[House Report 115-384]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-384
======================================================================
RISK-BASED CREDIT EXAMINATION ACT
_______
November 3, 2017.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 3911]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3911) to amend the Securities Exchange Act of
1934 with respect to risk-based examinations of Nationally
Recognized Statistical Rating Organizations, having considered
the same, report favorably thereon without amendment and
recommend that the bill do pass.
Purpose and Summary
On October 2, 2017, Representatives Ann Wagner and Bill
Foster introduced H.R. 3911, the ``Risk-Based Credit
Examinations Act of 2017'', which amends the Securities
Exchange Act of 1934 (Exchange Act) to make risk-based the
annual reporting requirements of the Nationally Recognized
Statistical Rating Organizations (NRSROs).
Background and Need for Legislation
The credit rating agencies--NRSROs--have received a healthy
and deserved dose of criticism for their failures in both
precipitating and accelerating the financial crisis. In the
years leading up to the crisis, the government adopted a series
of policies that had the effect of conferring a ``Good
Housekeeping'' seal of approval on the credit rating agencies
and their products, including designating certain agencies as
``nationally recognized'' and hard-wiring references to their
ratings into numerous Federal statutes and regulations. These
regulatory privileges and the perception that the government
had placed its imprimatur on the rating agencies' assessments
bred a sense of complacency among investors and a failure of
private-sector due diligence that contributed to mispriced risk
and a collapse of market confidence when ratings of certain
asset-backed securities were called into question during the
subprime melt-down of 2007 and 2008. As economist Lawrence J.
White observed:
There is little question that the three major credit
rating agencies were central parties in the subprime
mortgage lending boom. Subprime lending was fueled
importantly by the ability of the mortgage originators
to sell their loans to ``packagers'' (or securitizers),
who pooled the loans into securities and sold the
securities to institutional investors, or who combined
the securities with other debt instruments into yet-
more-complicated securities, . . . that were sold to
institutional investors. And crucial to the ability of
these packagers to sell the securities was the process
of obtaining favorable ratings on the securities.
To address the failures exposed by the financial crisis,
Subtitle C of Title IX of the Dodd-Frank Act includes many
credit rating agency reforms. While some of these provisions
may be constructive, several create new barriers to entry and
further entrench the type of rating agency oligopoly that has
not served investors or the economy well and was the reason
that Congress first passed credit agency legislation in 2006.
The new SEC Authorities in Subtitle C of Title IX of the
Dodd-Frank Act enhances the SEC's regulatory regime for NRSROs.
The NRSRO framework established by the Credit Rating Agency
Reform Act of 2006 was based on registration--not regulation.
Under this model, the SEC does not dictate the methodologies
used by the rating agencies or evaluate the accuracy of those
methodologies. The Dodd-Frank Act follows the 2006 Act's
``registration not regulation'' approach: while it does not
require the SEC to regulate or evaluate the rating agencies'
methodologies or models, it does seek to ensure that ratings
are based on an objective application of those methodologies
and that commercial considerations do not influence rating
decisions.
Section 932 creates an Office of Credit Ratings in the SEC,
imposes more stringent conflict-of-interest regulation on
credit rating agencies, and gives the compliance officers at
rating agencies additional responsibilities, including filing
annual reports with the SEC. The annual reports are
comprehensive and require that the OCR travels to the credit
rating agency and conduct on-sight interviews with management
and staff. Specifically, the Commission is required to examine
each NRSRO annually on eight review areas designated in the
Exchange Act, which are resource intensive and often redundant
when no material issues have been identified. Those eight
review areas are: (i) whether the NRSRO conducts business in
accordance with its policies, procedures, and rating
methodologies; (ii) the management of conflicts of interest by
the NRSRO; (iii) the implementation of ethics policies by the
NRSRO; (iv) the internal supervisory controls of the NRSRO; (v)
the governance of the NRSRO; (vi) the activities of the NRSRO's
Designated Compliance Officer; (vii) the processing of
complaints of the NRSRO; and (viii) the policies of the NRSRO
governing the post-employment activities of its former
personnel.
While credit rating agencies must be held accountable, the
Dodd-Frank Act's increased reporting requirements are a burden
for small credit rating agencies and have ultimately hurt
investors who bear the cost of the new rules. Small credit
rating agencies were not the cause of the financial crisis but
now are bearing the cost of rigid and in some cases blunt
legislative provisions that did not consider that not all
NRSROs are the same. Competition breeds innovation and
efficiency but Dodd-Frank's credit rating agencies' provisions
further cements the domination of large, well-established
NRSROs that can afford the costs of regulation.
The NRSRO legal and regulatory regime is complex and the
Dodd-Frank Act requirements prevent new credit rating agencies
from entering the market, and thereby chill innovation and
competition among credit rating agencies, and further
consolidate power in the very largest credit rating agencies.
On May 15, 2013, former SEC Chair Mary Jo White, on behalf
of a unanimous Commission, wrote a letter to Chairman
Hensarling to request that Congress amend the Exchange Act and
provide the SEC with the authority contained in H.R. 3911.
