an
application to register for an additional class of credit ratings is
found to be or becomes materially inaccurate before the Commission has
granted or denied the application. The notice must identify the
information found to be materially inaccurate. The Applicant/NRSRO must
also promptly file with the Commission accurate and complete
information as an application supplement on Form NRSRO.
3. Pursuant to Exchange Act Rule 17g-1(i), an NRSRO must make its
current Form NRSRO and information and documents filed in Exhibits 1
through 9 to Form NRSRO publicly and freely available on an easily
accessible portion of its corporate Internet website within 10 business
days after the date of the Commission Order granting an initial
application for registration as an NRSRO or an application to register
for an additional class of credit ratings and within 10 business days
after filing with or furnishing to, as applicable, the Commission an
update of registration, annual certification, or withdrawal from
registration on Form NRSRO. The certifications from qualified
institutional buyers, disclosure reporting pages, and Exhibits 10
through 13 are not required to be made publicly available by the NRSRO
pursuant to Rule 17g-1(i). An Applicant/NRSRO may request that the
Commission keep confidential the certifications from qualified
institutional buyers, the disclosure reporting pages, and the
information and documents in Exhibits 10-13 filed with the Commission.
An Applicant/NRSRO seeking confidential treatment for these submissions
should mark each page ``Confidential Treatment'' and comply with
Commission rules governing confidential treatment (See 17 CFR 200.80
and 17 CFR 200.83). The Commission will keep this information
confidential to the extent permitted by law.
4. Section 15E(a)(2) of the Exchange Act prescribes time periods
and requirements for the Commission to grant or deny an initial
application for registration as an NRSRO. These time periods also apply
to an application to register for an additional class of credit
ratings.
5. Type or clearly print all information. Use only the current
version of Form NRSRO or a reproduction of it.
6. Section 15E of the Exchange Act (15 U.S.C. 78o-7) authorizes the
Commission to collect the Information on Form NRSRO from an Applicant/
NRSRO. The principal purposes of Form NRSRO are to determine whether an
Applicant should be granted registration as an NRSRO, whether an NRSRO
should be granted registration in an additional class of credit
ratings, whether an NRSRO continues to meet the criteria for
registration as an NRSRO, for an NRSRO to withdraw from registration,
and to provide information about an NRSRO to users of credit ratings.
Intentional misstatements or omissions may constitute federal criminal
violations under 18 U.S.C. 1001.
The information collection is in accordance with the clearance
requirements of Section 3507 of the Paperwork Reduction Act of 1995 (44
U.S.C. 3507). The Commission may not conduct or sponsor, and you are
not required to respond to, a collection of information unless it
displays a valid Office of Management and Budget (OMB) control number.
The time required to complete and file or furnish, as applicable, this
form, will vary depending on individual circumstances. The estimated
average time to complete an initial application is displayed on the
facing page of this Form. Send comments regarding this burden estimate
or suggestions for reducing the burden to Chief Information Officer,
Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549 or PRA [email protected].
7. Under Exchange Act Rule 17g-2(b)(10), an NRSRO must retain
copies of all Form NRSROs (including Exhibits, accompanying
information, and documents) filed with or furnished to, as applicable,
the Commission. Exchange Act Rule 17g-2(c) requires that these records
be retained for three years after the date the record is made.
8. An Applicant must file with the Commission at the address
indicated below two paper copies of an initial application for
registration as an NRSRO under Exchange Act Rule 17g-1(a), an
application to register for an additional class of credit ratings under
Exchange Act Rule 17g-1(b), a supplement to an initial application or
application to register for an additional class of credit ratings under
Exchange Act Rule 17g-1(c), or a withdrawal of an initial application
or an application to register for an additional class of credit ratings
under Exchange Act Rule 17g-1(d).
ADDRESS--The mailing address for Form NRSRO is: U.S. Securities and
Exchange Commission, 100 F Street, NE. Washington, DC 20549.
After registration, an NRSRO must file with or furnish to, as
applicable, the Commission electronically in the format required by the
EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T, an update
of registration under Exchange Act Rule 17g-1(e), an annual
certification under Exchange Act Rule 17g-1(f), or a withdrawal from
registration under Exchange Act Rule 17g-1(g).
9. A Form NRSRO will be considered filed with or furnished to, as
applicable, the Commission on the date the Commission receives a
complete and properly executed Form NRSRO that follows all applicable
instructions for the Form, including the instructions in Item A.8 with
respect to how a Form NRSRO must be filed with or furnished to the
Commission.
10. An NRSRO is subject to applicable fines, penalties, and other
available sanctions set forth in Sections 15E, 21, 21A, 21B, 21C, and
32 of the Exchange Act (15 U.S.C. 78o-7, 78u, 78u-1, 78u-2, 78u-3, and
78ff, respectively) for violations of the securities laws.
B. INSTRUCTIONS FOR AN INITIAL APPLICATION
An Applicant applying to be registered with the Commission as an
NRSRO must file with the Commission an initial application on Form
NRSRO. To complete an initial application:
Check the ``INITIAL APPLICATION'' box at the top of Form
NRSRO.
Complete Items 1, 2, 3, 4, 5, 6, and 8. (See Instructions
below for each Item). Enter ``None'' or ``N/A'' where appropriate.
Unless exempt from the requirement, attach certifications
from qualified institutional buyers, marked ``Certification from
Qualified Institutional Buyer'' (See Instructions below for Item 6C).
Attach Exhibits 1 through 13 (See Instructions below for
each Exhibit).
Execute the Form.
The Applicant must promptly file with the Commission a written notice
if information submitted to the Commission in an initial application is
found to be or becomes materially inaccurate prior to the date of a
Commission order granting or denying the application. The notice must
identify the information found to be materially inaccurate. The
Applicant also must promptly file with the Commission an application
supplement on Form NRSRO (See instructions below for an application
supplement).
[[Page 33553]]
C. INSTRUCTIONS FOR AN APPLICATION TO ADD A CLASS OF CREDIT RATINGS
An NRSRO applying to register for an additional class of credit
ratings must file with the Commission an application on Form NRSRO. To
complete an application to register for an additional class of credit
ratings:
Check the ``APPLICATION TO ADD CLASS OF CREDIT RATINGS''
box at the top of Form NRSRO.
