[Federal Register Volume 80, Number 204 (Thursday, October 22, 2015)]
[Notices]
[Pages 64031-64033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26820]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76183; File No. S7-04-09]
Order Extending Temporary Conditional Exemption for Nationally
Recognized Statistical Rating Organizations From Requirements of Rule
17g-5(A)(3) Under the Securities Exchange Act of 1934 and Request for
Comment
October 16, 2015.
I. Introduction
On May 19, 2010, the Securities and Exchange Commission
(``Commission'') conditionally exempted, with respect to certain credit
ratings and until December 2, 2010, nationally recognized statistical
rating organizations (``NRSROs'') from certain requirements in Rule
17g-5(a)(3) \1\ under the Securities Exchange Act of 1934 (``Exchange
Act''), which had a compliance date of June 2, 2010.\2\ Pursuant to the
Order, an NRSRO is not required to comply with Rule 17g-5(a)(3) until
December 2, 2010 with respect to credit ratings where: (1) The issuer
of the structured finance product is a non-U.S. person; and (2) the
NRSRO has a reasonable basis to conclude that the structured finance
product will be offered and sold upon issuance, and that any arranger
linked to the structured finance product will effect transactions of
the structured finance product after issuance, only in transactions
that occur outside the U.S. (``covered transactions'').\3\ On November
23, 2010, the Commission extended the conditional temporary exemption
until December 2, 2011.\4\ On November 16, 2011, the Commission
extended the conditional temporary exemption until December 2, 2012.\5\
On November 26, 2012, the Commission extended the conditional temporary
exemption until December 2, 2013.\6\ On November 22, 2013, the
Commission extended the conditional temporary exemption until December
2, 2014.\7\ On November 19, 2014, the Commission extended the
conditional temporary exemption until December 2, 2015.\8\ 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, 2017.
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\1\ See 17 CFR 240.17g-5(a)(3).
\2\ See Exchange Act Release No. 62120 (May 19, 2010), 75 FR
28825 (May 24, 2010) (``Order'').
\3\ See id. at 28827-28 (setting forth conditions of relief).
\4\ See Exchange Act Release No. 63363 (Nov. 23, 2010), 75 FR
73137 (Nov. 29, 2010) (``First Extension Order'').
\5\ See Exchange Act Release No. 65765 (Nov. 16, 2011), 76 FR
72227 (Nov. 22, 2011) (``Second Extension Order'').
\6\ See Exchange Act Release No. 34-68286 (Nov. 26, 2012), 77 FR
71201 (Nov. 29, 2012) (``Third Extension Order'').
\7\ See Exchange Act Release No. 34-70919 (Nov. 22, 2013), 78 FR
70984 (Nov. 27, 2013) (``Fourth Extension Order'').
\8\ See Exchange Act Release No. 34-73649 (Nov. 19, 2014), 79 FR
70261 (Nov. 25, 2014) (``Fifth
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.\9\ Paragraph (a) of Rule 17g-5 \10\
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 \11\ and Rule 17g-1) \12\ 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).\13\ Paragraph (c) of Rule
17g-5 specifically prohibits eight types of conflicts of interest.
Consequently, an NRSRO is prohibited from issuing or maintaining a
credit rating when it is subject to these conflicts regardless of
whether it had disclosed them and established procedures reasonably
designed to address them.
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\9\ 17 CFR 240.17g-5(b) and (c).
\10\ 17 CFR 240.17g-5(a).
\11\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
\12\ 17 CFR 240.17g-1.
\13\ 15 U.S.C. 78o-7(h).
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In November 2009, the Commission adopted paragraph (a)(3) of Rule
17g-5. This provision requires an NRSRO that is hired by an arranger to
determine an initial credit rating for a structured finance product to
take certain steps designed to allow an NRSRO that is not hired by the
arranger to nonetheless determine an initial credit rating--and
subsequently monitor that credit rating--for the structured finance
product.\14\ 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) \15\ unless it has taken the
steps prescribed in paragraphs (a)(1) and (2) of Rule 17g-5 (discussed
above) and the steps prescribed in paragraph (a)(3) of Rule 17g-5.\16\
Rule 17g-5(a)(3), among other things, requires that the NRSRO must:
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\14\ See 17 CFR 240.17g-5(a)(3); see also Exchange Act Release
No. 61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009) (``Adopting
Release'') at 63844-45.
