
[Federal Register Volume 76, Number 94 (Monday, May 16, 2011)]
[Notices]
[Pages 28265-28297]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11877]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64456; File No. 4-629]


Solicitation of Comment To Assist in Study on Assigned Credit 
Ratings

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') 
requests public comment to assist it in carrying out a study on, among 
other matters, the feasibility of establishing a system in which a 
public or private utility or a self-regulatory organization (``SRO'') 
assigns nationally recognized statistical rating organizations 
(``NRSROs'') to determine credit ratings for structured finance 
products. This study, and a resulting report to Congress, are required 
by Section 939F of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (the ``Dodd-Frank Act'').

DATES: The Commission will accept comments on matters related to the 
study on or before September 13, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number 4-629 on the subject line.

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Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090. All submissions should refer to File Number 
4-629. This file number should be included on the subject line if e-
mail 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). 
Comments are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street, 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; we do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Randall W. Roy, Assistant Director, at 
(202) 551-5522; Alan A. Dunetz, Branch Chief, at (212) 336-0072; Kevin 
S. Davey, Securities Compliance Examiner, at (212) 336-0075; Kristin A. 
Devitto, Securities Compliance Examiner, at (212) 336-0038; Diane 
Audino, Securities Compliance Examiner, at (212) 336-0076, or Timothy 
C. Fox, at (202) 551-5687, Special Counsel, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-7010.

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act into 
law.\1\ Under Section 939F of the Dodd-Frank Act (``Section 939F''), 
the Commission must submit to the Committee on Banking, Housing, and 
Urban Affairs of the Senate and the Committee on Financial Services of 
the House of Representatives, not later than 24 months after the date 
of enactment of the Dodd-Frank Act, a report containing: (1) The 
findings of a study on matters related to assigning credit ratings for 
structured finance products; and (2) any recommendations for regulatory 
or statutory changes that the Commission determines should be made to 
implement the findings of the study.\2\
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    \1\ Public Law 111-203, 124 Stat. 1376, H.R. 4173 (2010).
    \2\ See Section 939F. Section 939F(a) provides that, for 
purposes of Section 939F, the term ``structured finance product'' 
means an ``asset-backed security,'' as defined in Section 3(a)(77) 
of the Securities Exchange Act of 1934 (``Exchange Act''), as added 
by Section 941 of the Dodd-Frank Act (15 U.S.C. 78c(a)(77)), and any 
structured product based on an asset-backed security, as determined 
by the Commission, by rule. For the purposes of this solicitation of 
comment, the term ``structured finance product'' means an ``asset-
backed security'' as defined in Section 3(a)(77) of the Exchange Act 
and, to the extent not included in that definition, any security or 
money market instrument issued by an asset pool or as part of any 
asset-backed or mortgage-backed securities transaction. See, e.g., 
17 CFR 240.17g-2(a)(2)(iii), (a)(7), and (b)(9), 17 CFR 240.17g-
3(a)(6), 17 CFR 240.17g-5(a)(3) and (b)(9), and 17 CFR 17g-6(a)(4). 
See also Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 61050 (Nov. 23, 
2009), 74 FR at 63832 (Dec. 4, 2009), at 74 FR 63832, footnote 3.
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    Section 939F provides that the Commission, in carrying out the 
study, shall address four areas. One, the credit rating process for 
structured finance products and the conflicts of interest associated 
with the issuer-pay and the subscriber-pay models.\3\ Two, the 
feasibility of establishing a system in which a public or private 
utility or an SRO assigns NRSROs to determine the credit ratings for 
structured finance products, including: (1) An assessment of potential 
mechanisms for determining fees for NRSROs for structured finance 
products; (2) appropriate methods for paying fees to NRSROs to rate 
structured finance products; (3) the extent to which the creation of 
such a system would be viewed as the creation of moral hazard by the 
Federal Government; and (4) any constitutional or other issues 
concerning the establishment of such a system.\4\ Three, the range of 
metrics one could use to determine the accuracy of credit ratings for 
structured finance products.\5\ Four, alternative means for 
compensating NRSROs that would create incentives for accurate credit 
ratings for structured finance products.\6\
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    \3\ See Public Law 111-203 Sec.  939F(b)(1).
    \4\ See Public Law 111-203 Sec.  939F(b)(2)(A) through (B).
    \5\ See Public Law 111-203 Sec.  939F(b)(3).
    \6\ See Public Law 111-203 Sec.  939F(b)(4).
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    In addition, Section 939F provides that, after submission of the 
report to Congress resulting from the study, the Commission shall, by 
rule, as the Commission determines is necessary or appropriate in the 
public interest or for the protection of investors, establish a system 
for the assignment of NRSROs to determine the initial credit ratings of 
structured finance products, in a manner that prevents the issuer, 
sponsor, or underwriter of the structured finance product from 
selecting the NRSRO that will determine the initial credit ratings and 
monitor such credit ratings.\7\ In issuing any rule, the Commission is 
required to give thorough consideration to the provisions of Section 
15E(w) of the Securities Exchange Act of 1934, as that provision would 
have been added by Section 939D of H.R. 4173 (111th Congress), as 
passed by the Senate on May 20, 2010 (the ``Section 15E(w) 
Provisions''), and shall implement the system described in such Section 
939D (the ``Section 15E(w) System'') unless the Commission determines 
that an alternative system would better serve the public interest and 
the protection of investors.\8\
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    \7\ See Public Law 111-203 Sec.  939F(d).
    \8\ Id. For ease of reference, the Section 15E(w) Provisions are 
attached as an Appendix to this solicitation of comments.
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    In carrying out the study required by Section 939F, the Commission 
believes that comments, proposals, data, and analysis from interested 
parties representing a wide range views of, and involvement in, the 
market for structured finance products and the role of NRSROs in that 
market would provide valuable assistance. In this regard, the 
Commission seeks comment from: (1) Investors and other persons who use 
credit ratings; (2) participants in pensions funds and other retirement 
vehicles that may hold structured finance products; (3) portfolio and 
fund managers; (4) investment advisers; (5) insurance companies; (6) 
credit rating agencies; (7) financial institutions; (8) originators of 
financial assets that are securitized into structured finance products 
(including, but not limited to, originators of residential and 
commercial real estate loans, corporate loans, student loans, credit 
card receivables, consumer loans and leases, auto loans and leases, 
auto floor plans, equipment loans and leases, and any other financial 
assets that are securitized); (9) issuers, underwriters, sponsors, and 
depositors involved in the issuance of structured finance products; 
(10) regulators; (11) members of the academic community; and (12) any 
other persons who have views concerning, and involvement in, the market 
for structured finance products and the role of NRSROs in that market. 
In addition, given the complexity of the issues surrounding the matters 
to be addressed in the study, the Commission believes an extended 
comment period of 120 days is appropriate in order to provide 
sufficient opportunity for all interested parties to consider and 
respond to the questions and provide any additional comments, 
proposals, data, and analysis they believe germane to the study.

II. Request for Comment

    The Commission requests that interested parties provide comments,

[[Page 28267]]