Complete Items 1, 2, 3, 4, 5, 6, 7, and 8 on the Form
following all applicable instructions for each Item (See Instructions
below for each Item). If any information in an Item on a previously
submitted Form NRSRO is materially inaccurate, update that information.
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if
the Item is not being updated.
Unless exempt from the requirement, attach certifications
from qualified institutional buyers for the additional class of credit
ratings marked ``Certification from Qualified Institutional Buyer''
(See Instructions below for Item 6C).
If any information in an Exhibit previously submitted is
materially inaccurate, update that information.
Execute the Form.
The Applicant must promptly file with the Commission a written notice
if information submitted to the Commission in an application to add a
class of credit ratings is found to be or becomes materially inaccurate
prior to the date of a Commission order granting or denying the
application. The notice must identify the information found to be
materially inaccurate. The Applicant also must promptly file with the
Commission an application supplement on Form NRSRO (See instructions
below for an application supplement).
D. INSTRUCTIONS FOR AN APPLICATION SUPPLEMENT
An Applicant must file an application supplement with the
Commission on Form NRSRO if information submitted to the Commission in
a pending initial application for registration as an NRSRO or a pending
application to register for an additional class of credit ratings is
found to be or becomes materially inaccurate. To complete an
application supplement:
Check the ``APPLICATION SUPPLEMENT'' box at the top of
Form NRSRO.
Indicate on the line provided under the box the Item(s) or
Exhibit(s) being supplemented.
Complete Items 1, 2, 3, 4, 5 and 8 on the Form following
all applicable instructions for each Item (See Instructions below for
each Item). If supplementing an initial application, also complete Item
6. If supplementing an application for registration in an additional
class of credit ratings, also complete Items 6 and 7. If any
information in an Item on a previously submitted Form NRSRO is
materially inaccurate, update that information. Enter ``None'' or ``N/
A'' where appropriate. Complete each Item even if the Item is not being
updated.
If a certification from a qualified institutional buyer is
being updated or a new certification is being added, attach the updated
or new certification.
If an Exhibit is being updated, attach the updated
Exhibit.
Execute the Form.
E. INSTRUCTIONS FOR AN UPDATE OF REGISTRATION
After registration is granted, Section 15E(b)(1) of the Exchange
Act requires that an NRSRO must promptly amend its application for
registration if information or documents provided in a previously
submitted Form NRSRO become materially inaccurate. This requirement
does not apply to Item 7 and Exhibit 1, which only are required to be
updated annually with the annual certification. It also does not apply
to Exhibits 10-13 and the certifications from qualified institutional
buyers, which are not required to be updated on Form NRSRO after
registration. An NRSRO amending its application for registration must
file with the Commission an update of its registration on Form NRSRO.
To complete an update of registration:
Check the ``UPDATE OF REGISTRATION'' box at the top of
Form NRSRO.
Indicate on the line provided under the box the Item(s) or
Exhibit(s) being updated.
Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form
following all applicable instructions for each Item (See Instructions
below for each Item). If any information in an Item on a previously
submitted Form NRSRO is materially inaccurate, update that information.
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if
the Item is not being updated.
If an Exhibit is being updated, attach the updated
Exhibit.
Execute the Form.
F. INSTRUCTIONS FOR ANNUAL CERTIFICATIONS
After registration is granted, Section 15E(b)(2) of the Exchange
Act requires that an NRSRO file with the Commission an annual
certification not later than 90 days after the end of each calendar
year. The annual certification must be filed with the Commission on
Form NRSRO and must include an update of the information in Item 7 and
the credit rating transition and default rates submitted in Exhibit 1,
a certification that the information and documents on or with Form
NRSRO continue to be accurate (use the certification on the Form), and
a list of material changes to the application for registration that
occurred during the previous calendar year. To complete an annual
certification:
Check the ``ANNUAL CERTIFICATION'' box at the top of Form
NRSRO.
Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form
following all applicable instructions for each Item (See Instructions
below for each Item). If any information in an Item on the previously
submitted Form NRSRO is materially inaccurate, update that information.
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if
the Item is not being updated.
If any information in a non-confidential Exhibit
previously submitted is materially inaccurate, update that information.
(Note: After registration, Exhibits 10 through 13 are not required to
be made publicly available by the NRSRO pursuant to Exchange Act Rule
17g-1(i) and they should not be updated with the filing of the annual
certification. Instead, similar information must be filed with the
Commission not more than 90 days after the end of each fiscal year
under Exchange Act Rule 17g-3.).
Attach a list of all material changes made to the
information or documents in the application for registration of the
NRSRO that occurred during the previous calendar year.
Execute the Form.
G. INSTRUCTIONS FOR A WITHDRAWAL FROM REGISTRATION
Section 15E(e)(1) of the Exchange Act provides that an NRSRO may
voluntarily withdraw its registration with the Commission. Under
Exchange Act Rule, 17g-1(g), to withdraw from registration, an NRSRO
must furnish the Commission with a notice of withdrawal from
registration on Form NRSRO. The withdrawal from registration will
become effective 45 calendar days after the withdrawal from
registration is furnished to the Commission upon such terms and
conditions as the Commission may establish as necessary in the public
interest or for the protection of
[[Page 33554]]
investors. To complete a withdrawal from registration:
Check the ``WITHDRAWAL FROM REGISTRATION'' box at the top
of Form NRSRO.
Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form
following all applicable instructions for each Item (See Instructions
below for each Item). If any information on a previously submitted Form
NRSRO is materially inaccurate, update that information. Enter ``None''
or ``N/A'' where appropriate. Complete each Item even if the Item is
not being updated.
Execute the Form.
H. INSTRUCTIONS FOR SPECIFIC LINE ITEMS
Item 1A. Provide the name of the person (e.g., XYZ Corporation)
that is filing or furnishing, as applicable, the Form NRSRO. This means
the name of the person that is applying for registration as an NRSRO or
is registered as an NRSRO and not the name of the individual that is
executing the Form.