Hearings
The Committee on Financial Services held a hearing
examining matters relating to H.R. 3911 on April 26, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
October 11, 2017, and October 12, 2017, and ordered H.R. 3911
to be reported favorably to the House without amendment by a
recorded vote of 60 yeas to 0 nays (Record vote no. FC-85), a
quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 60 yeas to 0 nays
(Record vote no. FC-85), a quorum being present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 3911
will eliminate the one-size fits all annual reporting
requirements currently placed on NRSROs and alleviate the
unnecessary burdens and disproportionate costs on small credit
rating agencies by amending the Securities Exchange Act of 1934
to make the criteria required in annual reporting by NRSROs
risk-based.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 1, 2017.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3911, the Risk-
Based Credit Examination Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 3911--Risk-Based Credit Examination Act
Under current law, the Office of Credit Ratings (OCR)
within the Securities and Exchange Commission (SEC) conducts an
annual examination of nationally recognized statistical rating
organizations (NRSROs) in eight specified review areas and
produces an annual report on its findings. H.R. 3911 would
authorize the OCR to include the results from any or all of
those examinations in its annual reviews.
Based on an analysis of information from the SEC, CBO
estimates that implementing H.R. 3911 would not significantly
affect the costs for the SEC to produce its annual reviews of
NRSROs. Moreover, the SEC is authorized to collect fees
sufficient to offset its annual appropriation; therefore,
assuming appropriation actions consistent with that authority,
CBO estimates that the net effect of the bill on discretionary
spending would be negligible.
Enacting H.R. 3911 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 3911 would not increase
net direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2028.
H.R. 3911 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Stephen Rabent.
The estimate was approved by H. Samuel Papenfuss, Deputy
Assistant Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This Section cites H.R. 3911 as the ``Risk-Based Credit
Examination Act''
Section 2. Risk-based examination of Nationally Recognized Statistical
Rating Organizations
This section amends the Securities Exchange Act of 1934 to
allow for the SEC to perform risk-based examinations of the
NRSROs by focusing on those areas designated in Section
15E(p)(3)(B) of the Exchange Act that the SEC in its discretion
identifies as appropriate for review for each NRSRO.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, and existing law in which no
change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italics and existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS.
(a) Registration Procedures.--
(1) Application for registration.--
(A) In general.--A credit rating agency that
elects to be treated as a nationally recognized
statistical rating organization for purposes of
this title (in this section referred to as the
``applicant''), shall furnish to the Commission
an application for registration, in such form
as the Commission shall require, by rule or
regulation issued in accordance with subsection
(n), and containing the information described
in subparagraph (B).
(B) Required information.--An application for
registration under this section shall contain
information regarding--
(i) credit ratings performance
measurement statistics over short-term,
mid-term, and long-term periods (as
applicable) of the applicant;
(ii) the procedures and methodologies
that the applicant uses in determining
credit ratings;
(iii) policies or procedures adopted
and implemented by the applicant to
prevent the misuse, in violation of
this title (or the rules and
regulations hereunder), of material,
nonpublic information;
(iv) the organizational structure of
the applicant;
(v) whether or not the applicant has
in effect a code of ethics, and if not,
the reasons therefor;
(vi) any conflict of interest
relating to the issuance of credit
ratings by the applicant;
(vii) the categories described in any
of clauses (i) through (v) of section
3(a)(62)(B) with respect to which the
applicant intends to apply for
registration under this section;
(viii) on a confidential basis, a
list of the 20 largest issuers and
subscribers that use the credit rating
services of the applicant, by amount of
net revenues received therefrom in the
fiscal year immediately preceding the
date of submission of the application;
(ix) on a confidential basis, as to
each applicable category of obligor
described in any of clauses (i) through
(v) of section 3(a)(62)(B), written
certifications described in
subparagraph (C), except as provided in
subparagraph (D); and
(x) any other information and
documents concerning the applicant and
any person associated with such
applicant as the Commission, by rule,
may prescribe as necessary or
appropriate in the public interest or
for the protection of investors.
(C) Written certifications.--Written
certifications required by subparagraph
(B)(ix)--
(i) shall be provided from not fewer
than 10 qualified institutional buyers,
none of which is affiliated with the
applicant;
(ii) may address more than one
category of obligors described in any
of clauses (i) through (v) of section
3(a)(62)(B);
(iii) shall include not fewer than 2
certifications for each such category
of obligor; and
(iv) shall state that the qualified
institutional buyer--
(I) meets the definition of a
qualified institutional buyer
under section 3(a)(64); and
(II) 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.
(D) Exemption from certification
requirement.--A written certification under
subparagraph (B)(ix) is not required with
respect to any credit rating agency which has
received, or been the subject of, a no-action
letter from the staff of the Commission prior
to August 2, 2006, stating that such staff
would not recommend enforcement action against
any broker or dealer that considers credit
ratings issued by such credit rating agency to
be ratings from a nationally recognized
statistical rating organization.
(E) Limitation on liability of qualified
institutional buyers.--No qualified
institutional buyer shall be liable in any
private right of action for any opinion or
statement expressed in a certification made
pursuant to subparagraph (B)(ix).
(2) Review of application.--
(A) Initial determination.--Not later than 90
days after the date on which the application
for registration is furnished to the Commission
under paragraph (1) (or within such longer
period as to which the applicant consents) the
Commission shall--
(i) by order, grant such registration
for ratings in the subject category or
categories of obligors, as described in
clauses (i) through (v) of section
3(a)(62)(B); or
(ii) institute proceedings to
determine whether registration should
be denied.
(B) Conduct of proceedings.--
(i) Content.--Proceedings referred to
in subparagraph (A)(ii) shall--
(I) include notice of the
grounds for denial under
consideration and an
opportunity for hearing; and
(II) be concluded not later
than 120 days after the date on
which the application for
registration is furnished to
the Commission under paragraph
(1).