proposals, data, and analysis in response to the questions below, as 
appropriate, given their views of, and involvement in, the market for 
structured finance products and the role of NRSROs in that market.\9\ 
In this regard, the Commission requests that interested parties address 
the topics and questions set forth in three sections below. Section 
II.A seeks comment on the credit rating process for structured finance 
products and the conflicts of interest associated with the issuer-pay 
and the subscriber-pay models.\10\ Section II.B seeks comment on the 
Section 15E(w) System for assigning NRSROs to determine credit ratings 
for structured finance products. Finally, Section II.C seeks comment on 
potential alternatives to the Section 15E(w) System.
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    \9\ The Commission has received a comment that relates to 
matters in this solicitation of comment as part of its general 
request for public input on regulatory initiatives under the Dodd-
Frank Act. See letter from Anne Simpson of CalPERS dated October 4, 
2010. This comment and others relating to credit rating agencies are 
available at: http://www.sec.gov/comments/df-title-ix/credit-rating-agencies/credit-rating-agencies.shtml.
    \10\ Section 939F(b)(1) requires the Commission to address these 
matters in carrying out the study. See Public Law 111-203 Sec.  
939F(b)(1).
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    In addition, the General Accountability Office (``GAO'') has 
developed a framework (``GAO Framework'') for Congress and others to 
use in evaluating or crafting alternative compensation models for 
NRSROs.\11\ The GAO notes that this framework could be used by the 
Commission to ``evaluate current proposals for compensating NRSROs, 
develop new proposals, and identify trade-offs among them'' in carrying 
out the study required by Section 939F.\12\ Consequently, the 
Commission requests in Sections II.B and II.C that interested parties 
use the GAO Framework to evaluate, respectively, the Section 15E(w) 
System and potential alternatives to that system, including 
alternatives not identified in this release.\13\
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    \11\ See Securities and Exchange Commission: Action Needed to 
Improve Rating Agency Registration Program and Performance Related 
Disclosures, GAO Report 10-782 (September 2010) (``GAO Report 10-
782'') at pp. 79-93. As discussed below, the GAO Framework consists 
of a seven factor test to use in evaluating alternative compensation 
models for NRSROs. Id. The seven factors are: (1) Independence (the 
ability for the compensation model to mitigate conflicts of interest 
inherent between the entity paying for the rating and the NRSRO); 
(2) accountability (the ability of the compensation model to promote 
NRSRO responsibility for the accuracy and timeliness of their 
ratings); (3) competition (the extent to which the compensation 
model creates an environment in which NRSROs compete for customers 
by producing higher-quality ratings at competitive prices); (4) 
transparency (the accessibility, usability, and clarity of the 
compensation model and the dissemination of information on the model 
to market participants); (5) feasibility (the simplicity and ease 
with which the compensation model can be implemented in the 
securities market); (6) market acceptance and choice (the 
willingness of the securities market to accept the compensation 
model, the ratings produced under that model, and any new market 
players established by the compensation model); and (7) oversight 
(the evaluation of the model to help ensure it works as intended). 
Section 939E of the Dodd-Frank requires the GAO to conduct a study 
on alternative means for compensating NRSROs in order to create 
incentives for NRSROs to provide more accurate credit ratings, 
including any statutory changes that would be required to facilitate 
the use of an alternative means of compensation. See Public Law 111-
203 Sec.  939E. Section 939E further requires the GAO to provide the 
Committee on Banking, Housing, and Urban Affairs of the Senate and 
the Committee on Financial Services of the House of Representatives, 
not later than 18 months after the date of enactment of the Dodd-
Frank Act, a report on the results of the study, including 
recommendations, if any, for providing incentives to credit rating 
agencies to improve the credit rating process. Id.
    \12\ GAO Report 10-782 at pp. 92-93.
    \13\ In addition, Section 939F requires the Commission to 
address specific matters with respect to the Section 15E(w) System. 
See Public Law 111-203 Sec.  939F. While these matters may be 
covered broadly by the GAO Framework, the Commission requests, in 
Section II.B, that interested parties address these matters through 
a series of additional targeted questions.
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    Finally, the Commission notes that 10 credit rating agencies 
currently are registered as NRSROs, eight of which are registered in 
the class of credit rating for issuers of asset-backed securities.\14\ 
Based on information disclosed by these eight NRSROs in their most 
recently updated Form NRSROs, the Commission estimates that 
approximately 94% of the outstanding credit ratings for structured 
finance products were determined by the three largest NRSROs (see 
Figure 1 below).\15\ The Commission requests that interested parties, 
in responding to the topics and questions below address, as applicable, 
the likely impact the proposals would have on the concentration of 
issuance of credit ratings for structured finance products among 
NRSROs.
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    \14\ The classes of credit ratings for which an NRSRO can be 
registered are enumerated in the definition of ``nationally 
recognized statistical rating organization'' in Section 3(a)(62) of 
the Exchange Act: (1) Financial institutions, brokers, or dealers; 
(2) insurance companies; (3) corporate issuers; (4) issuers of 
asset-backed securities (as that term is defined in Section 1101(c) 
of part 229 of Title 17, Code of Federal Regulations, as in effect 
on the date of enactment of this paragraph); and (5) issuers of 
government securities, municipal securities, or securities issued by 
a foreign government. 15 U.S.C. 78c(a)(62).
    \15\ Item 7 of Form NRSRO requires an NRSRO to provide the 
approximate number of credit ratings outstanding in each class of 
credit rating for which the NRSRO is registered.

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[GRAPHIC] [TIFF OMITTED] TN16MY11.000

A. The Credit Rating Process for Structured Finance Products and the 
Conflicts of Interest Associated With the Issuer-Pay and the 
Subscriber-Pay Models

    Section 939F(b)(1) provides that the Commission, in carrying out 
the study, shall address the credit rating process for structured 
finance products and the conflicts of interest associated with the 
issuer-pay and the subscriber-pay models.
Request for Comment
    The Commission requests comments, proposals, data, and analysis to 
assist in analyzing the credit rating process for structured finance 
products and the conflicts of interest associated with the issuer-pay 
and the subscriber-pay models. In addition, the Commission requests 
comments, proposals, data, and analysis in response to the following 
questions:
    1. Describe the processes by which an NRSRO determines an initial 
credit rating for a structured finance product and, thereafter, 
monitors that credit rating.\16\ If the processes differ based on the 
type of structured finance product (e.g., a residential mortgage backed 
security (``RMBS''), a commercial mortgage-backed security (``CMBS''), 
a collateralized debt obligation (``CDO''), a collateralized loan 
obligation (``CLO''), an asset backed security collateralized by credit 
card receivables, auto loans, auto leases, dealer floor plan financing, 
student loans, consumer loans, consumer leases, equipment loans, 
equipment leases, or other similar financial assets (``other ABS''), an 
issuance by an asset-backed commercial paper conduit (``ABCP''), or any 
other structured finance product), describe the different processes and 
provide any supporting data and analysis. In describing the processes 
for these asset classes, interested parties are encouraged to describe 
any strengths or weaknesses of such processes. Responses should 
include:
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    \16\ In responding to the questions below about processes, 
interested parties are encouraged to use flow charts, if 
appropriate, to illustrate the processes described in responses, 
including using visual channels (``swim lanes'') to identify NRSRO 
resources (e.g., entities, departments, personnel) involved or used 
in each step of the process and the interactions between NRSRO 
personnel and internal and external parties during each step in the 
process.
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    a. A description of the process by which NRSROs are compensated for 
determining initial credit ratings for structured finance products and 
for ongoing monitoring of those ratings.
    b. A description of the data collection phase of the process for 
determining and monitoring credit ratings for structured finance 
products, including: The types of data collected; the sources from 
which the data is obtained; whether, and, if so how, the data is 
validated; whether the data is public or non-public; and how, if at 
all, the data is captured in the NRSRO's systems.
    c. A description of the analytical phase of the process for 
determining and monitoring credit ratings for structured finance 
products, including the types of analyses performed (e.g., cash flow, 
sensitivity, loss, and stress analysis).
    d. A description of the process for approving and publishing a 
credit rating for a structured finance product, including the steps 
that could lead to the modification of the credit rating before it is 
published (e.g., an issuer ``appeal'' process).
    e. A description of how the processes identified above and any 
other processes relating to determining and monitoring of structured 
finance products (including absent or missing process steps or other 
process-related weaknesses) contributed, if at all, to the performance 
of credit ratings for structured finance products leading up and during 
the financial crisis. If process-related weaknesses contributed to the 
poor performance of credit ratings for structured finance products, 
describe whether and, if so, how those weaknesses have been addressed.
    2. Provide data on the number of credit ratings for structured 
finance products initially determined by each NRSRO each year for the 
last ten years or identify sources of information where that data can 
be located. If possible, provide data for each asset class of 
structured finance products identified above.
    3. Describe the potential conflicts of interest in the issuer-pay 
model in rating structured finance products. For example, in what ways, 
if any, does the issuer, underwriter, or sponsor (``arranger'') of the 
structured finance product paying the NRSRO to determine the credit 
rating create conflicts of interest? What are the potential impacts on 
the NRSRO and the credit ratings issued from these conflicts of 
interest? Also, compare the potential conflicts in rating structured 
finance products with the potential conflicts in rating other classes 
of obligors, securities, or money