Item 1E. The individual listed as the contact person must be
authorized to receive all communications and papers from the Commission
and must be responsible for their dissemination within the Applicant/
NRSRO.
Certification. The certification must be executed by the Chief
Executive Officer or the President of the person that is filing or
furnishing, as applicable, the Form NRSRO or an individual with similar
responsibilities.
Item 3. Identify credit rating affiliates that issue credit ratings
on behalf of the person filing or furnishing, as applicable, the Form
NRSRO in one or more of the classes of credit ratings identified in
Item 6 or Item 7. A ``credit rating affiliate'' is a separate legal
entity or a separately identifiable department or division thereof that
determines credit ratings that are credit ratings of the person filing
or furnishing, as applicable, the Form NRSRO. The information in Items
4-8 and all the Exhibits must incorporate information about the credit
ratings, methodologies, procedures, policies, financial condition,
results of operations, personnel, and organizational structure of each
credit rating affiliate identified in Item 3, as applicable. Any credit
rating determined by a credit rating affiliate identified in Item 3
will be treated as a credit rating issued by the person filing or
furnishing, as applicable, the Form NRSRO for purposes of Section 15E
of the Exchange Act and the Commission's rules thereunder. The terms
``Applicant'' and ``NRSRO'' as used on Form NRSRO and the Instructions
for the Form mean the person filing or furnishing, as applicable, the
Form NRSRO and any credit rating affiliate identified in Item 3.
Item 4. Section 15E(j)(1) of the Exchange Act requires an NRSRO to
designate a compliance officer responsible for administering the
policies and procedures of the NRSRO established pursuant to Sections
15E(g) and (h) of the Exchange Act (respectively, to prevent the misuse
of material nonpublic information and address and manage conflicts of
interest) and for ensuring compliance with applicable securities laws,
rules, and regulations.
Item 5. Section 15E(a)(3) of the Exchange Act and Exchange Act Rule
17g-1(i) require an NRSRO to make Form NRSRO and Exhibits 1-9 to Form
NRSRO filed with the Commission publicly and freely available on an
easily accessible portion of the NRSRO's corporate Internet Web site
within 10 business days after the date of the Commission order granting
an initial application for registration as an NRSRO or an application
to register for an additional class of credit ratings and within 10
business days after filing with or furnishing to, as applicable, the
Commission an amendment, annual certification, or withdrawal from
registration on Form NRSRO. The certifications from qualified
institutional investors, Disclosure Reporting Pages, and Exhibits 10
through 13 are not required to be made publicly available on the
NRSRO's corporate Internet Web site. Describe how the current Form
NRSRO and Exhibits 1-9 will be made publicly and freely available on an
easily accessible portion of the NRSRO's corporate Internet Web site by
providing the Internet address and link to the Form and Exhibits.
Item 6. Complete Item 6 only if filing an initial application for
registration, an application to be registered in an additional class of
credit ratings, or an application supplement.
Item 6A. Pursuant to Section 15E(a)(1)(B)(vii) of the Exchange Act,
an Applicant applying for registration as an NRSRO must disclose in the
application the classes of credit ratings for which the Applicant/NRSRO
is applying to be registered. Indicate these classes by checking the
appropriate box or boxes. For each class of credit ratings, provide in
the appropriate box the approximate number of obligors, securities, and
money market instruments in that class for which the Applicant/NRSRO
presently has a credit rating outstanding as of the date of the
application. In determining this amount, the Applicant/NRSRO must treat
as a separately rated security or money market instrument each
individually rated security and money market instrument that, for
example, is assigned a distinct CUSIP or other unique identifier, has
distinct credit enhancement features as compared with other securities
or money market instruments of the same issuer, or has a different
maturity date as compared with other securities or money market
instruments of the same issuer. The Applicant/NRSRO must not include an
obligor, security, or money market instrument in more than one class of
credit rating. An Applicant/NRSRO must include in the class of credit
ratings described in Section 3(a)(62)(B)(iv) of the Exchange Act
(issuers of asset-backed securities) to the extent not described in
Section 3(a)(62)(B)(iv), any rated security or money market instrument
issued by an asset pool or as part of any asset-backed securities
transaction. For each class of credit ratings, also provide in the
appropriate box the approximate date the Applicant/NRSRO began issuing
and making readily accessible credit ratings in the class on a
continuous basis through the present as a ``credit rating agency,'' as
that term is defined in Section 3(a)(61) of the Exchange Act. If there
was a period when the Applicant/NRSRO stopped issuing credit ratings in
a particular class or stopped operating as a credit rating agency,
provide the approximate date the Applicant/NRSRO resumed issuing and
making readily accessible credit ratings in that class as a credit
rating agency. Refer to the definition of ``credit rating agency'' in
the instructions below (also at 15 U.S.C. 78c(a)(61)) to determine when
the Applicant/NRSRO began operating as a ``credit rating agency.''
Item 6B. To meet the definition of ``credit rating agency''
pursuant to Section 3(a)(61)(A) of the Exchange Act, the Applicant
must, among other things, issue ``credit ratings on the Internet or
through another readily accessible means, for free or for a reasonable
fee.'' Briefly describe how the Applicant/NRSRO makes the credit
ratings in the classes indicated in Item 6A readily accessible for free
or for a reasonable fee. If a person must pay a fee to obtain a credit
rating made readily accessible by the Applicant/NRSRO, provide a fee
schedule or describe the price(s) charged.
Item 6C. If the Applicant/NRSRO is required to file qualified
institutional buyer certifications under Section 15E(a)(1)(C) of the
Exchange Act file a minimum of 10 certifications from qualified
institutional buyers, none of which is affiliated with the Applicant/
[[Page 33555]]
NRSRO. Each certification may address more than one class of credit
ratings. To be registered as an NRSRO for a class of credit ratings
identified in Item 6A under ``Applying for Registration,'' the
Applicant/NRSRO must file at least two certifications that address the
class of credit ratings. If this is an application of an NRSRO to be
registered in one or more additional classes of credit ratings, file at
least two certifications that address each additional class of credit
ratings.