\15\ Paragraph (b)(9) of Rule 17g-5 identifies the following
conflict of interest: Issuing or maintaining a credit rating for a
security or money market instrument issued by an asset pool or as
part of any asset-backed securities transaction that was paid for by
the issuer, sponsor, or underwriter of the security or money market
instrument. 17 CFR 240.17g-5(b)(9).
\16\ 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; \17\ and
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\17\ 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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[[Page 64032]]
Obtain from the arranger a written representation that can
reasonably be relied upon that the arranger will, among other things,
disclose on a password-protected Internet Web site the information it
provides to the hired NRSRO to determine the initial credit rating (and
monitor that credit rating) and provide access to the Web site to an
NRSRO that provides it with a copy of the certification described in
paragraph (e) of Rule 17g-5.\18\
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\18\ In particular, under paragraph (a)(3)(iii) of Rule 17g-5,
the arranger must represent to the hired NRSRO that it will:
(1) Maintain the information described in paragraphs
(a)(3)(iii)(C), (a)(3)(iii)(D), and (a)(3)(iii)(E) of Rule 17g-5
available at an identified password-protected Internet Web site that
presents the information in a manner indicating which information
currently should be relied on to determine or monitor the credit
rating; (2) provide access to such password-protected Internet Web
site during the applicable calendar year to any NRSRO that provides
it with a copy of the certification described in paragraph (e) of
Rule 17g-5 that covers that calendar year, provided that such
certification indicates that the nationally recognized statistical
rating organization providing the certification either: (i)
Determined and maintained credit ratings for at least 10% of the
issued securities and money market instruments for which it accessed
information pursuant to paragraph (a)(3)(iii) of Rule 17g-5 in the
calendar year prior to the year covered by the certification, if it
accessed such information for 10 or more issued securities or money
market instruments; or (ii) has not accessed information pursuant to
paragraph (a)(3) of Rule 17g-5 10 or more times during the most
recently ended calendar year; (3) post on such password-protected
Internet Web site all information the arranger provides to the
NRSRO, or contracts with a third party to provide to the NRSRO, for
the purpose of determining the initial credit rating for the
security or money market instrument, including information about the
characteristics of the assets underlying or referenced by the
security or money market instrument, and the legal structure of the
security or money market instrument, at the same time such
information is provided to the NRSRO; (4) post on such password-
protected Internet Web site all information the arranger provides to
the NRSRO, or contracts with a third party to provide to the NRSRO,
for the purpose of undertaking credit rating surveillance on the
security or money market instrument, including information about the
characteristics and performance of the assets underlying or
referenced by the security or money market instrument at the same
time such information is provided to the NRSRO; and (5) post on such
password-protected Internet Web site, promptly after receipt, any
executed Form ABS Due Diligence-15E containing information about the
security or money market instrument delivered by a person employed
to provide third-party due diligence services with respect to the
security or money market instrument.
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The Commission stated in the Adopting Release that Rule 17g-5(a)(3)
is designed to address conflicts of interest and improve the quality of
credit ratings for structured finance products by making it possible
for more NRSROs to rate structured finance products.\19\ 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.\20\ 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.\21\ The Commission stated that Rule
17g-5(a)(3) was designed to increase the number of credit ratings
extant for a given structured finance product and, in particular, to
promote the issuance of credit ratings by NRSROs that are not hired by
arrangers.\22\ 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.\23\ 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.\24\ 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.\25\
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\19\ Adopting Release at 63844.
\20\ Id.
\21\ Id.
\22\ Id.
\23\ Id.
\24\ Id.