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market instruments, such as issuers that are financial institutions, 
non-financial corporations, insurance companies, and governments and 
municipalities. In this regard, does the concentration of underwriters 
and sponsors of structured finance products potentially make any 
conflicts more acute in this class of credit ratings? Does having a 
large number of clients reduce risk that a single client could unduly 
influence the NRSRO? In addition, are the potential conflicts of 
interest more acute in terms of rating certain types of structured 
finance products as compared with other types of structured finance 
products? For example, do certain types of structured finance products 
account for a larger percentage of revenues to NRSROs than other types 
of products in today's market and the market as it existed prior to the 
credit crisis?
    4. Is there empirical data, studies, or other information that the 
issuer-pay conflict of interest influenced credit ratings issued by 
NRSROs? If so, identify and describe any such data, studies, or other 
information. For example, is there empirical data, studies, or other 
information that initial credit ratings for structured finance products 
determined by NRSROs operating under the issuer-pay model are higher 
than initial credit ratings determined by NRSROs operating under the 
subscriber-pay model? If so, identify and describe any such data, 
studies, or other information. In addition, if it can be demonstrated 
that conflicts influenced the credit ratings for structured finance 
products, is there empirical data, studies, or other information that 
market participants understood the impact, by for example, pricing 
structured finance products differently than other types of securities 
or money market instruments with identical ratings? If so, identify and 
describe any such data, studies, or other information.
    5. Describe any actions that NRSROs have taken or internal controls 
that NRSROs have in place, or could take or put in place, to mitigate 
conflicts of interests in the issuer-pay model.
    6. Describe the potential conflicts of interest in the subscriber-
pay model in rating structured finance products. Subscriber-paid credit 
ratings commonly are not made available for free (and, consequently, 
not broadly disseminated to the marketplace). What impact, if any, does 
this have on market participants' ability to detect conflicts of 
interest? In addition, address how the interests of subscribers may 
create potential incentives to unduly influence an NRSRO in determining 
a credit rating? For example, does a subscriber's investing limitations 
(e.g., a subscriber may only invest in structured finance products that 
are rated above a certain level in the rating scale of an NRSRO or may 
have a long or short position that could produce gains or losses 
depending on how a product is rated) create conflicts of interests? If 
so, in what manner and to what extent? Also, do subscriber-paid NRSROs 
have individual subscribers that account for a material portion of 
their annual revenues? For example, a subscriber could be a large 
financial institution that purchases multiple data feeds 
(subscriptions) to the NRSRO's credit ratings and analysis. If so, does 
this create a concentrated revenue source that may make the subscriber-
paid conflict more acute, similar to the concentration of structured 
finance sponsors in the issuer-paid context? Also address whether the 
diversity of interest among the subscribers mitigates the possibility 
that a single subscriber can unduly influence ratings? For example, is 
this conflict mitigated to the extent that different subscribers may 
have different interests with respect to how a particular security is 
rated?
    7. Is there empirical data, studies, or other information that the 
subscriber-pay conflict of interest influenced credit ratings issued by 
NRSROs? If so, identify and describe any such data, studies, or other 
information.
    8. Describe any actions that NRSROs have taken or internal controls 
that NRSROs have in place, or could take or put in place, to mitigate 
the conflicts of interests in the subscriber-pay model.
    9. Compare the types and degree of conflicts of interest presented 
by the issuer-pay and subscriber-pay models.
    10. Does reputational risk mitigate potential conflicts of interest 
in the credit rating industry? If so, describe how? If not, describe 
why. In responding to these questions concerning reputational risk, 
identify and describe any supporting empirical data, studies, or other 
information.
    11. NRSROs as such did not become subject to registration and 
oversight requirements until June 2007.\17\ Given that much of the 
activity relating to the rating of RMBS and CDOs linked to subprime 
mortgages occurred prior to that date, describe if, and how the 
registration and oversight requirements have mitigated potential 
conflicts of interest in the rating of structured finance products? For 
example, Section 15E of the Exchange Act and the Commission's rules 
require NRSROs, among other things, to disclose and manage conflicts of 
interest and, in some cases, establish absolute prohibitions against 
having certain conflicts of interest.\18\ In addition, the goal of the 
Credit Rating Agency Reform Act of 2006--which established a 
registration and oversight program for NRSROs through self-executing 
provisions added to the Exchange Act and implementing rules adopted by 
the Commission under the Exchange Act as amended by the Rating Agency 
Act of 2006--was to improve ratings quality by fostering 
accountability, transparency, and competition in the credit rating 
industry. Is there empirical data, studies, or other information that 
the measures in Section 15E of the Exchange Act and the Commission's 
rules have or have not mitigated conflicts of interest in rating 
structured finance products? If so, identify and describe any such 
data, studies, or other information.
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    \17\ See the Credit Rating Agency Reform Act of 2006 (Pub. L. 
109-291 (2006)); see also Oversight of Credit Rating Agencies 
Registered as Nationally Recognized Statistical Rating 
Organizations, Exchange Act Release No. 55857 (June 5, 2007), 72 FR 
33564 (June 18, 2007).
    \18\ See, e.g., 15 U.S.C. 78o-7(h), 17 CFR 240.17g-5, and 
Exhibit 6 to Form NRSRO (17 CFR 249b.300).
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    12. Would government efforts to reduce investor reliance on credit 
ratings such as through provisions in Sections 939 and 939A of the 
Dodd-Frank Act mitigate the potential conflicts of interest in the 
rating of structured finance products? If so, how? Would the Section 
15E(w) System have the potential to increase or mitigate the impact of 
other efforts to reduce investor reliance on credit ratings?
    13. Describe the benefits of the current process for determining 
credit ratings for structured finance products. For example, what are 
the incentives under the current processes to produce accurate credit 
ratings? In addition, are there benefits in allowing the arranger to 
select the NRSRO to determine a credit rating for a structured finance 
product? For example, do arrangers select NRSROs based on their 
knowledge of which NRSROs investors will accept as issuing credible 
credit ratings? In addition, do arrangers select NRSROs based on their 
knowledge of which NRSROs have the resources, capacity, and technical 
competence to determine credit ratings for the structured finance 
product they are intending to bring to market, or, do arrangers select 
an NRSRO because they believe it will give them the highest rating?
    14. The Section 15E(w) System would apply only to structured 
finance products. What are the differences, if any, between structured 
finance products and other products NRSROs rate? Do these differences 
warrant a

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separate system for assigning credit ratings to NRSROs? If so, why?

B. The Section 15E(w) System

    The Section 15E(w) System, among other things, would require the 
Commission to: (1) Establish a Credit Rating Agency Board (``CRA 
Board''), which would be an SRO; (2) select the initial members of the 
CRA Board; and (3) establish a schedule to ensure that the CRA Board 
begins assigning qualified NRSROs (``Qualified NRSROs'') to provide 
initial ratings not later than one year after the selection of the 
members of the CRA Board.\19\ A Qualified NRSRO would be an NRSRO that 
the CRA Board determines to be qualified to issue initial credit 
ratings with respect to one or more categories of structured finance 
products.\20\
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    \19\ See subparagraph (2)(A) of the Section 15E(w) Provisions. 
The CRA Board initially would be composed of an odd number of 
members selected from the industry, with the total numerical 
membership of the CRA Board to be determined by the Commission. See 
subparagraph (2)(C)(i) of the Section 15E(w) Provisions. Of the 
members initially selected to serve on the CRA Board: (1) Not less 
than a majority of the members would need to be representatives of 
the investor industry who do not represent issuers; (2) not less 
than one member would need to be a representative of the issuer 
industry; (3) not less than one member would need to be a 
representative of the credit rating agency industry; and (4) not 
less than one member would need to be an independent member. See 
subparagraphs (2)(C)(ii)(I) through (IV) of the Section 15E(w) 
Provisions. The initial members of the CRA Board would be appointed 
to terms of 4 years. See subparagraph (2)(C)(i) of the Section 
15E(w) Provisions. Prior to the expiration of the terms of office of 
the initial CRA Board members, the Commission would be required to 
establish fair procedures for the nomination and election of future 
members of the Board. See subparagraph (2)(C)(iv) of the Section 
15E(w) Provisions.
    \20\ See subparagraphs (1)(B) and (3) of the Section 15E(w) 
Provisions. An NRSRO seeking to become a Qualified NRSRO with 
respect to a category of structured finance products would need to 
submit an application to the CRA Board. See subparagraphs (3)(A) and 
(B) of the Section 15E(w) Provisions. The application would need to 
contain: (1) Information about the institutional and technical 
capacity of the NRSRO to issue credit ratings; (2) information on 
whether the NRSRO has been exempted by the Commission from any 
requirements under Section 15E of the Exchange Act; and (3) any 
additional information the Board may require. See subparagraphs 
(3)(A)(ii)(I) through (III) of the Section 15E(w) Provisions.
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    An issuer that seeks an initial credit rating for a structured 
finance product would be prohibited from requesting such a rating from 
an NRSRO and, instead, be required to submit a request for the initial 
credit rating to the CRA Board.\21\ The CRA Board would select a 
Qualified NRSRO to provide the initial credit rating to the issuer.\22\ 
A Qualified NRSRO selected to determine an initial credit rating could 
refuse to accept a particular request by notifying the CRA Board of 
such refusal, and submitting to the CRA Board a written explanation of 
the refusal.\23\ The CRA Board then would select a different Qualified 
NRSRO to determine the initial credit rating.\24\ Qualified NRSROs 
would be able to determine fees unless the CRA Board determines it is 
necessary to issue rules on fees.\25\ If rules are deemed necessary, a 
Qualified NRSRO would be required to charge an issuer a reasonable fee 
as determined by the Commission.\26\
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    \21\ See subparagraph (4) of the Section 15E(w) Provisions. An 
issuer would be permitted to request or receive additional credit 
ratings for the structured finance product, if the initial credit 
rating is provided using the CRA Board assignment process. See 
subparagraph (9) of the Section 15E(w) Provisions.
    \22\ See subparagraph (5)(A) of the Section 15E(w) Provisions. 
The method of selecting the Qualified NRSRO would be based on an 
evaluation by the CRA Board of a number of alternatives designed to 
reduce the conflicts of interest that exist under the issuer-pays 
model, including a lottery or rotating assignment system. See 
subparagraph (5)(B) of the Section 15E(w) Provisions. In addition, 
in evaluating the selection method, the CRA Board would be required 
to consider: (1) The information submitted by the Qualified NRSRO in 
its application to become a Qualified NRSRO regarding the 
institutional and technical capacity of the Qualified NRSRO to issue 
credit ratings; (2) an, at least, annual evaluation of the 
performance of each Qualified NRSRO; (3) formal feedback from 
institutional investors; and (4) information from items (1) and (2) 
to implement a mechanism which increases or decreases assignments 
based on past performance. See subparagraph (5)(B)(ii) of the 
Section 15E(w) Provisions. The CRA Board, in choosing a selection 
method, would not be able to use a method that allows for the 
solicitation or consideration of the preferred NRSRO of the issuer. 
See subparagraph (5)(B)(iii) of the Section 15E(w) Provisions.
    \23\ See subparagraph (5)(C)(i) of the Section 15E(w) 
Provisions.
    \24\ See subparagraph (5)(C)(ii) of the Section 15E(w) 
Provisions.
    \25\ See subparagraph (8)(B) of the Section 15E(w) Provisions.
    \26\ See subparagraph (8)(A) of the Section 15E(w) Provisions.
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    The CRA Board would be required to prescribe rules by which it 
evaluates the performance of each Qualified NRSRO, including rules that 
require, at a minimum, an annual evaluation of each Qualified 
NRSRO.\27\ The CRA Board, in conducting the annual evaluation would be 
required to consider: (1) The results of an annual examination of the 
Qualified NRSRO; (2) surveillance of credit ratings conducted by the 
Qualified NRSRO after the credit ratings are issued, including, how the 
rated instruments perform, the accuracy of the ratings as compared to 
the other NRSROs, and the effectiveness of the methodologies used by 
the Qualified NRSRO; and (3) any additional factors the CRA Board 
determines to be relevant.\28\
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    \27\ See subparagraph (7)(A) of the Section 15E(w) Provisions.
    \28\ See subparagraph (7)(B) of the Section 15E(w) Provisions. 
While the evaluation contemplates an annual examination of the 
Qualified NRSRO, the Section 15E(w) Provisions do not contain an 
explicit requirement for the CRA Board to conduct an annual 
examination of each Qualified NRSRO.
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Request for Comment
    The Commission requests comments, proposals, data, or analysis that 
could assist in analyzing the Section 15E(w) System. In addition, the 
Commission requests comments, proposals, data, and analysis in response 
to the following questions and, to the extent that responses would 
differ based on whether the CRA Board is an SRO, a public utility, or 
private utility, please explain the differences.\29\
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    \29\ While the Section 15E(w) Provisions would require the 
Commission to establish a CRA Board that is an SRO, Section 939F 
expands the possible types of entities that would assign credit 
ratings to include potentially a public or private utility. 
Consequently, for the purposes of evaluating the Section 15E(w) 
Provisions, the Commission requests that interested parties address 
how the nature of each of these alternative assigning entities (SRO, 
Public Utility, and Private Utility) might change analysis in the 
responses to the questions asked below. For the purposes of the 
questions, the Commission uses the term ``CRA Board,'' however, 
interested parties should read that term to mean potentially an SRO, 
public utility, or private utility.
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    1. Identify and describe the benefits of implementing the Section 
15E(w) System.
    2. Identify and describe the costs of implementing the Section 
15E(w) System.
    3. Evaluate the Section 15E(w) System using the GAO Framework by 
addressing the following factors: \30\
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    \30\ The questions for each factor in the GAO Framework in most 
cases mirror questions contained in GAO Report 10-782. See GAO 
Report 10-782 at pp. 85-93. Commenters are encouraged to read the 
relevant sections of GAO Report 10-782 for more details on the 
reasoning behind these questions and the issues they seek to target 
and elicit comment on.
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    a. Independence--Address the ability of the Section 15E(w) System 
to mitigate conflicts of interest between the entity paying for the 
rating and the NRSRO.\31\ To what extent, if any, would the Section 
15E(w) System influence the relationship between the NRSRO and the 
entity paying for the rating? Would the Section 15E(w) System eliminate 
or mitigate conflict of interests between the entity paying for the 
rating and the NRSRO? If so, in what ways and to what extent? In 
addition, what potential conflicts would be created by such a system? 
What controls, if any would need to be implemented to mitigate these 
conflicts? In addition, how would the system limit conflicts of 
interest between users of ratings and the NRSRO, and between issuers 
and the NRSRO?
---------------------------------------------------------------------------