The required certifications must be signed by a person duly
authorized by the certifying entity, must be notarized, must be marked
``Certification from Qualified Institutional Buyer,'' and must be in
substantially the following form:
``I, [Executing official], am authorized by [Certifying entity] to
execute this certification on behalf of [Certifying entity]. I certify
that all actions by stockholders, directors, general partners, and
other bodies necessary to authorize me to execute this certification
have been taken and that [Certifying entity]:
(i) Meets the definition of a `qualified institutional buyer' as
set forth in section 3(a)(64) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)(64)) pursuant to the following subsection(s) of 17
CFR 230.144A(a)(1) [insert applicable citations];
(ii) Has seriously considered the credit ratings of [the Applicant/
NRSRO] in the course of making some of its investment decisions for at
least the three years immediately preceding the date of this
certification, in the following classes of credit ratings: [Insert
applicable classes of credit ratings]; and
(iii) Has not received compensation either directly or indirectly
from [the Applicant/NRSRO] for executing this certification.
[Signature]
Print Name and Title
You are not required to make a Certification from a Qualified
Institutional Buyer filed with this Form NRSRO publicly available on
your corporate Internet Web site pursuant to Exchange Act Rule 17g-
1(i). You may request that the Commission keep these certifications
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
certifications confidential upon request to the extent permitted by
law.
Item 7. An Applicant filing Form NRSRO to apply for registration as
an NRSRO should not complete Item 7. An NRSRO filing or furnishing, as
applicable, Form NRSRO for any other reason must complete Item 7. The
information in Item 7 must be updated on an annual basis with the
filing of the annual certification.
Item 7A. Indicate the classes of credit ratings for which the NRSRO
is currently registered by checking the appropriate box or boxes. For
each class of credit ratings, provide in the appropriate box the
approximate number of obligors, securities, and money market
instruments in that class for which the NRSRO had a credit rating
outstanding as of the end of the most recently ended calendar year. In
determining this amount, NRSRO must treat as a separately rated
security or money market instrument each individually rated security
and money market instrument that, for example, is assigned a distinct
CUSIP or other unique identifier, has distinct credit enhancement
features as compared with other securities or money market instruments
of the same issuer, or has a different maturity date as compared with
other securities or money market instruments of the same issuer. The
NRSRO must not include an obligor, security, or money market instrument
in more than one class of credit rating. An NRSRO must include in the
class of credit ratings described in Section 3(a)(62)(B)(iv) of the
Exchange Act (issuers of asset-backed securities) to the extent not
described in Section 3(a)(62)(B)(iv), any rated security or money
market instrument issued by an asset pool or as part of any asset-
backed securities transaction. For each class of credit ratings, also
provide in the appropriate box the approximate date the NRSRO began
issuing and making readily accessible credit ratings in the class on a
continuous basis through the present as a ``credit rating agency,'' as
that term is defined in Section 3(a)(61) of the Exchange Act. If there
was a period when the NRSRO stopped issuing credit ratings in a
particular class or stopped operating as a credit rating agency,
provide the approximate date the NRSRO resumed issuing and making
readily accessible credit ratings in that class as a credit rating
agency. Refer to the definition of ``credit rating agency'' in the
instructions below (also at 15 U.S.C. 78c(a)(61)) to determine when the
NRSRO began operating as a ``credit rating agency.''
Item 7B. Briefly describe how the NRSRO makes the credit ratings in
the classes indicated in Item 7A readily accessible for free or for a
reasonable fee. If a person must pay a fee to obtain a credit rating
made readily accessible by the NRSRO, provide a fee schedule or
describe the price(s) charged.
Item 8. Answer each question by checking the appropriate box. Refer
to the definition of ``person within an Applicant/NRSRO'' set forth
below to determine the persons to which the questions apply.
Information that relates to an affirmative answer must be provided on a
Disclosure Reporting Page (NRSRO) and filed with Form NRSRO. Submit a
separate Disclosure Reporting Page (NRSRO) for each person that: (a)
has committed or omitted any act, or has been subject to an order or
finding, enumerated in subparagraphs (A), (D), (E), (G), or (H) of
section 15(b)(4) of the Securities Exchange Act of 1934, has been
convicted of any offense specified in section 15(b)(4)(B) of the
Securities Exchange Act of 1934, or has been enjoined from any action,
conduct, or practice specified in section 15(b)(4)(C) of the Securities
Exchange Act of 1934; (b) has been convicted of any crime that is
punishable by imprisonment for 1 or more years, and that is not
described in section 15(b)(4) of the Securities Exchange Act of 1934,
or has been convicted of a substantially equivalent crime by a foreign
court of competent jurisdiction; or (c) is subject to any order of the
Commission barring or suspending the right of the person to be
associated with an NRSRO. The Disclosure Reporting Page (NRSRO) is
attached to these instructions. Note: The definition of ``person within
an Applicant/NRSRO'' is narrower than the definition of ``person
associated with a nationally recognized statistical rating
organization'' in Section 3(a)(63) of the Exchange Act. You are not
required to make any disclosure reporting pages submitted with this
Form NRSRO publicly available on your corporate Internet Web site
pursuant to Exchange Act Rule 17g-1(i). You may request that the
Commission keep any disclosure reporting pages confidential by marking
each page ``Confidential Treatment'' and complying with Commission
rules governing confidential treatment. The Commission will keep the
disclosure reporting pages confidential upon request to the extent
permitted by law.
