[Federal Register Volume 76, Number 225 (Tuesday, November 22, 2011)]
[Notices]
[Pages 72227-72230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30053]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65765; File No. S7-04-09]
Order Extending Temporary Conditional Exemption for Nationally
Recognized Statistical Rating Organizations From Requirements of Rule
17g-5 Under the Securities Exchange Act of 1934 and Request for Comment
November 16, 2011.
I. Introduction
On May 19, 2010, the Securities and Exchange Commission
(``Commission'') conditionally exempted, with respect to certain credit
ratings and until December 2, 2010, nationally recognized statistical
rating organizations (``NRSROs'') from certain requirements
[[Page 72228]]
in Rule 17g-5(a)(3) \1\ under the Securities Exchange Act of 1934
(``Exchange Act''), which had a compliance date of June 2, 2010.\2\
Pursuant to the Order, an NRSRO is not required to comply with Rule
17g-5(a)(3) until December 2, 2010 with respect to credit ratings
where: (1) The issuer of the structured finance product is a non-U.S.
person; and (2) the NRSRO has a reasonable basis to conclude that the
structured finance product will be offered and sold upon issuance, and
that any arranger linked to the structured finance product will effect
transactions of the structured finance product after issuance, only in
transactions that occur outside the U.S. (``covered transactions'').\3\
On November 23, 2010, the Commission extended the conditional temporary
exemption until December 2, 2011 (the ``Extension Order'').\4\ The
Commission is extending the temporary conditional exemption exempting
NRSROs from complying with Rule 17g-5(a)(3) with respect to rating
covered transactions until December 2, 2012.
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\1\ See 17 CFR 240.17g-5(a)(3).
\2\ See Securities Exchange Act Release No. 62120 (May 19,
2010), 75 FR 28825 (May 24, 2010) (``Order'').
\3\ See id. at 28827-28 (setting forth conditions of relief).
\4\ See Securities Exchange Act Release No. 63363 (Nov. 23,
2010), 75 FR 73137 (Nov. 29, 2010) (``Extension Order'').
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II. Background
Rule 17g-5 identifies, in paragraphs (b) and (c) of the rule, a
series of conflicts of interest arising from the business of
determining credit ratings.\5\ Paragraph (a) of Rule 17g-5 \6\
prohibits an NRSRO from issuing or maintaining a credit rating if it is
subject to the conflicts of interest identified in paragraph (b) of
Rule 17g-5 unless the NRSRO has taken the steps prescribed in paragraph
(a)(1) (i.e., disclosed the type of conflict of interest in Exhibit 6
to Form NRSRO in accordance with Section 15E(a)(1)(B)(vi) of the
Exchange Act \7\ and Rule 17g-1) \8\ and paragraph (a)(2) (i.e.,
established and is maintaining and enforcing written policies and
procedures to address and manage conflicts of interest in accordance
with Section 15E(h) of the Exchange Act).\9\ Paragraph (c) of Rule 17g-
5 specifically prohibits seven types of conflicts of interest.
Consequently, an NRSRO is prohibited from issuing or maintaining a
credit rating when it is subject to these conflicts regardless of
whether it had disclosed them and established procedures reasonably
designed to address them.
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\5\ 17 CFR 240.17g-5(b) and (c).
\6\ 17 CFR 240.17g-5(a).
\7\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
\8\ 17 CFR 240.17g-1.
\9\ 15 U.S.C. 78o-7(h).