    \31\ See GAO Report 10-782 at p. 85 for a broader discussion of 
this factor in the GAO Framework.
---------------------------------------------------------------------------

    b. Accountability--Address the ability of the Section 15E(w) System 
to

[[Page 28271]]

promote NRSRO responsibility for the accuracy and timeliness of credit 
ratings.\32\ Specifically:
---------------------------------------------------------------------------

    \32\ See GAO Report 10-782 at pp. 85-86 for a broader discussion 
of this factor in the GAO Framework.
---------------------------------------------------------------------------

    i. How would the system create or distort economic incentives for 
NRSROs to produce quality ratings over the life of a security?
    ii. To what extent, if any, would the system create political or 
other influences that potentially could cause an NRSRO to consider 
factors other than the credit characteristics of the structured finance 
product when determining a credit rating for the product?
    iii. How would NRSRO performance be evaluated and by whom under the 
system? For example, would the system rely on market forces or third 
parties to evaluate performance? Would the system rely on evaluations 
of performance by the CRA Board that assigns NRSROs to provide ratings? 
How would ``quality'' credit ratings be defined and what criteria would 
be used to assess ratings performance?
    iv. When an NRSRO demonstrates poor performance, what would be the 
economic consequences under the system and who would determine those 
consequences? For example, how would an NRSRO's compensation or 
opportunity for future ratings business be linked to ratings 
performance?
    c. Competition--Address the extent to which the Section 15E(w) 
System would create an environment in which NRSROs compete for 
customers by producing higher-quality ratings at competitive 
prices.\33\ Specifically:
---------------------------------------------------------------------------

    \33\ See GAO Report 10-782 at pp. 86-87 for a broader discussion 
of this factor in the GAO Framework.
---------------------------------------------------------------------------

    i. In which ways would the system encourage NRSROs to compete? To 
what extent would the system encourage competition around the quality 
of ratings, ratings fees, and product innovation? To what extent would 
NRSROs with higher-quality ratings be rewarded with additional ratings 
business? For example, once an NRSRO is deemed a qualified NRSRO would 
it be entitled to a pro rata share to all deals brought to the CRA 
Board based solely on its capacity? Alternatively, would the CRA Board 
assess the quality of the NRSRO and assign business based on 
qualitative metrics?
    ii. To what extent would the system encourage new entrants and 
reduce barriers to entry in the industry? Alternatively, to what extent 
would the system discourage new entrants and increase barriers to 
entry?
    iii. To what extent would the system allow for flexibility in the 
differing sizes, resources, and specialties of NRSROs?
    iv. To what extent would market forces impact ratings fees under 
the system?
    v. To what extent, if any, would the system incentivize NRSROs to 
compete other than on the basis of the accuracy and quality of their 
ratings?
    d. Transparency--Address the accessibility, usability, and clarity 
of the Section 15E(w) System and the dissemination of information on 
the program to market participants.\34\ Specifically, how clear would 
the mechanics of the system be to market participants? For example, 
describe the level of transparency that would exist under the system 
with respect to: (1) How the NRSRO would obtain ratings business; (2) 
how ratings fees would be determined; (3) how NRSROs would be 
compensated; and (4) how the program would link ratings performance to 
NRSRO compensation or the award of additional business.
---------------------------------------------------------------------------

    \34\ See GAO Report 10-782 at p. 88 for a broader discussion of 
this factor in the GAO Framework. The GAO notes that transparency in 
this context does not refer to the transparency or disclosure regime 
of the NRSROs but is specific to the transparency of the 
compensation model only. GAO Report 10-782 at p. 88, Footnote 112.
---------------------------------------------------------------------------

    e. Feasibility--Address the simplicity and ease with which the 
Section 15E(w) System could be implemented in the securities 
market.\35\ Specifically:
---------------------------------------------------------------------------

    \35\ See GAO Report 10-782 at pp. 88-90 for a broader discussion 
of this factor in the GAO Framework.
---------------------------------------------------------------------------

    i. Would the system be easily implemented? If not, how difficult 
would implementing the system be?
    ii. Could the system be instituted through existing regulatory or 
statutory authority or is additional authority needed?
    iii. What would be the costs to implement the system and who would 
fund them?
    iv. Which body would administer the system, and would this be an 
established body? If not, how would it be created?
    v. What, if any, infrastructure would be needed to implement the 
system? What information technology would be required? Which body would 
be responsible for developing and maintaining it?
    vi. What impact would the system have on bringing new issuances to 
market and trading on the secondary market?
    vii. How many NRSROs would be required for the system to function 
as intended? How would the exit of an NRSRO from the ratings industry 
affect the system's feasibility? What impact would the system have on 
the financial viability of an NRSRO?
    f. Market acceptance and choice--Address the willingness of the 
securities market to accept the Section 15E(w) System, the credit 
ratings produced under such a system, and any new market players 
established by the system.\36\ Specifically:
---------------------------------------------------------------------------

    \36\ See GAO Report 10-782 at pp. 90-91 for a broader discussion 
of this factor in the GAO Framework.
---------------------------------------------------------------------------

    i. What role, if any, would market participants have in selecting 
NRSROs to produce credit ratings, assessing the quality of credit 
ratings, and determining NRSRO compensation? More specifically, what 
would the roles of issuers and investors be in these processes? Where 
would these roles differ between the Section 15E(w) System and other 
potential programs and what would be the trade-offs? Would all market 
participants be likely to accept the credit ratings produced under the 
Section 15E(w) System? If not, what would be the potential consequences 
for the securitization market?
    ii. What impact, if any, would the system have on each market 
participant using the credit ratings?
    iii. Would market participation need to be mandated, and if so, for 
which participants?
    iv. To what extent, if any, might market participants discount the 
quality and reliability of a credit rating based on the system's 
approach to selecting which Qualified NRSRO would rate a structured 
finance product?
    g. Oversight: Address how the Section 15E(w) System would be 
evaluated to help ensure that it works as intended.\37\ Specifically:
---------------------------------------------------------------------------

    \37\ See GAO Report 10-782 at pp. 92-93 for a broader discussion 
of this factor in the GAO Framework.
---------------------------------------------------------------------------

    i. Would the system provide for an independent internal control 
function?
    ii. What external oversight (from a regulator or third-party 
auditor) would the system provide to ensure it is working as intended? 
In what ways would the CRA Board be held accountable for its decisions?
    iii. If third-party auditors would provide external oversight with 
respect to the system, how would they be selected, what would be their 
reporting responsibilities, and to whom would they report?
    iv. Who would compensate the regulatory or third-party auditor for 
auditing the system? How would the compensation for the regulator/
auditor