Item 9. Exhibits. Section 15E(a)(1)(B) of the Exchange Act requires
a credit rating agency's application for registration as an NRSRO to
contain certain specific information and documents and, pursuant to
Section 15E(a)(1)(B)(x), any other information and documents concerning
the applicant and any person associated with the applicant that the
Commission requires as necessary or appropriate in the public interest
or for the protection of investors. If any information or
[[Page 33556]]
document required to be included with any Exhibit is maintained in a
language other than English, file a copy of the original document and a
version of the document translated into English. Attach a certification
by an authorized person that the translated version is a true,
accurate, and complete English translation of the information or
document. Attach the Exhibits to Form NRSRO in numerical order. Bind
each Exhibit separately, and mark each Exhibit or bound volume of the
Exhibit with the appropriate Exhibit number. The information in the
Exhibits must be sufficiently detailed to allow for verification. The
information and documents in Exhibits 1 through 9 must be made publicly
and freely available on an easily accessible portion of the NRSRO's
corporate Internet Web site pursuant to Exchange Act Rule 17g-1(i). The
information and documents in Exhibits 10 through 13 are not required to
be made publicly available on the NRSRO's corporate Internet Web site
pursuant to Exchange Act Rule 17g-1(i). An NRSRO may request that the
Commission keep these Exhibits confidential by marking each page of
them ``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 these
Exhibits confidential upon request to the extent permitted by law.
(Note: After registration, Exhibits 10 through 13 are not required to
be made publicly available by the NRSRO pursuant to Exchange Act Rule
17g-1(i) and they should not be updated with the filing of the annual
certification. Instead, similar information must be filed with the
Commission not more than 90 days after the end of each fiscal year
pursuant to Exchange Act Rule 17g-3.).
Exhibit 1. (1) An Applicant/NRSRO must provide in this Exhibit
performance measurement statistics consisting of transition and default
rates for each class and subclass of credit ratings (listed below) for
which it is seeking registration as an NRSRO or for which it is
registered as an NRSRO. For each applicable class and subclass of
credit ratings, an Applicant/NRSRO must provide transition and default
rates for 1-, 3-, and 10-year time periods through the most recent
calendar year end. The transition and default rates for each time
period must be presented together in tabular form (``Transition/Default
Matrix''). The Transition/Default Matrices must be presented on a
calendar year basis even if the Applicant/NRSRO has a fiscal year end
other than December 31. Exhibit 1 must be updated annually with the
filing of the NRSRO's Annual Certification pursuant to Exchange Act
Rule 17g-1(f). Pursuant to Exchange Act Rule 17g-1(i), an NRSRO must
make the Annual Certification publicly and freely available on an
easily accessible portion of the NRSRO's corporate Internet Web site
within 10 business days after the filing and must make its up-to-date
Exhibit 1 freely available in writing to any individual who requests a
copy of the Exhibit. The classes and subclasses of credit ratings for
which an Applicant/NRSRO must provide Transition/Default Matrices are
(as applicable):
(A) The class of credit ratings described in Section 3(a)(62)(B)(i)
of the Exchange Act (financial institutions, brokers, or dealers).
(B) The class of credit ratings described in Section
3(a)(62)(B)(ii) of the Exchange Act (insurance companies);
(C) The class of credit ratings described in Section
3(a)(62)(B)(iii) of the Exchange Act (corporate issuers);
(D) The following subclasses of credit ratings described in Section
3(a)(62)(B)(iv) of the Exchange Act (issuers of asset-backed
securities) and, to the extent not described in Section
3(a)(62)(B)(iv), any security or money market instrument issued by an
asset pool or as part of any asset-backed securities transaction:
(i) Residential mortgage backed securities (``RMBS'') (for the
purposes of Exhibit 1, RMBS means a securitization primarily of
residential mortgages);
(ii) Commercial mortgage backed securities (``CMBS'') (for the
purposes of Exhibit 1, CMBS means a securitization primarily of
commercial mortgages);
(iii) Collateralized loan obligations (``CLOs'') (for the purposes
of Exhibit 1, a CLO means a securitization primarily of commercial
loans);
(iv) Collateralized debt obligations (``CDOs'') (for the purposes
of Exhibit 1, a CDO means a securitization primarily of other debt
instruments such as RMBS, CMBS, CLOs, CDOs, other asset backed
securities, and corporate bonds);
(v) Asset-backed commercial paper (``ABCP'') (for the purposes of
Exhibit 1, ABCP means short term notes issued by a structure that
securitizes a variety of financial assets (e.g., trade receivables or
credit card receivables), which secure the notes);
(vi) Other asset-backed securities (``other ABS'') (for the
purposes of Exhibit 1, other ABS means a securitization primarily of
auto loans, auto leases, floor plan financings, credit card
receivables, student loans, consumer loans, or equipment leases); and
(vii) Other structured finance products (``other SFPs'') (for the
purposes of Exhibit 1, other SFPs means any structured finance product
not identified in subparagraphs (i) through (vi) above--the Applicant/
NRSRO must provide a description of the products in this subclass); and
(E) The following subclasses of credit ratings described in Section
3(a)(62)(B)(v) of the Exchange Act (issuers of government securities,
municipal securities, or securities issued by a foreign government):
(i) Sovereign issuers;
(ii) United States public finance; and
(iii) International public finance.
(2) The Transition/Default Matrices for applicable classes and
subclasses of credit ratings must be presented in the same order that
the classes and subclasses of credit ratings are identified in
paragraphs (1)(A) through (E) above. For a given class or subclass,
Transition/Default Matrices must be presented in the following order:
1-year matrix, 3-year matrix and then 10-year matrix. If the Applicant/
NRSRO has not been determining credit ratings in the applicable class
or subclass for the length of time necessary to produce a 1-, 3-, and/
or 10-year Transition/Default Matrix, it must explain that fact in the
location where the Transition/Default Matrix would have been presented
in the Exhibit. The Applicant/NRSRO must clearly define, after the
presentation of all applicable Transition/Default Matrices, each
symbol, number, or score in the rating scale used by the Applicant/
NRSRO to denote a credit rating category and notches within a category
for each class and subclass of credit ratings in any Transition/Default
Matrix presented in the Exhibit. In, addition the Applicant/NRSRO must
clearly explain the conditions under which it classifies obligors,
securities, or money market instruments as being in default. Next, the
Applicant/NRSRO must provide the uniform resource locator (URL) of its
corporate Internet Web site where the credit rating histories required
to be disclosed pursuant to 17 CFR 17g-7(b) will be located (in the
case of an Applicant) or are located (in the case of an NRSRO). Exhibit
1 must contain no performance measurement statistics or information
other than as described in, and required by, these Instructions for
Exhibit 1; except that the Applicant/NRSRO may provide after the
presentation of all required Transition/Default Matrices and other
disclosures the Internet Web site URLs where other information relating
to performance
[[Page 33557]]
measurement statistics of the Applicant/NRSRO is located.