(ii) Determination.--At the
conclusion of such proceedings, the
Commission, by order, shall grant or
deny such application for registration.
(iii) Extension authorized.--The
Commission may extend the time for
conclusion of such proceedings for not
longer than 90 days, if it finds good
cause for such extension and publishes
its reasons for so finding, or for such
longer period as to which the applicant
consents.
(C) Grounds for decision.--The Commission
shall grant registration under this
subsection--
(i) if the Commission finds that the
requirements of this section are
satisfied; and
(ii) unless the Commission finds (in
which case the Commission shall deny
such registration) that--
(I) the applicant does not
have adequate financial and
managerial resources to
consistently produce credit
ratings with integrity and to
materially comply with the
procedures and methodologies
disclosed under paragraph
(1)(B) and with subsections
(g), (h), (i), and (j); or
(II) if the applicant were so
registered, its registration
would be subject to suspension
or revocation under subsection
(d).
(3) Public availability of information.--Subject to
section 24, the Commission shall, by rule, require a
nationally recognized statistical rating organization,
upon the granting of registration under this section,
to make the information and documents submitted to the
Commission in its completed application for
registration, or in any amendment submitted under
paragraph (1) or (2) of subsection (b), publicly
available on its website, or through another
comparable, readily accessible means, except as
provided in clauses (viii) and (ix) of paragraph
(1)(B).
(b) Update of Registration.--
(1) Update.--Each nationally recognized statistical
rating organization shall promptly amend its
application for registration under this section if any
information or document provided therein becomes
materially inaccurate, except that a nationally
recognized statistical rating organization is not
required to amend--
(A) the information required to be filed
under subsection (a)(1)(B)(i) by filing
information under this paragraph, but shall
amend such information in the annual submission
of the organization under paragraph (2) of this
subsection; or
(B) the certifications required to be
provided under subsection (a)(1)(B)(ix) by
filing information under this paragraph.
(2) Certification.--Not later than 90 days after the
end of each calendar year, each nationally recognized
statistical rating organization shall file with the
Commission an amendment to its registration, in such
form as the Commission, by rule, may prescribe as
necessary or appropriate in the public interest or for
the protection of investors--
(A) certifying that the information and
documents in the application for registration
of such nationally recognized statistical
rating organization (other than the
certifications required under subsection
(a)(1)(B)(ix)) continue to be accurate; and
(B) listing any material change that occurred
to such information or documents during the
previous calendar year.
(c) Accountability for Ratings Procedures.--
(1) Authority.--The Commission shall have exclusive
authority to enforce the provisions of this section in
accordance with this title with respect to any
nationally recognized statistical rating organization,
if such nationally recognized statistical rating
organization issues credit ratings in material
contravention of those procedures relating to such
nationally recognized statistical rating organization,
including procedures relating to the prevention of
misuse of nonpublic information and conflicts of
interest, that such nationally recognized statistical
rating organization--
(A) includes in its application for
registration under subsection (a)(1)(B)(ii); or
(B) makes and disseminates in reports
pursuant to section 17(a) or the rules and
regulations thereunder.
(2) Limitation.--The rules and regulations that the
Commission may prescribe pursuant to this title, as
they apply to nationally recognized statistical rating
organizations, shall be narrowly tailored to meet the
requirements of this title applicable to nationally
recognized statistical rating organizations.
Notwithstanding any other provision of this section, or
any other provision of law, neither the Commission nor
any State (or political subdivision thereof) may
regulate the substance of credit ratings or the
procedures and methodologies by which any nationally
recognized statistical rating organization determines
credit ratings. Nothing in this paragraph may be
construed to afford a defense against any action or
proceeding brought by the Commission to enforce the
antifraud provisions of the securities laws.
(3) Internal controls over processes for determining
credit ratings.--
(A) In general.--Each nationally recognized
statistical rating organization shall
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.
(B) Attestation requirement.--The Commission
shall prescribe rules requiring each nationally
recognized statistical rating organization to
submit to the Commission an annual internal
controls report, which shall contain--
(i) a description of the
responsibility of the management of the
nationally recognized statistical
rating organization in establishing and
maintaining an effective internal
control structure under subparagraph
(A);
(ii) an assessment of the
effectiveness of the internal control
structure of the nationally recognized
statistical rating organization; and
(iii) the attestation of the chief
executive officer, or equivalent
individual, of the nationally
recognized statistical rating
organization.
(d) Censure, Denial, or Suspension of Registration; Notice
and Hearing.--
(1) In general.--The Commission, by order, shall
censure, place limitations on the activities,
functions, or operations of, suspend for a period not
exceeding 12 months, or revoke the registration of any
nationally recognized statistical rating organization,
or with respect to any person who is associated with,
who is seeking to become associated with, or, at the
time of the alleged misconduct, who was associated or
was seeking to become associated with a nationally
recognized statistical rating organization, the
Commission, by order, shall censure, place limitations
on the activities or functions of such person, suspend
for a period not exceeding 1 year, or bar such person
from being associated with a nationally recognized
statistical rating organization, if the Commission
finds, on the record after notice and opportunity for
hearing, that such censure, placing of limitations,
suspension, bar or revocation is necessary for the
protection of investors and in the public interest and
that such nationally recognized statistical rating
organization, or any person associated with such an
organization, whether prior to or subsequent to
becoming so associated--
(A) has committed or omitted any act, or is
subject to an order or finding, enumerated in
subparagraph (A), (D), (E), (H), or (G) of
section 15(b)(4), has been convicted of any
offense specified in section 15(b)(4)(B), or is
enjoined from any action, conduct, or practice
specified in subparagraph (C) of section
15(b)(4), during the 10-year period preceding
the date of commencement of the proceedings
under this subsection, or at any time
thereafter;
(B) has been convicted during the 10-year
period preceding the date on which an
application for registration is filed with the
Commission under this section, or at any time
thereafter, of--
(i) any crime that is punishable by
imprisonment for 1 or more years, and
that is not described in section
15(b)(4)(B); or
(ii) a substantially equivalent crime
by a foreign court of competent
jurisdiction;
(C) is subject to any order of the Commission
barring or suspending the right of the person
to be associated with a nationally recognized
statistical rating organization;
(D) fails to file the certifications required
under subsection (b)(2);
(E) fails to maintain adequate financial and
managerial resources to consistently produce
credit ratings with integrity;
(F) has failed reasonably to supervise, with
a view to preventing a violation of the
securities laws, an individual who commits such
a violation, if the individual is subject to
the supervision of that person.