[[Page 28272]]

be determined? How would it be funded?
    v. To what extent would a third-party auditor allow flexibility in 
oversight to accommodate NRSROs of different sizes?
    4. Assessment of potential mechanisms for determining fees for 
NRSROs. Section 939F(b)(2)(A) requires that the Commission's study 
address the feasibility of establishing a system in which a CRA Board 
assigns NRSROs to determine the credit ratings for structured finance 
products, including an assessment of the potential mechanisms for 
determining fees for NRSROs. Consequently, to the extent not addressed 
in responses to the questions above with respect to the GAO Framework, 
the Commission requests comment, proposals, data, and analysis on the 
following:
    a. Under the Section 15E(w) System, the CRA Board would be required 
to assign which NRSRO (from a pool of Qualified NRSROs) is employed to 
determine the initial credit rating for a structured finance product. 
Consequently, would the fee a Qualified NRSRO could charge the arranger 
need to be set by rule? For example, each Qualified NRSRO would be 
assured of being assigned a percentage of the credit rating business 
brought to the CRA Board by issuers. Depending on capacity, certain 
NRSROs may be assigned to determine more credit ratings than other 
NRSROs. Therefore, in the absence of competitive market forces, would 
Qualified NRSROs charge unreasonably high fees? If so, what mechanism 
could be used to determine the reasonable fee? Should, for example, 
arrangers be able to reject a Qualified NRSRO that charges above market 
fees? Moreover, would the amount of the fee need to depend on the type 
of structured finance product being rated or the complexity of the 
structured finance product? For example, do NRSROs typically charge 
different fees depending on whether the structured finance product is, 
for example, an RMBS, a CMBS, a CDO, a CLO, other ABS, an issuance of 
ABCP, or another type of structured finance product? If so, would it be 
appropriate to set different fees on each type of structured finance 
product? In addition, how would fees be determined for new product 
types? Furthermore, do the fees charged by NRSROs depend on their 
business models? If so, how would this impact the determination of what 
constitutes a reasonable fee? In addition, would the amount of the fee 
need to depend on the complexity of a structured finance product, 
independently of its type? Finally, do the fees charged by NRSROs 
depend on the policies and procedures they use to determine credit 
ratings? If so, how would this impact the determination of what 
constitutes a reasonable fee?
    b. In determining the reasonableness of fees, could the fees 
charged by NRSROs and other credit rating agencies to rate structured 
finance products outside the context of the assignment process serve as 
a benchmark? For example, under the Section 15E(w) System, the issuer, 
after obtaining an initial credit rating through the assignment 
process, would be able to obtain additional credit ratings not assigned 
by the CRA Board. Would the fee charged for these unassigned credit 
ratings for structured finance products provide a basis to set the fees 
used for assigned credit ratings? Alternatively, would the fees NRSROs 
charge to determine other classes of credit ratings such as for 
financial institutions, corporate issuers, insurance companies, and 
government issuers provide a basis to set the fees used for the 
assignment process? How do the fees charged to rate these types of 
obligors, securities, and money market instruments differ from the fees 
charged to rate structured finance products?
    c. How could the fee setter determine and, thereafter, monitor 
whether the fee established by rule constitutes an ``above market fee'' 
that over-compensates the Qualified NRSRO (potentially imposing unfair 
costs on issuers that might be passed on to investors) or under-
compensates the NRSRO (potentially causing it to devote less resources 
to determining the credit rating with possible consequences in terms of 
the quality of the credit rating)?
    d. What would be the impact if the fee set by rule was viewed as 
too low by NRSROs? For example, would NRSROs refuse to apply to be 
Qualified NRSROs? Or, would too few NRSROs apply to be Qualified NRSROs 
to implement the program? How would the fee setter determine the 
appropriate level of fee to attract a sufficient number of NRSROs to 
the program without imposing greater costs on issuers than would be the 
case when fees are determined through a competitive process?
    e. Could setting fees by rule have negative impacts on the quality 
of credit ratings? For example, could it reduce incentives for NRSROs 
to compete based on producing accurate credit ratings?
    f. Are there instances where SROs, public utilities, or private 
utilities set fees between a company and an entity providing a service 
to the company that could serve as models for how to set reasonable 
fees for purposes of assigning credit ratings business? If so, describe 
how the mechanisms these entities use to set reasonable fees could 
apply in the assigned credit rating context.
    g. Provide any other comments, proposals, data, or analysis that 
could assist in assessing potential mechanisms determining how to set 
reasonable fees for assigned structured finance credit ratings.
    5. Appropriate methods for paying fees to the NRSRO. Section 
939F(b)(2)(B) requires the Commission's study to address the 
feasibility of establishing a system in which a CRA Board assigns 
NRSROs to determine the credit ratings for structured finance products, 
including, an assessment of appropriate methods for paying fees to the 
NRSROs. Consequently, to the extent not addressed in responses to the 
questions above with respect to the GAO Framework, the Commission 
requests comment, proposals, data, and analysis on the following:
    a. Under the 15E(w) System, how should a fee be provided to the 
Qualified NRSRO selected to determine an initial credit rating for an 
arranger? For example, should the arranger provide the fee to the CRA 
Board, which, in turn, would provide the funds to the NRSRO? Would it 
be appropriate for the CRA Board to receive and disburse funds in this 
manner? For example, the CRA Board acting as a conduit for the funds 
could create potential risk in terms of appropriately maintaining 
custody of the funds, accounting for the funds, and allocating the 
funds to the Qualified NRSROs. In addition, it would require the CRA 
Board to have sophisticated operational capabilities in terms of having 
access to systems to process financial transactions involving hundreds 
of thousands of dollars between potentially hundreds of arrangers of 
structured finance products and the Qualified NRSROs. For these 
reasons, having the CRA Board serve as temporary custodian of the funds 
paid by arrangers to Qualified NRSROs could substantially increase the 
costs of operating the CRA Board. Furthermore, if the CRA Board became 
insolvent, would the arranger or the Qualified NRSRO have a claim for 
the funds? Would this depend on how much work the NRSRO had performed 
in terms of determining the initial credit rating? In this regard, 
should the CRA Board provide the funds to the Qualified NRSRO when the 
Qualified NRSRO is selected to determine the credit rating or when the 
Qualified NRSRO issues the initial credit rating? What is the current 
practice in terms of the timing when arrangers pay NRSROs for 
determining initial credit ratings? In addition, how

[[Page 28273]]

long is the period between the time an NRSRO is hired to determine an 
initial credit rating and the time the credit rating is issued? Does 
the length of time depend on the type of structured finance product 
being rated? If so, describe the different time periods.
    b. Alternatively, should the arranger pay the fee directly to the 
selected Qualified NRSRO? If so, would this potentially negatively 
impact the goal of the Section 15E(w) System to address the conflict of 
interest arising from the issuer-pay model?
    c. Should the CRA Board allocate the fee to determine the initial 
credit rating to the selected Qualified NRSRO over the term of the 
structured finance product? For example, should 50% of the fee be paid 
up-front and the balance of the fee be distributed periodically until 
all the principal and interest outstanding on the structured finance 
product is paid? Moreover, if the structured finance product goes into 
default, would it be appropriate to withhold the unpaid balance of the 
fee from the NRSRO? Would the appropriateness of withholding the fee 
depend on the initial rating? For example, if the initial rating is in 
one of the highest categories (e.g., AAA or AA) and the bond defaults, 
would it be more appropriate to withhold the fee from the NRSRO than if 
the initial rating were in a lower category (e.g., BB or CCC)? If it 
would be appropriate to withhold the unpaid balance of the fee in the 
case of default, what entity would be legally entitled to the unpaid 
balance of the fee? Would it be appropriate to return the unpaid 
balance to the issuer, underwriter, or sponsor of the structured 
finance product? Would it be appropriate to provide the unpaid balance 
to investors in the structured finance product? The Commission notes 
that the fees paid to rate structured finance products are a small 
fraction of the principal amount invested in an issuance of a 
structured finance product. Consequently, would a requirement to return 
the unpaid amount to investors create an expectation that the investors 
would be compensated for losses suffered if the structured finance 
product defaults? The Commission notes that a program of allocating the 
fee over the term of the structured finance product might require the 
CRA Board to serve as the conduit for the funds transferred from the 
arrangers to the Qualified NRSROs, raising the issues about custodial 
responsibility and attendant costs discussed above.
    d. How should fees for performing surveillance of credit ratings be 
addressed under the Section 15E(w) System? For example, should the 
Qualified NRSRO selected to determine the initial credit rating be 
allowed to negotiate a surveillance fee directly with the arranger and 
receive such a fee directly from the arranger? Alternatively, should 
the fee to determine the initial credit rating include an amount to 
cover the cost of surveillance? If so, should the CRA Board disburse 
the surveillance fee to the Qualified NRSRO? If so, when should that 
distribution take place? In addition, if the Section 15E(w) System only 
applies to the fee for the initial credit rating, what issues would 
arise in terms of finding an NRSRO to provide surveillance? For 
example, if the selected Qualified NRSRO only agreed to provide the 
initial credit rating, what would happen if the arranger could not find 
an NRSRO to perform surveillance for a reasonable fee?
    e. Provide any other comments, proposals, data, or analysis that 
could assist in assessing appropriate methods for paying fees to 
NRSROs.
    6. Extent to which the creation of such a system would be viewed as 
the creation of moral hazard by the Federal Government. Section 
939F(b)(2)(C) requires the Commission's study to address the 
feasibility of establishing a system in which a CRA Board assigns 
NRSROs to determine the credit ratings for structured finance products, 
including, an assessment of the extent to which the creation of such a 
system would be viewed as the creation of moral hazard by the Federal 
Government. Consequently, to the extent not addressed in responses to 
the questions above with respect to the GAO Framework, the Commission 
requests comment, proposals, data, and analysis on the following:
    a. Would investors and other users of credit ratings view credit 
ratings for structured finance products determined through the CRA 
Board assignment process as more reliable than other credit ratings 
and, consequently, perform less analysis themselves before investing in 
a structured finance product? For example, under the Section 15E(w) 
System, the CRA Board would determine whether an NRSRO is qualified to 
issue initial credit ratings with respect to one or more categories of 
structured finance products. In addition, the CRA Board would be 
required to conduct an annual evaluation of a Qualified NRSRO to 
consider, among other things, (1) the surveillance of credit ratings 
conducted by the Qualified NRSRO after the credit ratings are issued, 
including, how the rated instruments perform; (2) the accuracy of the 
ratings as compared to the other NRSROs; and (3) the effectiveness of 
the methodologies used by the Qualified NRSRO. Would investors view the 
CRA Board as providing a ``stamp of approval'' on, or an endorsement 
of, the credit ratings determined through the assignment process? If 
the Section 15E(w) System would increase investor reliance on credit 
ratings, what potential impact would such a consequence have on 
government efforts to reduce investor reliance on credit ratings such 
as through provisions in Sections 939 and 939A of the Dodd-Frank Act? 
For example, would the system cause investors and other users of credit 
ratings to increase their reliance credit ratings for structured 
finance products? If so, how much do investors and other users of 
credit ratings currently rely on credit ratings for structured finance 
products and how might that level of reliance change if the Section 
15E(w) System was implemented?
    b. Would the CRA Board, as a governmental or quasi-governmental 
entity, be susceptible to political pressure in terms of its assignment 
of credit ratings to Qualified NRSROs or its other responsibilities? In 
addition, would a Qualified NRSRO assigned to determine a credit rating 
be susceptible to political pressure to issue a credit rating at a 
level favored by the CRA Board in order to obtain additional 
assignments from the CRA Board?
    c. Provide any other comments, proposals, data, or analysis that 
could assist in assessing the extent to which the creation of such a 
system would be viewed as the creation of moral hazard by the Federal 
Government.
    7. Constitutional or other issues concerning the establishment of 
such a system. Section 939F(b)(2)(D) requires the Commission's study to 
address the feasibility of establishing a system in which a CRA Board 
assigns NRSROs to determine the credit ratings for structured finance 
products, including, an assessment of any constitutional or other 
issues concerning the establishment of such a system. Consequently, to 
the extent not addressed in responses to the questions above with 
respect to the GAO Framework, the Commission requests comment, 
proposals, data, and analysis on the following:
    a. In terms of operational feasibility, what is the likelihood that 
the number of NRSROs applying to be treated as Qualified NRSROs would 
be sufficient to achieve the goals of the Section 15E(w) System? For 
example, how many NRSROs would need to be determined to be Qualified 
NRSROs for the system to operate as envisioned? What would