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In December 2009, the Commission adopted subparagraph (a)(3) to
Rule 17g-5. This provision requires an NRSRO that is hired by an
arranger to determine an initial credit rating for a structured finance
product to take certain steps designed to allow an NRSRO that is not
hired by the arranger to nonetheless determine an initial credit
rating--and subsequently monitor that credit rating--for the structured
finance product.\10\ In particular, under Rule 17g-5(a)(3), an NRSRO is
prohibited from issuing or maintaining a credit rating when it is
subject to the conflict of interest identified in paragraph (b)(9) of
Rule 17g-5 (i.e., being hired by an arranger to determine a credit
rating for a structured finance product) \11\ unless it has taken the
steps prescribed in paragraphs (a)(1) and (2) of Rule 17g-5 (discussed
above) and the steps prescribed in new paragraph (a)(3) of Rule 17g-
5.\12\ Rule 17g-5(a)(3), among other things, requires that the NRSRO
must:
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\10\ See 17 CFR 240.17g-5(a)(3); see also Securities Exchange
Act Release No. 61050 (November 23, 2009), 74 FR 63832 (``Adopting
Release'') at 63844-45.
\11\ Paragraph (b)(9) of Rule 17g-5 identifies the following
conflict of interest: issuing or maintaining a credit rating for a
security or money market instrument issued by an asset pool or as
part of any asset-backed or mortgage-backed securities transaction
that was paid for by the issuer, sponsor, or underwriter of the
security or money market instrument. 17 CFR 240.17g-5(b)(9).
\12\ 17 CFR 240.17g-5(a)(3).
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Maintain on a password-protected Internet Web site a list
of each structured finance product for which it currently is in the
process of determining an initial credit rating in chronological order
and identifying the type of structured finance product, the name of the
issuer, the date the rating process was initiated, and the Internet Web
site address where the arranger represents the information provided to
the hired NRSRO can be accessed by other NRSROs;
Provide free and unlimited access to such password-
protected Internet Web site during the applicable calendar year to any
NRSRO that provides it with a copy of the certification described in
paragraph (e) of Rule 17g-5 that covers that calendar year; \13\ and
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\13\ Paragraph (e) of Rule 17g-5 requires that an NRSRO seeking
to access the hired NRSRO's Internet Web site during the applicable
calendar year must furnish the Commission with the following
certification:
The undersigned hereby certifies that it will access the
Internet Web sites described in 17 CFR 240.17g-5(a)(3) solely for
the purpose of determining or monitoring credit ratings. Further,
the undersigned certifies that it will keep the information it
accesses pursuant to 17 CFR 240.17g-5(a)(3) confidential and treat
it as material nonpublic information subject to its written policies
and procedures established, maintained, and enforced pursuant to
section 15E(g)(1) of the Act (15 U.S.C. 78o-7(g)(1)) and 17 CFR
240.17g-4. Further, the undersigned certifies that it will determine
and maintain credit ratings for at least 10% of the issued
securities and money market instruments for which it accesses
information pursuant to 17 CFR 240.17g-5(a)(3)(iii), if it accesses
such information for 10 or more issued securities or money market
instruments in the calendar year covered by the certification.
Further, the undersigned certifies one of the following as
applicable: (1) In the most recent calendar year during which it
accessed information pursuant to 17 CFR 240.17g-5(a)(3), the
undersigned accessed information for [Insert Number] issued
securities and money market instruments through Internet Web sites
described in 17 CFR 240.17g-5(a)(3) and determined and maintained
credit ratings for [Insert Number] of such securities and money
market instruments; or (2) The undersigned previously has not
accessed information pursuant to 17 CFR 240.17g-5(a)(3) 10 or more
times during the most recently ended calendar year.
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Obtain from the arranger a written representation that can
reasonably be relied upon that the arranger will, among other things,
disclose on a password-protected Internet Web site the information it
provides to the hired NRSRO to determine the initial credit rating (and
monitor that credit rating) and provide access to the Web site to an
NRSRO that provides it with a copy of the certification described in
paragraph (e) Rule 17g-5.\14\
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\14\ In particular, under paragraph (a)(3)(iii) of Rule 17g-5,
the arranger must represent to the hired NRSRO that it will:
(1) Maintain the information described in paragraphs
(a)(3)(iii)(C) and (a)(3)(iii)(D) of Rule 17g-5 available at an
identified password-protected Internet Web site that presents the
information in a manner indicating which information currently
should be relied on to determine or monitor the credit rating;
(2) Provide access to such password-protected Internet Web site
during the applicable calendar year to any NRSRO that provides it
with a copy of the certification described in paragraph (e) of Rule
17g-5 that covers that calendar year, provided that such
certification indicates that the nationally recognized statistical
rating organization providing the certification either: (i)
Determined and maintained credit ratings for at least 10% of the
issued securities and money market instruments for which it accessed
information pursuant to paragraph (a)(3)(iii) of Rule 17g-5 in the
calendar year prior to the year covered by the certification, if it
accessed such information for 10 or more issued securities or money
market instruments; or (ii) has not accessed information pursuant to
paragraph (a)(3) of Rule 17g-5 10 or more times during the most
recently ended calendar year.