(2) Suspension or revocation for particular class of
securities.--
(A) In general.--The Commission may
temporarily suspend or permanently revoke the
registration of a nationally recognized
statistical rating organization with respect to
a particular class or subclass of securities,
if the Commission finds, on the record after
notice and opportunity for hearing, that the
nationally recognized statistical rating
organization does not have adequate financial
and managerial resources to consistently
produce credit ratings with integrity.
(B) Considerations.--In making any
determination under subparagraph (A), the
Commission shall consider--
(i) whether the nationally recognized
statistical rating organization has
failed over a sustained period of time,
as determined by the Commission, to
produce ratings that are accurate for
that class or subclass of securities;
and
(ii) such other factors as the
Commission may determine.
(e) Termination of Registration.--
(1) Voluntary withdrawal.--A nationally recognized
statistical rating organization may, upon such terms
and conditions as the Commission may establish as
necessary in the public interest or for the protection
of investors, withdraw from registration by furnishing
a written notice of withdrawal to the Commission.
(2) Commission authority.--In addition to any other
authority of the Commission under this title, if the
Commission finds that a nationally recognized
statistical rating organization is no longer in
existence or has ceased to do business as a credit
rating agency, the Commission, by order, shall cancel
the registration under this section of such nationally
recognized statistical rating organization.
(f) Representations.--
(1) Ban on representations of sponsorship by united
states or agency thereof.--It shall be unlawful for any
nationally recognized statistical rating organization
to represent or imply in any manner whatsoever that
such nationally recognized statistical rating
organization has been designated, sponsored,
recommended, or approved, or that the abilities or
qualifications thereof have in any respect been passed
upon, by the United States or any agency, officer, or
employee thereof.
(2) Ban on representation as nrsro of unregistered
credit rating agencies.--It shall be unlawful for any
credit rating agency that is not registered under this
section as a nationally recognized statistical rating
organization to state that such credit rating agency is
a nationally recognized statistical rating organization
registered under this title.
(3) Statement of registration under securities
exchange act of 1934 provisions.--No provision of
paragraph (1) shall be construed to prohibit a
statement that a nationally recognized statistical
rating organization is a nationally recognized
statistical rating organization under this title, if
such statement is true in fact and if the effect of
such registration is not misrepresented.
(g) Prevention of Misuse of Nonpublic Information.--
(1) Organization policies and procedures.--Each
nationally recognized statistical rating organization
shall establish, maintain, and enforce written policies
and procedures reasonably designed, taking into
consideration the nature of the business of such
nationally recognized statistical rating organization,
to prevent the misuse in violation of this title, or
the rules or regulations hereunder, of material,
nonpublic information by such nationally recognized
statistical rating organization or any person
associated with such nationally recognized statistical
rating organization.
(2) Commission authority.--The Commission shall issue
final rules in accordance with subsection (n) to
require specific policies or procedures that are
reasonably designed to prevent misuse in violation of
this title (or the rules or regulations hereunder) of
material, nonpublic information.
(h) Management of Conflicts of Interest.--
(1) Organization policies and procedures.--Each
nationally recognized statistical rating organization
shall establish, maintain, and enforce written policies
and procedures reasonably designed, taking into
consideration the nature of the business of such
nationally recognized statistical rating organization
and affiliated persons and affiliated companies
thereof, to address and manage any conflicts of
interest that can arise from such business.
(2) Commission authority.--The Commission shall issue
final rules in accordance with subsection (n) to
prohibit, or require the management and disclosure of,
any conflicts of interest relating to the issuance of
credit ratings by a nationally recognized statistical
rating organization, including, without limitation,
conflicts of interest relating to--
(A) the manner in which a nationally
recognized statistical rating organization is
compensated by the obligor, or any affiliate of
the obligor, for issuing credit ratings or
providing related services;
(B) the provision of consulting, advisory, or
other services by a nationally recognized
statistical rating organization, or any person
associated with such nationally recognized
statistical rating organization, to the
obligor, or any affiliate of the obligor;
(C) business relationships, ownership
interests, or any other financial or personal
interests between a nationally recognized
statistical rating organization, or any person
associated with such nationally recognized
statistical rating organization, and the
obligor, or any affiliate of the obligor;
(D) any affiliation of a nationally
recognized statistical rating organization, or
any person associated with such nationally
recognized statistical rating organization,
with any person that underwrites the securities
or money market instruments that are the
subject of a credit rating; and
(E) any other potential conflict of interest,
as the Commission deems necessary or
appropriate in the public interest or for the
protection of investors.