[[Page 28274]]

be the metric or process for measuring or determining the number of 
NRSROs necessary for the system to function? For example, how would the 
system match the number of structured finance product issuances with 
the necessary capacity, resources, and expertise to rate the products 
in a competent and timely manner? What would be the implications for 
the securitization markets if an insufficient number of NRSROs are 
determined to be Qualified NRSROs (either because not enough applied or 
because the applicants did not satisfy the criteria to be treated as 
Qualified NRSROs)?
    b. In terms of operational feasibility, what level of staffing 
would be necessary for the CRA Board to carry out its responsibilities? 
In addition, what would be the necessary expertise and qualifications 
of the CRA Board members and staff to carry out the CRA Board's 
responsibilities? How could the CRA Board ensure that it has the 
necessary staffing and that its staff has the necessary expertise and 
qualifications?
    c. In terms of operational feasibility, could the process by which 
the CRA Board selects a Qualified NRSRO materially delay the issuance 
of a structured finance product and diminish the quality of the credit 
ratings determined through the assignment process? For example, how 
would the CRA Board monitor which Qualified NRSROs have current 
capacity to undertake the determination of a credit rating sought by an 
arranger? If the CRA Board selects a Qualified NRSRO that refuses to 
rate the structured finance product because, for example, it has 
reached its capacity to determine initial credit ratings, how long 
would it take for the CRA Board to select another Qualified NRSRO? In 
addition, how would the CRA Board address situations where a Qualified 
NRSRO misjudges its ability to undertake the assignment to determine an 
initial credit rating? For example, the Qualified NRSRO, in order to 
increase revenues, might agree to more assignments than it is capable 
of handling or to an assignment to rate a type of structured finance 
product it does not have the technical expertise to rate. Could this 
circumstance potentially put the arranger in a situation where it must 
wait far longer to obtain a credit rating than would normally be the 
case because the Qualified NRSRO spends time attempting to determine 
the initial credit rating before ultimately refusing the assignment? 
Moreover, could the quality of the credit ratings determined through 
the assignment process be compromised because the Qualified NRSRO 
devotes fewer resources to rating structured finance products in order 
to accept more assignments or accepts an assignment to rate a type of 
structured finance product for which it lacks adequate technical 
expertise? If so, how could these issues be addressed?
    d. In terms of operational feasibility, how would the CRA Board 
under the Section 15E(w) System perform the annual evaluation of each 
qualified NRSRO? Would an annual evaluation be sufficient to determine 
which Qualified NRSROs are selected on an on-going basis to determine 
initial credit ratings? For example, what if a Qualified NRSRO 
undergoes material changes between evaluations that would impact its 
ability to determine credit ratings? How would this be brought to the 
CRA Board's attention?
    e. In terms of market effects, how would the Section 15E(w) System 
impact the securitization markets? For example, how would it impact the 
origination of residential mortgages, commercial mortgages, commercial 
loans, credit card receivables, auto loans, auto leases, dealer floor-
plans, student loans, consumer loans, consumer leases, equipment loans, 
equipment leases, asset-backed commercial paper, or any other financial 
assets that are securitized? For example, would the uncertainty over 
which Qualified NRSRO would be selected to determine the initial credit 
rating or when the initial credit rating might be issued cause 
originators to finance the origination of these assets through means 
other than securitizing them? If so, what would be the implications for 
these markets? For example, would it cause originators to extend less 
credit? If so, how would this impact the economy? Alternatively, would 
the 15E(w) System give investors greater confidence in the integrity of 
credit ratings for structured finance products? Would that increased 
confidence facilitate the flow of credit?
    f. In terms of legal feasibility, would the establishment of a CRA 
Board to assign credit ratings for structured finance products raise 
legal issues under the U.S. Constitution? Please provide legal analysis 
explaining any such issues.
    g. In terms of legal feasibility, would the role of the Commission 
in overseeing the CRA Board raise legal issues? Please provide legal 
analysis explaining any such issues?
    h. In terms of legal feasibility, do the securities laws provide 
the Commission with authority to implement the Section 15E(w) System? 
Interested parties who believe existing authority is sufficient to 
implement such a system should provide legal analysis supporting their 
conclusions, including identifying relevant statutory authority. 
Interested parties who believe existing authority is not sufficient to 
implement such a system should provide legal analysis supporting their 
conclusions. In addition, interested parties are encouraged to 
recommend statutory amendments that could provide the authority 
necessary for the Commission to implement such a system.
    i. In terms of the potential to mitigate conflicts, would a 
Qualified NRSRO assigned to determine a credit rating for a structured 
finance product under the Section 15E(w) System potentially have the 
incentive to provide a favorable credit rating to obtain future 
business from arrangers to determine credit ratings outside the process 
of the Section 15E(w) System? The Commission notes that under the 
Section 15E(w) System an arranger can obtain additional credit ratings 
from NRSROs after obtaining an initial credit rating through the CRA 
Board selection process. If this potential conflict would be in the 
Section 15E(w) System, how could it be addressed? Would the annual 
evaluations of the Qualified NRSROs by the CRA Board, as required under 
the Section 15E(w) Provisions, identify an NRSRO that was unduly 
influenced by this conflict?
    j. In terms of the potential to mitigate conflicts, would an 
arranger be able to select more favorable credit ratings (``rating 
shop'') notwithstanding the implementation of the Section 15E(w) 
System? If so, how?
    k. In terms of the potential to mitigate conflicts, to what extent, 
if any, might market participants be able to create securities or money 
market instruments, or otherwise finance the assets underlying or 
linked to a structured finance product, so that the transaction does 
not fit within the definition of ``structure finance product'' and 
thereby avoid having to submit the deal to Section 15E(w) System? In 
addition, how would it be determined whether products fall within the 
definition of ``structured finance product''?
    l. Provide any other comments, proposals, data, or analysis that 
could assist in assessing Constitutional or other issues concerning the 
establishment of such a system.
    8. Range of metrics that could be used to determine the accuracy of 
credit ratings. Section 939F(b)(3) requires that the Commission's study 
address the range of metrics that could be used to determine the 
accuracy of credit