(3) The Transition/Default Matrices must be presented using the
format of the sample matrix (``Sample Matrix'') below. The top row of a
Transition/Default Matrix (the ``header row'') must contain column
headings. The first and second cells in the header row must contain the
headings, respectively: ``Credit Rating Scale'' and ``Number of Ratings
Outstanding as of [insert applicable date].'' The applicable date is
the date 1, 3, or 10 years prior to the most recent calendar year end
depending on whether the Transition/Default Matrix is for a 1-, 3-, or
10-year period. The next sequence of cells in the header row must
contain, from left to right, each symbol, number, or score in the
rating scale used by the Applicant/NRSRO to denote a credit rating
category and notches within a category for the applicable class or
subclass of credit ratings in descending order from the highest to the
lowest notch. The Applicant/NRSRO must not include a ``default''
category if its rating scale has such a category. The next headings
must be in the following order, from left to right, ``Default'' (see
explanation below), ``Paid Off'' (see explanation below), and
``Withdrawn (other)'' (see explanation below). The first column of a
Transition/Default Matrix must have a separate cell containing each
symbol, number, or score in the rating scale used by the Applicant/
NRSRO to denote a credit rating category and notches within a category
for the applicable class or subclass of credit ratings in descending
order from the highest to the lowest notch. The Applicant/NRSRO must
not include a ``default'' category in the column if its rating scale
has such a category. The last cell of the first column must contain the
word ``Total.'' Finally, the Transition/Default Matrix must have a
title identifying the applicable class or subclass of credit ratings,
the period covered, and the start date and end date of the period.
The Transition/Default Matrix must resemble the Sample Matrix below
except that the number of credit rating symbols depicted in the cells
of the first column and header row of a matrix will depend on the
number of notches in the applicable rating scale of the Applicant/NRSRO
(excluding a ``default'' category).
Corporate Issuers--10-Year Transition and Default Rates
[December 31, 2000 through December 31, 2010]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
ratings Paid Withdrawn
Credit rating scale outstanding as AAA AA A BBB BB B CCC CC C Default off (other)
of 12/31/2000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AAA............................................................. 10 50% 10% ....... ....... ; ....... ....... ....... ....... ....... 40% ...........
AA.............................................................. 2,000 1% 39% 12% 10% 8% 5% 4% ....... ....... 1% 19% 1%
A............................................................... 4,000 ....... 6% 34% 15% 10% 6% 4% 3% ....... 2% 18% 2%
BBB............................................................. 3,600 ....... 2% 9% 28% 15% 10% 6% 5% 1% 4% 17% 3%
BB.............................................................. 1,000 ....... ....... 2% 4% 20% 14% 5% ....... ....... 2% 16% 37%
B............................................................... 500 ....... ....... 1% 3% 6% 20% 20% 15% ....... 15% 15% 5%
CCC............................................................. 300 ....... ....... ....... ....... 4% 6% 15% 25% 20% 20% 4% 6%
CC.............................................................. 200 ....... ....... ....... ....... ....... 2% 8% 10% 38% 30% 2% 10%
C............................................................... 160 ....... ....... ....... ....... ....... ....... 2% 8% 10% 67% 1% 12%
-------------------------------------------------------------------------------------------------------------------------------
Total....................................................... 11,770 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ...........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(4) An Applicant/NRSRO must populate the cells in the columns and
rows of a Transition/Default Matrix in the following manner:
(A) Second Column Showing Number of Ratings Outstanding as of the
Period Start Date. To populate the cells of this column, the Applicant/
NRSRO must determine the number of obligors, securities, and money
market instruments in the applicable class or subclass of credit
ratings that were assigned an outstanding credit rating as of the
period start date (cumulatively, the ``start-date cohort''). In
determining the start-date cohort, the Applicant/NRSRO must exclude any
obligors, securities, or money market instruments that the NRSRO
classified as in default as of the start date. Next, the Applicant/
NRSRO must determine the number of obligors, securities, and money
market instruments in the start-date cohort assigned a credit rating
(other than an expected or preliminary credit rating) as of the start
date in each notch represented in the ``Credit Rating Scale'' column.
The Applicant/NRSRO must populate the cells of this column with the
number of obligors, securities, and/or money market instruments
assigned a credit rating in each notch and in the bottom cell the total
number of credit ratings in the start-date cohort.
(B) Rows Representing Credit Rating Notches. Each row representing
a credit rating notch must contain percents indicating the credit
rating outcomes of all the obligors, securities, and/or money market
instruments assigned a credit rating at that notch as of the period
start date. The percents in a row must add up to 100%. To compute the
percents for each row representing a notch in the rating scale in the
Transition/Default Matrix:
(i) The Applicant/NRSRO must determine the number of obligors,
securities, and money market instruments assigned a credit rating at
that notch as of the period start-date that were assigned a credit
rating at the same notch as of the period end date. This number must be
expressed as a percent of the total number of obligors, securities,
and/or money market instruments assigned a credit rating at that notch
as of the period start date and the percent must be entered in the
column representing the same notch. To determine this percent, the
Applicant/NRSRO must use the credit rating at the notch assigned to the
obligor, security, or money market instrument as of the period end date
and not a credit rating at any other notch assigned to the obligor,
security, or money market instrument between the period start date and
the period end date.
(ii) The Applicant/NRSRO must determine the number of obligors,
securities, and money market instruments assigned a credit rating at
that notch as of the period start date that were assigned a credit
rating at each other notch as of the period end date. These numbers
must be expressed as percents of the total number of obligors,
securities, and/or money market instruments assigned a credit rating at
that notch as of the period start date and the percents must be entered
in the columns representing each different notch. To determine these
percents, the Applicant/NRSRO must use the credit rating at the notch
assigned to the obligor, security, or money market instrument as of the
period end date and not a credit rating at any other notch assigned to
the obligor, security, or money market instrument between the period
start date and the period end date.