(3) Separation of ratings from sales and marketing.--
(A) Rules required.--The Commission shall
issue rules to prevent the sales and marketing
considerations of a nationally recognized
statistical rating organization from
influencing the production of ratings by the
nationally recognized statistical rating
organization.
(B) Contents of rules.--The rules issued
under subparagraph (A) shall provide for--
(i) exceptions for small nationally
recognized statistical rating
organizations with respect to which the
Commission determines that the
separation of the production of ratings
and sales and marketing activities is
not appropriate; and
(ii) suspension or revocation of the
registration of a nationally recognized
statistical rating organization, if the
Commission finds, on the record, after
notice and opportunity for a hearing,
that--
(I) the nationally recognized
statistical rating organization
has committed a violation of a
rule issued under this
subsection; and
(II) the violation of a rule
issued under this subsection
affected a rating.
(4) Look-back requirement.--
(A) Review by the nationally recognized
statistical rating organization.--Each
nationally recognized statistical rating
organization shall 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 nationally recognized statistical
rating organization or the issuer, underwriter,
or sponsor of a security or money market
instrument subject to a credit rating of the
nationally recognized statistical rating
organization was employed by the nationally
recognized statistical rating organization 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
nationally recognized statistical rating
organization shall--
(i) conduct a review to determine
whether any conflicts of interest of
the employee influenced the credit
rating; and
(ii) take action to revise the rating
if appropriate, in accordance with such
rules as the Commission shall
prescribe.
(B) Review by commission.--
(i) In general.--The Commission shall
conduct periodic reviews of the
policies described in subparagraph (A)
and the implementation of the policies
at each nationally recognized
statistical rating organization to
ensure they are reasonably designed and
implemented to most effectively
eliminate conflicts of interest.
(ii) Timing of reviews.--The
Commission shall review the code of
ethics and conflict of interest policy
of each nationally recognized
statistical rating organization--
(I) not less frequently than
annually; and
(II) whenever such policies
are materially modified or
amended.
(5) Report to commission on certain employment
transitions.--
(A) Report required.--Each nationally
recognized statistical rating organization
shall report to the Commission any case such
organization knows or can reasonably be
expected to know where a person associated with
such organization within the previous 5 years
obtains employment with any obligor, issuer,
underwriter, or sponsor of a security or money
market instrument for which the organization
issued a credit rating during the 12-month
period prior to such employment, if such
employee--
(i) was a senior officer of such
organization;
(ii) participated in any capacity in
determining credit ratings for such
obligor, issuer, underwriter, or
sponsor; or
(iii) supervised an employee
described in clause (ii).
(B) Public disclosure.--Upon receiving such a
report, the Commission shall make such
information publicly available.
(i) Prohibited Conduct.--
(1) Prohibited acts and practices.--The Commission
shall issue final rules in accordance with subsection
(n) to prohibit any act or practice relating to the
issuance of credit ratings by a nationally recognized
statistical rating organization that the Commission
determines to be unfair, coercive, or abusive,
including any act or practice relating to--
(A) conditioning or threatening to condition
the issuance of a credit rating on the purchase
by the obligor or an affiliate thereof of other
services or products, including pre-credit
rating assessment products, of the nationally
recognized statistical rating organization or
any person associated with such nationally
recognized statistical rating organization;
(B) 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 nationally recognized
statistical rating organization; or
(C) modifying or threatening to modify a
credit rating or otherwise departing from its
adopted systematic procedures and methodologies
in determining credit ratings, based on whether
the obligor, or an affiliate of the obligor,
purchases or will purchase the credit rating or
any other service or product of the nationally
recognized statistical rating organization or
any person associated with such organization.
(2) Rule of construction.--Nothing in paragraph (1),
or in any rules or regulations adopted thereunder, may
be construed to modify, impair, or supersede the
operation of any of the antitrust laws (as defined in
the first section of the Clayton Act, except that such
term includes section 5 of the Federal Trade Commission
Act, to the extent that such section 5 applies to
unfair methods of competition).
(j) Designation of Compliance Officer.--
(1) In general.--Each nationally recognized
statistical rating organization shall designate an
individual responsible for administering the policies
and procedures that are required to be established
pursuant to subsections (g) and (h), and for ensuring
compliance with the securities laws and the rules and
regulations thereunder, including those promulgated by
the Commission pursuant to this section.
(2) Limitations.--
(A) In general.--Except as provided in
subparagraph (B), an individual designated
under paragraph (1) may not, while serving in
the designated capacity--
(i) perform credit ratings;
(ii) participate in the development
of ratings methodologies or models;
(iii) perform marketing or sales
functions; or
(iv) participate in establishing
compensation levels, other than for
employees working for that individual.
(B) Exception.--The Commission may exempt a
small nationally recognized statistical rating
organization from the limitations under this
paragraph, if the Commission finds that
compliance with such limitations would impose
an unreasonable burden on the nationally
recognized statistical rating organization.
(3) Other duties.--Each individual designated under
paragraph (1) shall establish procedures for the
receipt, retention, and treatment of--
(A) complaints regarding credit ratings,
models, methodologies, and compliance with the
securities laws and the policies and procedures
developed under this section; and
(B) confidential, anonymous complaints by
employees or users of credit ratings.