[[Page 28275]]

ratings.\38\ Consequently, to the extent not addressed in responses to 
the questions above with respect to the GAO Framework, the Commission 
requests comment, proposals, data, and analysis on the following:
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    \38\ As noted above the CRA Board would be required to evaluate 
``the accuracy of the ratings provided by the qualified [NRSRO] as 
compared to other [NRSROs].'' See subparagraph (7)(B)(ii)(II) of 
Section 15E(w) Provisions.
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    a. How should the performance of credit ratings be measured in 
terms of accuracy?
    b. Section 3(a)(60) of the Exchange Act defines the term ``credit 
rating'' to mean ``an assessment of the creditworthiness of an obligor 
as an entity or with respect to specific securities or money market 
instruments.'' \39\ How should the term ``accuracy'' as applied to 
credit ratings be defined? For example, could there be a standard 
definition of ``accuracy'' that could be applied across all credit 
rating agencies that determine credit ratings for structured finance 
products? How feasible is such a definition given the differences in 
the procedures and methodologies NRSROs use to determine credit ratings 
and the ratings scales they use to denote relative creditworthiness? 
For example, some NRSROs may employ highly quantitative models under 
which the credit ratings are particularly sensitive to real-time 
information and, therefore, adjust frequently. Other NRSROs may employ 
qualitative approaches that result in credit ratings that remain more 
stable.
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    \39\ See 15 U.S.C. 78c(a)(60).
---------------------------------------------------------------------------

    c. Could the definition of ``accuracy'' be based on whether the 
structured finance product goes into default? For example, defaults may 
be very rare for some classes of structured finance products. For these 
classes, how would a definition of ``accuracy'' based on default work?
    d. Depending on how an interested party defines ``accuracy,'' what 
metrics could be used to measure accuracy? For example, could 
transition and default rates be used to measure accuracy? With respect 
to transition and default rates, how would their effectiveness in 
measuring the ``accuracy'' of the credit ratings be impacted by 
favorable or benign economic conditions? For example, in favorable 
economic conditions the ratings for structured finance products may 
remain stable and the number of defaults may be statistically 
insignificant.
    e. Over what time horizons should the accuracy of credit ratings be 
measured? For example, should it be measured over a period of years, or 
the life of the securities? Should ratings be evaluated for accuracy at 
specific points in time? If accuracy should be evaluated at specific 
points in time, should those times relate to events experienced by the 
security, or be unrelated to the security (e.g., calendar-related 
only)? Could using a specific time horizon distort how Qualified NRSROs 
determine credit ratings? For example, if the time horizon is longer, 
could Qualified NRSROs determine credit ratings at lower levels in the 
their rating scales in order to lessen the chance that the credit 
rating would be downgraded during the period? Alternatively, if the 
time horizon is short, could Qualified NRSROs be more prone to 
determine credit ratings at higher levels in their rating scales?
    f. Could the method of measuring accuracy create disincentives for 
Qualified NRSROs to determine credit ratings for certain types of 
products? For example, could Qualified NRSROs refuse to rate structured 
finance products that are inherently more volatile in terms of 
potential credit risk? If so, how could this impact capital formation?
    g. Provide any other comments, proposals, data, or analysis that 
could assist in assessing the range of metrics that could be used to 
determine the accuracy of credit ratings.

C. Alternative Means for Compensating NRSROs That Would Create 
Incentives for Accurate Credit Ratings

    Section 939F(b)(4) requires the Commission's study to address 
alternative means for compensating NRSROs that would create incentives 
for accurate credit ratings. Consequently, the Commission requests 
interested parties to provide comments, proposals, data, and analysis 
on any potential alternatives to the Section 15E(w) System. In this 
regard, several models that would establish alternative means for 
compensating NRSROs are identified below.\40\ The Commission requests 
comment on these models. In addition, the Commission requests comment 
on models not identified below that an interested party believes would 
achieve the objective of creating incentives for accurate credit 
ratings. Any such model should be described and analyzed using the GAO 
Framework.
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    \40\ Aside from the Rule 17g-5 Program, the alternatives 
identified below are drawn from GAO Report 10-782 at pp. 79-84. The 
first alternative in the GAO Report (the ``Random Selection Model'') 
is not identified below because it is similar to the Section 15E(w) 
System. Commenters are encouraged to read the relevant sections of 
GAO Report 10-782 for more details about these proposed alternative 
payment models and their goals and objectives.
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1. The Rule 17g-5 Program
    The Commission has adopted requirements codified in Rule 17g-5 
designed to create a mechanism for an NRSRO that is not hired to 
determine a credit rating for a structured finance product to 
nonetheless obtain the same information the hired NRSRO receives from 
the arranger to determine the initial credit rating and at the same 
time such information is provided to the hired NRSRO (the ``Rule 17g-5 
Program'').\41\ The goal is to create a means for an NRSRO not hired to 
rate the structured finance product to nonetheless determine an initial 
credit rating at the same time the hired NRSRO determines an initial 
credit rating and conduct surveillance on that credit rating along with 
the hired NRSRO.\42\ In other words, similar to the goal of Section 
939F, the Rule 17g-5 Program is intended to prevent the arranger of the 
structured finance product from selecting the NRSRO or NRSROs that 
exclusively can determine the initial credit rating for the structured 
finance product.\43\ When adopting the Rule 17g-

[[Page 28276]]

5 Program, the Commission stated that it was designed to make it more 
difficult for arrangers to exert influence over the NRSROs they hire 
because any inappropriate rating could be exposed to the market through 
the unsolicited ratings issued by NRSROs not hired to rate the 
structured finance product.\44\ The Commission also notes that 
investors seeking a credit rating from an NRSRO not hired to rate the 
structured finance product can pay an NRSRO of their choosing to rate 
the structured finance product using the Rule 17g-5 Program. Thus, it 
provides a mechanism for investors to select an NRSRO to rate a 
structured finance product they are considering purchasing or have 
purchased.
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    \41\ 17 CFR 240.17g-5(a)(3) and (b)(9). The Commission notes 
that it granted a conditional exemption to NRSROs from Rule 17g-
5(a)(3) 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 in the structured finance product after issuance, only 
in transactions that occur outside the U.S. These conditions are 
designed to confine the exemption's application to credit ratings of 
structured finance products issued in, and linked to, financial 
markets outside the U.S. See Exchange Act Release 62120 (May 19, 
2010) 75 FR 28825 (May 24, 2010); see also Exchange Act Release 
63363 (Nov. 23, 2010) 75 FR 73137 (Nov. 29, 2010).
    \42\ The Commission noted when adopting the Rule 17g-5 Program 
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. As a result, structured finance products 
frequently are issued with ratings from only one or two NRSROs that 
have been hired by the arranger, with the attendant conflict of 
interest. The [Rule 17g-5 Program is] 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 the arranger.'' See 
Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations, 74 FR at 63844 (Dec. 4, 2009).
    \43\ See Public Law 111-203 Sec.  939F(d) (``After submission of 
the report under subsection (c), the Commission shall, by rule, as 
the Commission determines is necessary or appropriate in the public 
interest or for the protection of investors, establish a system for 
the assignment of [NRSROs] to determine the initial credit ratings 
of structured finance products, in a manner that prevents the 
issuer, sponsor, or underwriter of the structured finance product 
from selecting the [NRSRO] that will determine the initial credit 
ratings and monitor such credit ratings.'').
    \44\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63844 (Dec. 4, 2009).
---------------------------------------------------------------------------

    The Rule 17g-5 Program operates by requiring an NRSRO hired to 
determine initial credit ratings for structured finance products to 
maintain a password-protected Internet Web site containing a list of 
each such structured finance product for which it currently is in the 
process of determining an initial credit rating.\45\ The list must be 
in chronological order and identify the type of security or money 
market instrument, the name of the issuer of the structured finance 
product, the date the rating process was initiated, and the Internet 
Web site address where the arranger of the structured finance product 
represents that information provided to the hired NRSRO can be accessed 
by other NRSROs.\46\ The hired NRSRO must provide free and unlimited 
access to the Web site to any other NRSRO that provides it with a copy 
of a certification stating, among other things, that it is accessing 
the Web site solely for the purpose of determining or monitoring credit 
ratings.\47\
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    \45\ See 17 CFR 240.17g-5(a)(3)(i).
    \46\ Id.
    \47\ See 17 CFR 240.17g-5(a)(3)(ii).
---------------------------------------------------------------------------