\25\ 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.\26\ The Commission received six comment
letters in response to this solicitation of comment.\27\ 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,\28\ inhibit the ability of local firms to
raise capital,\29\ and conflict with local laws.\30\ Several commenters
also requested that the conditional temporary exemption be extended or
made permanent.\31\ The First Extension Order again solicited public
comment on issues raised in connection with the extra-territorial
application of Rule 17g-5(a)(3).\32\ One commenter requested that the
Order be made permanent, citing many of the same reasons set forth in
prior comment letters.\33\ The Second Extension Order again solicited
public comment on issues raised in connection with the extra-
territorial application of Rule 17g-5(a)(3).\34\ Commenters supported
the exemption regarding the extra-territorial application of the
rule,\35\ with one of those commenters again requesting that the Order
be made permanent.\36\ The Third Extension Order again solicited public
comment on issues raised in connection with the extra-territorial
application of Rule 17g-5(a)(3). No comments were received. The Fourth
Extension Order again solicited public comment on issues raised in
connection with the extra-territorial application of Rule 17g-5(a)(3).
Two comments were received and the commenters supported the exemption
regarding the extra-territorial application of the rule.\37\ The Fifth
[[Page 64033]]
Extension Order again solicited public comment on issues raised in
connection with the extra-territorial application of Rule 17g-5(a)(3).
No comments were received.
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\26\ See Order at 28828.
\27\ Letter from Masamichi Kono, Vice Commissioner for
International Affairs, Financial Services Agency, Japan, dated Nov.
12, 2010 (``Japan FSA Letter''); Letter from Masaru Ono, Executive
Director, Securitization Forum of Japan, dated Nov. 12, 2010 (``SFJ
Letter''); Letter from Rick Watson, Managing Director, Association
for Financial Markets in Europe/European Securitisation Forum, dated
Nov. 11, 2010 (``AFME Letter''); Letter from Jack Rando, Director,
Capital Markets, Investment Industry Association of Canada, dated
Sep. 22, 2010 (``IIAC Letter''); Letter from Christopher Dalton,
Chief Executive Officer, Australian Securitisation Forum, dated Jun.
27, 2010 (``AuSF Letter''); Letter from Takefumi Emori, Managing
Director, Japan Credit Rating Agency, Ltd. (``JCR''), dated Jun. 25,
2010 (``JCR Letter'').
\28\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter;
AuSF Letter.
\29\ See AFME Letter; JCR Letter; AuSF Letter.
\30\ See Japan FSA Letter; AFME Letter; JCR Letter; AuSF Letter;
IIAC Letter.
\31\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter.
\32\ See Letter from Tom Deutsch, Executive Director, American
Securitization Forum, and Chris Dalton, Chief Executive Officer,
Australian Securitisation Forum, dated Aug. 9, 2011 (``ASF/AuSF
Letter 1''); Letter from Jack Rando, Director, Capital Markets,
Investment Industry Association of Canada, dated Nov. 2, 2011
(``IIAC Letter 2'').
\33\ See ASF/AuSF Letter 1.
\34\ Letter from Chris Barnard to the Commission, dated Nov. 23,
2011 (``Barnard Letter''); Letter from Tom Deutsch, Executive
Director, American Securitization Forum, and Chris Dalton, Chief
Executive Officer, Australian Securitisation Forum, dated Aug. 28,
2012 (``ASF/AuSF Letter 2'').
\35\ See Barnard Letter; ASF/AuSF Letter 2.
\36\ See ASF/AuSF Letter 2.
\37\ See Letter from Chris Barnard to the Commission, dated Nov.
26, 2013; Letter from Richard Hopkin,
Managing Director, Association for Financial Markets in Europe,
dated Nov. 10, 2014.
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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, 2017 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 Brent J. Fields,
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, 2017.
Accordingly,
It is hereby ordered, pursuant to Section 36 of the Exchange Act,
that a nationally recognized statistical rating organization is exempt
until December 2, 2017 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.
Brent J. Fields,
Secretary.
[FR Doc. 2015-26820 Filed 10-21-15; 8:45 am]
BILLING CODE 8011-01-P