(3) Post on such password-protected Internet Web site all
information the arranger provides to the NRSRO, or contracts with a
third party to provide to the NRSRO, for the purpose of determining
the initial credit rating for the security or money market
instrument, including information about the characteristics of the
assets underlying or referenced by the security or money market
instrument, and the legal structure of the security or money market
instrument, at the same time such information is provided to the
NRSRO; and
(4) Post on such password-protected Internet Web site all
information the arranger provides to the NRSRO, or contracts with a
third party to provide to the NRSRO, for the purpose of undertaking
credit rating surveillance on the security or money market
instrument, including information about the characteristics and
performance of the assets underlying or referenced by the security
or money market instrument at the same time such information is
provided to the NRSRO.
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[[Page 72229]]
The Commission stated in the Adopting Release that subparagraph
Rule 17g-5(a)(3) is designed to address conflicts of interest and
improve the quality of credit ratings for structured finance products
by making it possible for more NRSROs to rate structured finance
products.\15\ For example, the Commission noted that when an NRSRO is
hired to rate a structured finance product, some of the information it
relies on to determine the rating is generally not made public.\16\ As
a result, structured finance products frequently are issued with
ratings from only the one or two NRSROs that have been hired by the
arranger, with the attendant conflict of interest that creates.\17\ The
Commission stated that subparagraph Rule 17g-5(a)(3) was designed to
increase the number of credit ratings extant for a given structured
finance product and, in particular, to promote the issuance of credit
ratings by NRSROs that are not hired by arrangers.\18\ The Commission's
goal in adopting the rule was to provide users of credit ratings with
more views on the creditworthiness of structured finance products.\19\
In addition, the Commission stated that Rule 17g-5(a)(3) was designed
to reduce the ability of arrangers to obtain better than warranted
ratings by exerting influence over NRSROs hired to determine credit
ratings for structured finance products.\20\ Specifically, by opening
up the rating process to more NRSROs, the Commission intended to make
it easier for the hired NRSRO to resist such pressure by increasing the
likelihood that any steps taken to inappropriately favor the arranger
could be exposed to the market through the credit ratings issued by
other NRSROs.\21\
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\15\ Adopting Release at 63844.
\16\ Id.
\17\ Id.
\18\ Id.
\19\ Id.
\20\ Id.
\21\ Id.
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Rule 17g-5(a)(3) became effective on February 2, 2010, and the
compliance date for Rule 17g-5(a)(3) was June 2, 2010.
III. Extension of Conditional Temporary Extension
In the Order, the Commission requested comment generally, but also
on a number of specific issues.\22\ The Commission received six
comments in response to this solicitation of comment.\23\ The
commenters expressed concern that the extraterritorial application of
Rule 17g-5(a)(3) could, in the commenter's view, among other things,
disrupt local securitization markets,\24\ inhibit the ability of local
firms to raise capital,\25\ and conflict with local laws.\26\ Several
commenters also requested that the conditional temporary exemption be
extended or made permanent.\27\ The Extension Order again solicited
public comment on issues raised in connection with the extra-
territorial application of Rule 17g-5(a)(3).\28\ One comment letter
requested that the Order be made permanent, citing many of the same
reasons set forth in prior comment letters.\29\
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\22\ See Order, supra note 2, at 28828.