(iii) The Applicant/NRSRO must determine the number of obligors,
securities, and money market
[[Page 33558]]
instruments assigned a credit rating at that notch as of the period
start date that went into Default (see explanation below) at any time
during the applicable time period. This number must be expressed as a
percent of the total number of obligors, securities, and/or money
market instruments assigned a credit rating at that notch as of the
period start date and the percent must be entered in the Default
column. To determine this percent, the Applicant/NRSRO must classify an
obligor, security, or money market instrument as having gone into
Default if the conditions in either (a) or (b) (or in both (a) and (b))
are met:
(a) The obligor failed to timely pay principal or interest due
according to the terms of an obligation during the applicable period or
the issuer of the security or money market instrument failed to timely
pay principal or interest due according to the terms of the security or
money market instrument during the applicable period; or
(b) The Applicant/NRSRO classified the obligor, security, or money
market instrument as having gone into default using its own definition
of ``default'' during the applicable period.
An obligor, security, or money market instrument that goes into in
Default as defined in this paragraph (4)(B)(iii) must be classified as
in Default even if the Applicant/NRSRO assigned a credit rating to the
obligor, security, or money market instrument at a notch above default
in its rating scale on or after the event of Default or withdrew the
credit rating on or after the event of Default.
(iv) The Applicant/NRSRO must determine the number of obligors,
securities, and money market instruments assigned a credit rating at
that notch as of the period start date that Paid Off (see explanation
below) at any time during the applicable time period. This number must
be expressed as a percent of the total number of obligors, securities,
and/or money market instruments assigned a credit rating at that notch
as of the period start date and the percent must be entered in the Paid
Off column. To determine this percent, the Applicant/NRSRO must
classify an obligor, security, or money market instrument as Paid Off
if the conditions in either (a) or (b) are met;
(a) The obligor extinguished the obligation during the applicable
time period by paying in full all outstanding principal and interest
due on the obligation according to the terms of the obligation (e.g.,
because the obligation matured, was called, or was prepaid); and the
Applicant/NRSRO withdrew the credit rating because the obligation was
extinguished; or
(b) The issuer of the security or money market instrument
extinguished its obligation with respect to the security or money
market instrument during the applicable time period by paying in full
all outstanding principal and interest due according to the terms of
the security or money market instrument (e.g., because the security or
money market instrument matured, was called, or was prepaid); and the
Applicant/NRSRO withdrew the credit rating for the security or money
market instrument because the obligation was extinguished.
(v) The Applicant/NRSRO must determine the number of obligors,
securities, and money market instruments assigned a credit rating at
that notch as of the period start date for which the Applicant/NRSRO
withdrew a credit rating assigned to the obligor, security, or money
market instrument at any time during the applicable time period for a
reason other than Default (as described in paragraph (4)(B)(iii)) or
Paid-Off (as described in paragraph (4)(B)(iv)). This number must be
expressed as a percent of the total number of obligors, securities,
and/or money market instruments assigned a credit rating at that notch
as of the period start date and the percent must be entered in the
Withdrawn (other) column. The Applicant/NRSRO must classify the
obligor, security, or money market instrument as Withdrawn (other) even
if the Applicant/NRSRO assigned a credit rating to the obligor,
security, or money market instrument after withdrawing its credit
rating.
Exhibit 2. Provide in this Exhibit a general description of the
procedures and methodologies used by the Applicant/NRSRO to determine
credit ratings, including unsolicited credit ratings within the classes
of credit ratings for which the Applicant/NRSRO is seeking registration
or is registered. The description must be sufficiently detailed to
provide users of credit ratings with an understanding of the processes
employed by the Applicant/NRSRO in determining credit ratings,
including, as applicable, descriptions of: Policies for determining
whether to initiate a credit rating; a description of the public and
non-public sources of information used in determining credit ratings,
including information and analysis provided by third-party vendors;
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
securities transaction is relied on in determining credit ratings; the
quantitative and qualitative models and metrics used to determine
credit ratings, including 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 securities transaction factor into the determination of
credit ratings; the methodologies by which credit ratings of other
credit rating agencies are treated to determine credit ratings for
securities or money market instruments issued by an asset pool or as
part of any asset-backed or mortgaged-backed securities transaction;
the procedures for interacting with the management of a rated obligor
or issuer of rated securities or money market instruments; the
structure and voting process of committees that review or approve
credit ratings; procedures for informing rated obligors or issuers of
rated securities or money market instruments about credit rating
decisions and for appeals of final or pending credit rating decisions;
procedures for monitoring, reviewing, and updating credit ratings,
including how frequently credit ratings are reviewed, whether different
models or criteria are used for ratings surveillance than for
determining initial ratings, whether changes made to models and
criteria for determining initial ratings are applied retroactively to
existing ratings, and whether changes made to models and criteria for
performing ratings surveillance are incorporated into the models and
criteria for determining initial ratings; and procedures to withdraw,
or suspend the maintenance of, a credit rating. An Applicant/NRSRO may
provide in Exhibit 2 the location on its corporate Internet Web site
where additional information about the procedures and methodologies is
located.
Exhibit 3. Provide in this Exhibit a copy of the written policies
and procedures established, maintained, and enforced by the Applicant/
NRSRO to prevent the misuse of material, nonpublic information pursuant
to Section 15E(g) of the Exchange Act and 17 CFR 240.17g-4. Do not
include any information that is proprietary or that would diminish the
effectiveness of a specific policy or procedure if made publicly
available.
Exhibit 4. Provide in this Exhibit information about the
organizational structure of the Applicant/NRSRO, including, as
applicable, an organizational chart that identifies, as applicable, the
ultimate and sub-holding companies, subsidiaries, and material
affiliates of the Applicant/NRSRO; an organizational chart showing the
[[Page 33559]]
divisions, departments, and business units of the Applicant/NRSRO; and
an organizational chart showing the managerial structure of the
Applicant/NRSRO, including the designated compliance officer identified
in Item 4.
Exhibit 5. Provide in this Exhibit a copy of the written code of
ethics the Applicant/NRSRO has in effect or a statement of the reasons
why the Applicant/NRSRO does not have a written code of ethics in
effect.