(4) Compensation.--The compensation of each
compliance officer appointed under paragraph (1) shall
not be linked to the financial performance of the
nationally recognized statistical rating organization
and shall be arranged so as to ensure the independence
of the officer's judgment.
(5) Annual reports required.--
(A) Annual reports required.--Each individual
designated under paragraph (1) shall submit to
the nationally recognized statistical rating
organization an 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 that
includes--
(i) a description of any material
changes to the code of ethics and
conflict of interest policies of the
nationally recognized statistical
rating organization; and
(ii) a certification that the report
is accurate and complete.
(B) Submission of reports to the
commission.--Each nationally recognized
statistical rating organization shall file the
reports required under subparagraph (A)
together with the financial report that is
required to be submitted to the Commission
under this section.
(k) Statements of Financial Condition.--Each nationally
recognized statistical rating organization 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.
(l) Sole Method of Registration.--
(1) In general.--On and after the effective date of
this section, a credit rating agency may only be
registered as a nationally recognized statistical
rating organization for any purpose in accordance with
this section.
(2) Prohibition on reliance on no-action relief.--On
and after the effective date of this section--
(A) an entity that, before that date,
received advice, approval, or a no-action
letter from the Commission or staff thereof to
be treated as a nationally recognized
statistical rating organization pursuant to the
Commission rule at section 240.15c3-1 of title
17, Code of Federal Regulations, may represent
itself or act as a nationally recognized
statistical rating organization only--
(i) during Commission consideration
of the application, if such entity has
filed an application for registration
under this section; and
(ii) on and after the date of
approval of its application for
registration under this section; and
(B) the advice, approval, or no-action letter
described in subparagraph (A) shall be void.
(3) Notice to other agencies.--Not later than 30 days
after the date of enactment of this section, the
Commission shall give notice of the actions undertaken
pursuant to this section to each Federal agency which
employs in its rules and regulations the term
``nationally recognized statistical rating
organization'' (as that term is used under Commission
rule 15c3-1 (17 C.F.R. 240.15c3-1), as in effect on the
date of enactment of this section).
(m) Accountability.--
(1) In general.--The enforcement and penalty
provisions of this title shall apply to statements made
by a credit rating agency in the same manner and to the
same extent as such provisions apply to statements made
by a registered public accounting firm or a securities
analyst under the securities laws, and such statements
shall not be deemed forward-looking statements for the
purposes of section 21E.
(2) Rulemaking.--The Commission shall issue such
rules as may be necessary to carry out this subsection.
(n) Regulations.--
(1) New provisions.--Such rules and regulations as
are required by this section or are otherwise necessary
to carry out this section, including the application
form required under subsection (a)--
(A) shall be issued by the Commission in
final form, not later than 270 days after the
date of enactment of this section; and
(B) shall become effective not later than 270
days after the date of enactment of this
section.
(2) Review of existing regulations.--Not later than
270 days after the date of enactment of this section,
the Commission shall--
(A) review its existing rules and regulations
which employ the term ``nationally recognized
statistical rating organization'' or ``NRSRO'';
and
(B) amend or revise such rules and
regulations in accordance with the purposes of
this section, as the Commission may prescribe
as necessary or appropriate in the public
interest or for the protection of investors.
(o) NRSROs Subject to Commission Authority.--
(1) In general.--No provision of the laws of any
State or political subdivision thereof requiring the
registration, licensing, or qualification as a credit
rating agency or a nationally recognized statistical
rating organization shall apply to any nationally
recognized statistical rating organization or person
employed by or working under the control of a
nationally recognized statistical rating organization.
(2) Limitation.--Nothing in this subsection prohibits
the securities commission (or any agency or office
performing like functions) of any State from
investigating and bringing an enforcement action with
respect to fraud or deceit against any nationally
recognized statistical rating organization or person
associated with a nationally recognized statistical
rating organization.
(p) Regulation of Nationally Recognized Statistical Rating
Organizations.--
(1) Establishment of office of credit ratings.--
(A) Office established.--The Commission shall
establish within the Commission an Office of
Credit Ratings (referred to in this subsection
as the ``Office'') to administer the rules of
the Commission--
(i) with respect to the practices of
nationally recognized statistical
rating organizations in determining
ratings, for the protection of users of
credit ratings and in the public
interest;
(ii) to promote accuracy in credit
ratings issued by nationally recognized
statistical rating organizations; and
(iii) to ensure that such ratings are
not unduly influenced by conflicts of
interest.
(B) Director of the office.--The head of the
Office shall be the Director, who shall report
to the Chairman.
(2) Staffing.--The Office established under this
subsection shall be staffed sufficiently to carry out
fully the requirements of this section. The staff shall
include persons with knowledge of and expertise in
corporate, municipal, and structured debt finance.
(3) Commission examinations.--
(A) Annual examinations required.--The Office
shall conduct an examination of each nationally
recognized statistical rating organization at
least annually.
(B) Conduct of examinations.--Each
examination under subparagraph (A) shall
include, as appropriate, a review of--
(i) whether the nationally recognized
statistical rating organization
conducts business in accordance with
the policies, procedures, and rating
methodologies of the nationally
recognized statistical rating
organization;
(ii) the management of conflicts of
interest by the nationally recognized
statistical rating organization;
(iii) implementation of ethics
policies by the nationally recognized
statistical rating organization;
(iv) the internal supervisory
controls of the nationally recognized
statistical rating organization;
(v) the governance of the nationally
recognized statistical rating
organization;
(vi) the activities of the individual
designated by the nationally recognized
statistical rating organization under
subsection (j)(1);
(vii) the processing of complaints by
the nationally recognized statistical
rating organization; and
(viii) the policies of the nationally
recognized statistical rating
organization governing the post-
employment activities of former staff
of the nationally recognized
statistical rating organization.