\23\ Letter from Masamichi Kono, Vice Commissioner for
International Affairs, Financial Services Agency, Japan, to
Elizabeth Murphy, Secretary, Commission, dated Nov. 12, 2010
(``Japan FSA Letter''); Letter from Masaru Ono, Executive Director,
Securitization Forum of Japan, to Elizabeth Murphy, Secretary,
Commission, dated Nov. 12, 2010 (``SFJ Letter''); Letter from Rick
Watson, Managing Director, Association for Financial Markets in
Europe/European Securitisation Forum, to Elizabeth Murphy,
Secretary, Commission, dated Nov. 11, 2010 (``AFME Letter''); Letter
from Jack Rando, Director, Capital Markets, Investment Industry
Association of Canada, to Randall Roy, Assistant Director, Division,
Commission, dated Sep. 22, 2010 (``IIAC Letter''); Letter from
Christopher Dalton, Chief Executive Officer, Australian
Securitisation Forum, to Randall Roy, Assistant Director, Division,
Commission, dated Jun. 27, 2010 (``AuSF Letter''); Letter from
Takefumi Emori, Managing Director, Japan Credit Rating Agency, Ltd.
(``JCR'') to Elizabeth Murphy, Secretary, Commission, dated Jun. 25,
2010 (``JCR Letter'').
\24\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter,
AuSF Letter.
\25\ See AFME Letter; JCR Letter; AuSF Letter.
\26\ See Japan FSA Letter; AFME Letter; JCR Letter; AuSF Letter;
IIAC Letter. With respect to local laws, we note that the European
Commission in recent months has issued a relevant proposal for
amendments to the European Union Regulation on Credit Ratings. See
``Regulation of the European Parliament and of the Counsel on
amending Regulation (EC) No 1060/2009 on credit rating agencies''
(available at http://ec.europa.eu/internal_market/securities/docs/agencies/100602_proposal_en.pdf).
\27\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter.
\28\ See Letter from Tom Deutsch, Executive Director, American
Securitization Forum, and Chris Dalton, Chief Executive Officer,
Australian Securitization Forum, to Randall Roy, Assistant Director,
and Joseph Levinson, Special Counsel, Division, Commission, dated
Aug. 9, 2011.
\29\ See id.
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Given the continued concerns about potential disruptions of local
securitization markets, and because the Commission's consideration of
the issues raised will benefit from additional time to engage in
further dialogue with interested parties and to monitor market and
regulatory developments, the Commission believes extending the
conditional temporary exemption until December 2, 2012 is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
IV. Request for Comment
The Commission believes that it would be useful to continue to
provide interested parties opportunity to comment. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/exorders.shtml); or
Send an email to [email protected]. Please include
File Number S7-04-09 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 St., NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-04-09. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/exorders.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F St. NE., Washington, DC 20549
on official business days between the hours of 10 a.m. and 3 p.m. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
V. Conclusion
For the foregoing reasons, the Commission believes it would be
necessary or appropriate in the public interest and consistent with the
protection of investors to extend the conditional temporary exemption
exempting NRSROs from complying with Rule 17g-5(a)(3) with respect to
rating covered transactions until December 2, 2012.
Accordingly,
It is hereby ordered, pursuant to Section 36 of the Exchange Act,
that a nationally recognized statistical rating
[[Page 72230]]
organization is exempt until December 2, 2012 from the requirements in
Rule 17g-5(a)(3) (17 CFR 240.17g-5(a)(3)) for credit ratings where:
(1) The issuer of the security or money market instrument is not a
U.S. person (as defined under Securities Act Rule 902(k)); and
(2) The nationally recognized statistical rating organization has a
reasonable basis to conclude that the structured finance product will
be offered and sold upon issuance, and that any arranger linked to the
structured finance product will effect transactions of the structured
finance product after issuance, only in transactions that occur outside
the U.S.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-30053 Filed 11-21-11; 8:45 am]
BILLING CODE 8011-01-P