Exhibit 6. Identify in this Exhibit 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, 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:
[cir] 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.
[cir] Have business relationships that are more than arms 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).
Exhibit 7. Provide in this Exhibit a copy of the written policies
and procedures established, maintained, and enforced by the Applicant/
NRSRO to address and manage conflicts of interest pursuant to Section
15E(h) of the Exchange Act. Do not include any information that is
proprietary or that would diminish the effectiveness of a specific
policy or procedure if made publicly available.
Exhibit 8. Provide in this Exhibit the following information about
the Applicant/NRSRO's credit analysts and the persons who supervise the
credit analysts:
The total number of credit analysts (including credit
analyst supervisors).
The total number of credit analyst supervisors.
A general description of the minimum qualifications
required of the credit analysts, including education level and work
experience (if applicable, distinguish between junior, mid, and senior
level credit analysts).
A general description of the minimum qualifications
required of the credit analyst supervisors, including education level
and work experience.
Exhibit 9. Provide in this Exhibit the following information about
the designated compliance officer (identified in Item 4) of the
Applicant/NRSRO:
Name.
Employment history.
Post secondary education.
Whether employed by the Applicant/NRSRO full-time or part-
time.
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 person 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. For purposes of this
Exhibit:
Net revenue means revenue earned by the Applicant for any type of
service or product provided to the person, regardless of whether
related to credit rating services, and net of any rebates and
allowances the Applicant paid or owes to the person; and
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. An
NRSRO is not required to make this Exhibit publicly available on its
corporate Internet Web site, 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 confidential upon request to the extent
permitted by law. (Note: After registration, Exhibit 10 should not be
updated with the filing of the annual certification. Instead, similar
information must be filed with the Commission not more than 90 days
after the end of each fiscal year pursuant to Exchange Act Rule 17g-3).
Exhibit 11. Provide in this Exhibit the financial statements of the
Applicant, which must include a balance sheet, an income statement and
statement of cash flows, and a statement of changes in ownership
equity, audited by an independent public accountant, for each of the
three fiscal or calendar years ending immediately before the date of
the Applicant's initial application to the Commission, subject to the
following:
If the Applicant is a division, unit, or subsidiary of a
parent company, the Applicant may provide audited consolidated
financial statements of its parent company.
If the Applicant does not have audited financial
statements for one or
[[Page 33560]]
more of the three fiscal or calendar years ending immediately before
the date of the initial application, the Applicant may provide
unaudited financial statements for the applicable year or years, but
must provide audited financial statements for the fiscal or calendar
year ending immediately before the date of the initial application.
Attach to the unaudited financial statements a certification by a
person duly authorized by the Applicant to make the certification that
the person has responsibility for the financial statements and that to
the best knowledge of the person making the certification the financial
statements fairly present, in all material respects, the Applicant's
financial condition, results of operations, and cash flows for the
period presented.
An NRSRO is not required to make this Exhibit publicly available on
its corporate Internet Web site, 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 confidential upon request to
the extent permitted by law. (Note: After registration, Exhibit 11
should not be updated with the filing of the annual certification.
Instead, similar information must be filed with the Commission not more
than 90 days after the end of each fiscal year pursuant to Exchange Act
Rule 17g-3).
Exhibit 12. Provide in this Exhibit the following information, as
applicable, and which is not required to be audited, regarding the
Applicant's aggregate revenues for the fiscal or calendar year ending
immediately before the date of the initial application:
Revenue from determining and maintaining credit ratings;
Revenue from subscribers;
Revenue from granting licenses or rights to publish credit
ratings; and
Revenue from all other services and products offered by
your credit rating organization (include descriptions of any major
sources of revenue).
An NRSRO is not required to make this Exhibit publicly available on
its corporate Internet Web site, 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 confidential upon request to
the extent permitted by law. (Note: After registration, Exhibit 12
should not be updated with the filing of the annual certification.
Instead, similar information must be filed with the Commission not more
than 90 days after the end of each fiscal year pursuant to Exchange Act
Rule 17g-3).
Exhibit 13. Provide in this Exhibit the approximate total and
median annual compensation of the Applicant's credit analysts for the
fiscal or calendar year ending immediately before the date of this
initial application. In calculating total and median annual
compensation, the Applicant may exclude deferred compensation, provided
such exclusion is noted in the Exhibit.
An NRSRO is not required to make this Exhibit publicly available on
its corporate Internet Web site 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 confidential upon request to the extent
permitted by law. (Note: After registration, Exhibit 13 should not be
updated with the filing of the annual certification. Instead, similar
information must be filed with the Commission not more than 90 days
after the end of each fiscal year pursuant to Exchange Act Rule 17g-3).
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. NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION [Section
3(a)(62) of the Exchange Act]--A credit rating agency that:
Issues credit ratings certified by qualified institutional
buyers in accordance with section 15(a)(1)(B)(ix) of the Exchange Act
with respect to:
[cir] Financial institutions, brokers, or dealers;
[cir] Insurance companies;
[cir] Corporate issuers;
[cir] issuers of asset-backed securities;
[cir] issuers of government securities, municipal securities, or
securities issued by a foreign government; or
[cir] a combination of one or more of the above; and
is registered as an NRSRO.
6. PERSON--An individual, partnership, corporation, trust, company,
limited liability company, or other organization (including a
separately identifiable department or division).
7. PERSON WITHIN AN APPLICANT/NRSRO--The person filing or
furnishing, as applicable, 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 the credit
rating affiliates (or any person occupying a similar status or
performing similar functions).
8. 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.
8. 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.
19. Section 249b.400 and Form ABS Due Diligence-15E are added to
read as follows:
[[Page 33561]]
Sec. 249b.400 Form ABS Due Diligence-15E, Certification of third-
party provider of due diligence services for asset-backed securities
Note: The text of Form ABS Due Diligence-15E will not appear in
the Code of Federal Regulations.
BILLING CODE 8011-01-P
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By the Commission.
Dated: May 18, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-12659 Filed 6-7-11; 8:45 am]
BILLING CODE 8011-01-C