(C) Inspection reports.--The Commission shall
make available to the public, in an easily
understandable format, an annual report
summarizing--
(i) the essential findings of all
examinations conducted under
subparagraph (A), as deemed appropriate
by the Commission;
(ii) the responses by the nationally
recognized statistical rating
organizations to any material
regulatory deficiencies identified by
the Commission under clause (i); and
(iii) whether the nationally
recognized statistical rating
organizations have appropriately
addressed the recommendations of the
Commission contained in previous
reports under this subparagraph.
(4) Rulemaking authority.--The Commission shall--
(A) establish, by rule, fines, and other
penalties applicable to any nationally
recognized statistical rating organization that
violates the requirements of this section and
the rules thereunder; and
(B) issue such rules as may be necessary to
carry out this section.
(q) Transparency of Ratings Performance.--
(1) Rulemaking required.--The Commission shall, by
rule, require that each nationally recognized
statistical rating organization publicly disclose
information on the initial credit ratings determined by
the nationally recognized statistical rating
organization 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
nationally recognized statistical rating organizations.
(2) Content.--The rules of the Commission under this
subsection shall require, at a minimum, disclosures
that--
(A) are comparable among nationally
recognized statistical rating organizations, to
allow users of credit ratings to compare the
performance of credit ratings across nationally
recognized statistical rating organizations;
(B) are clear and informative for investors
having a wide range of sophistication who use
or might use credit ratings;
(C) include performance information over a
range of years and for a variety of types of
credit ratings, including for credit ratings
withdrawn by the nationally recognized
statistical rating organization;
(D) are published and made freely available
by the nationally recognized statistical rating
organization, on an easily accessible portion
of its website, and in writing, when requested;
(E) are appropriate to the business model of
a nationally recognized statistical rating
organization; and
(F) each nationally recognized statistical
rating organization 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.
(r) Credit Ratings Methodologies.--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 nationally recognized statistical rating
organizations that require each nationally recognized
statistical rating organization--
(1) to ensure that credit ratings are determined
using procedures and methodologies, including
qualitative and quantitative data and models, that
are--
(A) approved by the board of the nationally
recognized statistical rating organization, a
body performing a function similar to that of a
board; and
(B) in accordance with the policies and
procedures of the nationally recognized
statistical rating organization for the
development and modification of credit rating
procedures and methodologies;
(2) to ensure that when material changes to credit
rating procedures and methodologies (including changes
to qualitative and quantitative data and models) are
made, that--
(A) the changes are applied consistently to
all credit ratings to which the changed
procedures and methodologies apply;
(B) 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 nationally
recognized statistical rating organization
within a reasonable time period determined by
the Commission, by rule; and
(C) the nationally recognized statistical
rating organization publicly discloses the
reason for the change; and
(3) to notify users of credit ratings--
(A) of the version of a procedure or
methodology, including the qualitative
methodology or quantitative inputs, used with
respect to a particular credit rating;
(B) when a material change is made to a
procedure or methodology, including to a
qualitative model or quantitative inputs;
(C) when a significant error is identified in
a procedure or methodology, including a
qualitative or quantitative model, that may
result in credit rating actions; and
(D) of the likelihood of a material change
described in subparagraph (B) resulting in a
change in current credit ratings.
(s) Transparency of Credit Rating Methodologies and
Information Reviewed.--
(1) Form for disclosures.--The Commission shall
require, by rule, each nationally recognized
statistical rating organization to prescribe a form to
accompany the publication of each credit rating that
discloses--
(A) information relating to--
(i) the assumptions underlying the
credit rating procedures and
methodologies;
(ii) the data that was relied on to
determine the credit rating; and
(iii) if applicable, how the
nationally recognized statistical
rating organization used servicer or
remittance reports, and with what
frequency, to conduct surveillance of
the credit rating; and
(B) 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 nationally
recognized statistical rating organization.
(2) Format.--The form developed under paragraph (1)
shall--
(A) be easy to use and helpful for users of
credit ratings to understand the information
contained in the report;
(B) require the nationally recognized
statistical rating organization to provide the
content described in paragraph (3)(B) in a
manner that is directly comparable across types
of securities; and
(C) be made readily available to users of
credit ratings, in electronic or paper form, as
the Commission may, by rule, determine.
(3) Content of form.--
(A) Qualitative content.--Each nationally
recognized statistical rating organization
shall disclose on the form developed under
paragraph (1)--
(i) the credit ratings produced by
the nationally recognized statistical
rating organization;
(ii) 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;
(iii) the potential limitations of
the credit ratings, and the types of
risks excluded from the credit ratings
that the nationally recognized
statistical rating organization does
not comment on, including liquidity,
market, and other risks;
(iv) information on the uncertainty
of the credit rating, including--
(I) information on the
reliability, accuracy, and
quality of the data relied on
in determining the credit
rating; and
(II) a statement relating to
the extent to which data
essential to the determination
of the credit rating were
reliable or limited,
including--
(aa) any limits on
the scope of historical
data; and
(bb) any limits in
accessibility to
certain documents or
other types of
information that would
have better informed
the credit rating;
(v) whether and to what extent third
party due diligence services have been
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;
(vi) 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;
(vii) 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 nationally
recognized statistical rating
organization in rating similar
issuances;
(viii) information relating to
conflicts of interest of the nationally
recognized statistical rating
organization; and
(ix) such additional information as
the Commission may require.