    In addition, the hired NRSRO must obtain a written representation 
from the arranger of the structured finance product that the NRSRO can 
reasonably rely on.\48\ The arranger must represent, among other 
things, that it will maintain a password-protected Internet Web site 
that other NRSROs can access.\49\ Further, the arranger must represent 
that it will post on this Web site all information the arranger 
provides to the hired NRSRO, or contracts with a third party to provide 
to the hired NRSRO, for the purpose of determining the initial credit 
rating and undertaking credit rating surveillance.\50\ The arranger 
also must represent that this information will be posted to the 
Internet Web site at the same time such information is provided to the 
hired NRSRO.\51\
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    \48\ See 17 CFR 240.17g-5(a)(3)(iii). When adopting the Rule 
17g-5 Program, the Commission stated that the ``question of whether 
reliance was reasonable will depend on the facts and circumstances 
of a given situation. Factors relevant to this analysis would 
include, but not be limited to: (1) Ongoing or prior failures by the 
arranger to adhere to the representations; or (2) a pattern of 
conduct by the arranger where it fails to promptly correct breaches 
of its representations.'' See Amendments to Rules for Nationally 
Recognized Statistical Rating Organizations, 74 FR at 63847 
(December 4, 2009).
    \49\ See 17 CFR 240.17g-5(a)(3)(iii).
    \50\ Id.
    \51\ Id.
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    The Commission notes that the Rule 17g-5 Program is but one aspect 
of the current registration and oversight program for NRSROs designed 
to address conflicts of interest, including provisions designed to 
promote transparency and competition. Among other things, NRSROs 
currently are required to establish, maintain, and enforce written 
policies and procedures reasonably designed to address conflicts of 
interest that can arise from their business.\52\ In addition, NRSROs 
are required to disclose the types of potential conflicts of interest 
relating to the issuance of credit ratings and the policies and 
procedures they have established to address those conflicts of 
interest.\53\ Moreover, NRSROs are prohibited from having conflicts of 
interest unless they have disclosed them and established policies and 
procedures reasonably designed to address them and, with respect to 
some conflicts, are prohibited from having the conflict in all 
circumstances.\54\ Furthermore, NRSROs are required to disclose 
information about the performance of their credit ratings and about 
their procedures and methodologies for determining credit ratings.\55\ 
These requirements are designed to mitigate potential conflicts of 
interest, and allow market participants to assess the quality of an 
NRSRO's ratings process and the ability of the NRSRO to address 
potential conflicts. The goal is to improve ratings quality by 
fostering accountability, transparency, and competition.
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    \52\ See 15 U.S.C. 78o-7(h)(1).
    \53\ See Exhibits 6 and 7 to Form NRSRO and the Instructions for 
those Exhibits.
    \54\ See 17 CFR 240.17g-5.
    \55\ See Exhibits 1 and 2 to Form NRSRO and the Instructions for 
those Exhibits.
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Request for Comment
    The Commission requests interested parties to provide comments, 
proposals, data, and analysis on whether the Rule 17g-5 Program 
provides a reasonable alternative to the Section 15E(w) System in terms 
of objectives and goals. In addition, the Commission requests comments, 
proposals, data, and analysis in response to the following questions:
    1. Interested parties are asked to provide a comparative evaluation 
of the Section 15E(w) System with the Rule 17g-5 Program using the GAO 
Framework.
    2. If an interested party believes the Rule 17g-5 Program would not 
be a reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals, could the Rule 17g-5 Program be modified to 
bridge the gap? If so, describe how? In addition, identify any 
additional benefits and costs that would result from such 
modifications.
    3. To the extent not addressed in responding to the questions 
above, describe how the Rule 17g-5 Program currently is being used to 
determine credit ratings for structured finance products. For example, 
is there sufficient time between when information about a pending 
transaction is posted on the arranger's Internet Web site and the 
transaction closes for an NRSRO not hired to rate the structured 
finance product to determine an initial credit rating? If not, how 
could this issue be addressed to provide a sufficient amount of time? 
For example, should there be a mandatory time period before a credit 
rating can be issued by the hired NRSRO? In addition, are NRSROs 
seeking to determine unsolicited credit ratings using the Rule 17g-5 
Program being asked to agree to terms and conditions that are not 
required of the hired NRSROs? If so, what is the rationale for 
requiring such different terms and conditions?
2. Investor-Owned Credit Rating Agency Model
    Under the Investor-Owned Credit Rating Agency Model, sophisticated 
investors would establish and operate an NRSRO that would produce 
credit ratings for structured finance products.\56\ Issuers would be 
required to obtain two ratings: One from the investor-owned credit 
rating agency and the second from their choice of NRSRO.
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    \56\ See GAO Report 10-782 at p. 82 for a more detailed 
description of this model.
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Request for Comment
    The Commission requests interested parties to provide comments, 
proposals, data, and analysis on whether the

[[Page 28277]]

Investor-Owned Credit Rating Agency Model provides a reasonable 
alternative to the Section 15E(w) System in terms of objectives and 
goals. In addition, the Commission requests comments, proposals, data, 
and analysis in response to the following questions:
    1. Interested parties are asked to provide a comparative evaluation 
of the Section 15E(w) System with the Investor-Owned Credit Rating 
Agency Model using the GAO Framework.
    2. If an interested party believes the Investor-Owned Credit Rating 
Agency Model would be a reasonable alternative to the Section 15E(w) 
System in terms of objectives and goals, explain how such a program 
could be implemented by the Commission. Could investors be required to 
participate? Should they be required to participate? In addition, 
analyze whether the Commission could implement such a program using 
existing authority in the securities laws or whether statutory 
amendments would be necessary. Finally, identify the benefits and costs 
of implementing such a program.
3. Stand-Alone Model
    Under the Stand-Alone Model, an NRSRO would be compensated through 
transaction fees imposed on original issuance and on secondary market 
transactions.\57\ Part of the fee would be paid by the issuer or 
secondary-market seller and the other portion of the fee by the 
investors purchasing the security in either the primary or secondary 
markets. Further, the NRSRO would be compensated over the life of the 
security based on these transaction fees.
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    \57\ See GAO Report 10-782 at pp. 82-83 for a more detailed 
description of this model.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests interested parties to provide comments, 
proposals, data, and analysis on whether the Stand-Alone Model provides 
a reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals. In addition, the Commission requests comments, 
proposals, data, and analysis in response to the following questions:
    1. Interested parties are asked to provide a comparative evaluation 
of the Section 15E(w) System with the Stand-Alone Model using the GAO 
Framework.
    2. If an interested party believes the Stand-Alone Model would be a 
reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals, explain how such a program could be implemented 
by the Commission. In addition, analyze whether the Commission could 
implement such a program using existing authority in the securities 
laws or whether statutory amendments would be necessary. Finally, 
identify the benefits and costs of implementing such a program.
4. Designation Model
    Under the designation model, all NRSROs would have the option of 
rating a new structured finance product issuance, and security holders 
would direct, or designate, fees to the NRSROs of their choice, based 
on the proportion of securities that they owned.\58\ The issuer would 
be required to provide all interested NRSROs with the information to 
rate the structured finance product and pay the rating fees to a third-
party administrator, which would manage the designation process. When 
the structured finance product was issued, the security holders would 
designate which of the NRSROs that rated the structured finance product 
should receive fees, based on their perception of research underlying 
the ratings. The security holders could designate one or several 
NRSROs. After the initial credit rating, the issuer would continue to 
pay maintenance rating fees to the third-party administrator, which 
bond holders also would allocate through the designation process every 
quarter over the life of the security. Additionally, under the 
Designation Model investors would review the quality of the work of the 
NRSROs and designate which firms should be compensated based on that 
review.\59\
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    \58\ See GAO Report 10-782 at pp. 83-84 for a more detailed 
description of this model.
    \59\ Id; see also Clark, Mayree and Andrew Jones ``A Free 
Approach to Rating Agency Function,'' SEC Roundtable to Examine 
Oversight of Credit Rating Agencies (April 15, 2009). A variation of 
the Designation Model would include imposing a moratorium between 
the issuance of a security and the publication of a rating by an 
NRSRO; see ``Wait to Rate: How to Save the Rating Agencies (and the 
Capital Markets)'' presentation by Pershing Square Capital 
Management, L.P. (May 26, 2010).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests interested parties to provide comments, 
proposals, data, and analysis on whether the Designation Model provides 
a reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals. In addition, the Commission requests comments, 
proposals, data, and analysis in response to the following questions:
    1. Interested parties are asked to provide a comparative evaluation 
of the Section 15E(w) System with the Designation Model using the GAO 
Framework.
    2. If an interested party believes the Designation Model would be a 
reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals, explain how such a program could be implemented 
by the Commission. In addition, analyze whether the Commission could 
implement such a program using existing authority in the securities 
laws or whether statutory amendments would be necessary. Finally, 
identify the benefits and costs of implementing such a program.
5. User-Pay Model
    Under the User-Pay Model, issuers would not pay for credit ratings 
of structured finance products.\60\ Instead, all ``users'' of 
structured finance credit ratings would be required to enter into a 
contract with the NRSRO and pay for the rating service of an NRSRO. 
Users would be defined as ``any entity that included a rated security, 
loan, or contract as an element of its assets or liabilities as 
recorded in an audited financial statement.'' \61\ Users would also 
include holders of long or short positions in fixed-income instruments, 
as well as parties that refer to a credit rating in contractual 
commitments or that are parties to derivative products that rely on 
rated securities or entities.\62\ The model would rely on third-party 
auditors to ensure that NRSROs receive payment from users of credit 
ratings.
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    \60\ See GAO Report 10-782 at p. 84 for a more detailed 
description of this model.
    \61\ Id.
    \62\ Id.
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Request for Comment
    The Commission requests interested parties to provide comments, 
proposals, data, and analysis on whether the User-Pay Model provides a 
reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals. In addition, the Commission requests comments, 
proposals, data, and analysis in response to the following questions:
    1. Interested parties are asked to provide a comparative evaluation 
of the Section 15E(w) System with the User-Pay Model using the GAO 
Framework.
    2. If an interested party believes the User-Pay Model would be a 
reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals, explain how such a program could be implemented 
by the Commission. In addition, analyze whether the Commission could 
implement such a program using existing authority in the securities 
laws or whether statutory amendments would be necessary.

[[Page 28278]]

Finally, identify the benefits and costs of implementing such a 
program.
6. Other Alternative Models
    Interested parties are encouraged to identify any other model that 
could serve as a reasonable alternative to the Section 15E(w) System in 
terms of objectives and goals.
Request for Comment
    The Commission requests interested parties to provide comments, 
proposals, data, and analysis on any other model that they believe 
would provide a reasonable alternative to the Section 15E(w) System in 
terms of objectives and goals. In addition, the Commission requests 
comments, proposals, data, and analysis in response to the following 
questions:
    1. Interested parties are asked to provide a comparative evaluation 
of the Section 15E(w) System with the other model.
    2. If an interested party believes the other model would be a 
reasonable alternative to the Section 15E(w) System in terms of 
objectives and goals, explain how such a program could be implemented 
by the Commission. In addition, analyze whether the Commission could 
implement such a program using existing authority in the securities 
laws or whether statutory amendments would be necessary. Finally, 
identify the benefits and costs of implementing such a program.

III. Conclusion

    All interested parties are invited to submit their views, in 
writing, on these questions.
    By the Commission.

    Dated: May 10, 2011.
Elizabeth M. Murphy,
Secretary.

APPENDIX--TEXT OF SECTION 15E(w) PROVISIONS \63\
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    \63\ Section 15(w) of the Securities Exchange Act of 1934, as 
that provision would have been added by Section 939D of H.R. 4173 
(111th Congress), as passed by the Senate on May 20, 2010.
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