(B) Quantitative content.--Each nationally
recognized statistical rating organization
shall disclose on the form developed under this
subsection--
(i) an explanation or measure of the
potential volatility of the credit
rating, including--
(I) any factors that might
lead to a change in the credit
ratings; and
(II) the magnitude of the
change that a user can expect
under different market
conditions;
(ii) information on the content of
the rating, including--
(I) the historical
performance of the rating; and
(II) the expected probability
of default and the expected
loss in the event of default;
(iii) information on the sensitivity
of the rating to assumptions made by
the nationally recognized statistical
rating organization, including--
(I) 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
(II) an analysis, using
specific examples, of how each
of the 5 assumptions identified
under subclause (I) impacts a
rating;
(iv) such additional information as
may be required by the Commission.
(4) Due diligence services for asset-backed
securities.--
(A) Findings.--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.
(B) Certification required.--In any case in
which third-party due diligence services are
employed by a nationally recognized statistical
rating organization, an issuer, or an
underwriter, the person providing the due
diligence services shall provide to any
nationally recognized statistical rating
organization that produces a rating to which
such services relate, written certification, as
provided in subparagraph (C).
(C) Format and content.--The Commission shall
establish the appropriate format and content
for the written certifications required under
subparagraph (B), to ensure that providers of
due diligence services have conducted a
thorough review of data, documentation, and
other relevant information necessary for a
nationally recognized statistical rating
organization to provide an accurate rating.
(D) Disclosure of certification.--The
Commission shall adopt rules requiring a
nationally recognized statistical rating
organization, at the time at which the
nationally recognized statistical rating
organization produces a rating, to disclose the
certification described in subparagraph (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.
(t) Corporate Governance, Organization, and Management of
Conflicts of Interest.--
(1) Board of directors.--Each nationally recognized
statistical rating organization shall have a board of
directors.
(2) Independent directors.--
(A) In general.--At least \1/2\ of the board
of directors, but not fewer than 2 of the
members thereof, shall be independent of the
nationally recognized statistical rating
agency. A portion of the independent directors
shall include users of ratings from a
nationally recognized statistical rating
organization.
(B) Independence determination.--In order to
be considered independent for purposes of this
subsection, a member of the board of directors
of a nationally recognized statistical rating
organization--
(i) may not, other than in his or her
capacity as a member of the board of
directors or any committee thereof--
(I) accept any consulting,
advisory, or other compensatory
fee from the nationally
recognized statistical rating
organization; or
(II) be a person associated
with the nationally recognized
statistical rating organization
or with any affiliated company
thereof; and
(ii) shall be disqualified from any
deliberation involving a specific
rating in which the independent board
member has a financial interest in the
outcome of the rating.
(C) Compensation and term.--The compensation
of the independent members of the board of
directors of a nationally recognized
statistical rating organization shall not be
linked to the business performance of the
nationally recognized statistical rating
organization, and shall be arranged so as to
ensure the independence of their judgment. The
term of office of the independent directors
shall be for a pre-agreed fixed period, not to
exceed 5 years, and shall not be renewable.
(3) Duties of board of directors.--In addition to the
overall responsibilities of the board of directors, the
board shall oversee--
(A) the establishment, maintenance, and
enforcement of policies and procedures for
determining credit ratings;
(B) the establishment, maintenance, and
enforcement of policies and procedures to
address, manage, and disclose any conflicts of
interest;
(C) the effectiveness of the internal control
system with respect to policies and procedures
for determining credit ratings; and
(D) the compensation and promotion policies
and practices of the nationally recognized
statistical rating organization.
(4) Treatment of nrsro subsidiaries.--If a nationally
recognized statistical rating organization is a
subsidiary of a parent entity, the board of the
directors of the parent entity may satisfy the
requirements of this subsection by assigning to a
committee of such board of directors the duties under
paragraph (3), if--
(A) at least \1/2\ of the members of the
committee (including the chairperson of the
committee) are independent, as defined in this
section; and
(B) at least 1 member of the committee is a
user of ratings from a nationally recognized
statistical rating organization.
(5) Exception authority.--If the Commission finds
that compliance with the provisions of this subsection
present an unreasonable burden on a small nationally
recognized statistical rating organization, the
Commission may permit the nationally recognized
statistical rating organization to delegate such
responsibilities to a committee that includes at least
one individual who is a user of ratings of a nationally
recognized statistical rating organization.
(u) Duty To Report Tips Alleging Material Violations of
Law.--
(1) Duty to report.--Each nationally recognized
statistical rating organization shall refer to the
appropriate law enforcement or regulatory authorities
any information that the nationally recognized
statistical rating organization receives from a third
party and finds credible that alleges that an issuer of
securities rated by the nationally recognized
statistical rating organization has committed or is
committing a material violation of law that has not
been adjudicated by a Federal or State court.
(2) Rule of construction.--Nothing in paragraph (1)
may be construed to require a nationally recognized
statistical rating organization to verify the accuracy
of the information described in paragraph (1).
(v) Information From Sources Other Than the Issuer.--In
producing a credit rating, a nationally recognized statistical
rating organization shall consider information about an issuer
that the nationally recognized statistical rating organization
has, or receives from a source other than the issuer or
underwriter, that the nationally recognized statistical rating
organization finds credible and potentially significant to a
rating decision.
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